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As filed with the Securities and Exchange Commission on June 9, 2000
File No. _______
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________
FORM U-1 APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
___________________________________
Exelon Corporation
(and Subsidiaries identified on Signature Page)
10 South Dearborn Street
37/th/ Floor
Chicago, IL 60603
(Name of company filing this statement and address of principal executive
offices)
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John W. Rowe Corbin A. McNeill, Jr.
Chairman, President and Chief Executive Officer Chairman, President and Chief Executive Officer
Unicom Corporation PECO Energy Company
10 South Dearborn Street 2301 Market Street
37/th/ Floor P.O. Box 8699
Chicago, IL 60603 Philadelphia, PA 19101
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_______________________________
The Commission is requested to send copies of all notices, orders and
communications in connection with this Application-Declaration to:
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Rebecca J. Lauer James W. Durham
Vice President and General Counsel Senior Vice President and General Counsel
Unicom Corporation PECO Energy Company
10 South Dearborn Street 2301 Market Street
37/th/ Floor P.O. Box 8699
Chicago, IL 60603 Philadelphia, PA 19101
William J. Harmon Kevin P. Gallen
Jones, Day, Reavis & Pogue Morgan, Lewis & Bockius LLP
77 West Wacker 1800 M Street, N.W.
Suite 3500 Washington, DC 20036-5869
Chicago, IL 60601
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Table of Contents
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Item 1. Description of the Proposed Transaction............................................................. 1
A. Introduction and General Request.................................................................... 1
1. Introduction................................................................................... 1
2. General Request................................................................................ 1
B. Description of the Parties to the Transaction....................................................... 2
C. Overview of the Financing Request................................................................... 3
D. Parameters for Financing Authorization.............................................................. 5
1. Effective Cost of Money........................................................................ 5
2. Maturity of Debt and Final Redemption on Preferred Securities.................................. 5
3. Issuance Expenses.............................................................................. 5
4. Use of Proceeds................................................................................ 5
5. Financial Condition............................................................................ 6
E. Description of Specific Types of Financing.......................................................... 7
1. Exelon External Financing...................................................................... 7
(a) Common Stock...................................................................... 7
i. General................................................................... 8
ii. Acquisitions.............................................................. 8
(b) Preferred Securities.............................................................. 9
(c) Long-Term Debt.................................................................... 9
(d) Short-Term Debt................................................................... 10
(e) Total Financing Sought............................................................ 11
(f) Other Securities.................................................................. 12
(g) Financing Risk Management Devices................................................. 12
i. Interest Rate Risk........................................................ 12
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ii. Anticipatory Hedges....................................................... 13
iii. Accounting Standards...................................................... 13
2. Financing Subsidiaries......................................................................... 13
3. Utility Subsidiary Financing................................................................... 14
(a) Short-Term Debt................................................................... 15
(b) Genco Financing and Assumption of Indebtedness.................................... 15
(c) Financing Risk Management Devices................................................. 17
4. Non-Utility Subsidiary Financings.............................................................. 17
5. Guarantees, Intra-system Advances and Intra-System Money Pool.................................. 18
(a) Guarantee and Intra-system Advances............................................... 18
(b) Non-Utility Subsidiary Guarantees................................................. 21
(c) Authorization and Operation of the Money Pools.................................... 21
i. Utility Money Pool........................................................ 21
ii. Non-Utility Money Pool.................................................... 23
iii. Other Contributions to Money Pool......................................... 24
iv. Operation of the Money Pools and Administrative Matters................... 24
v. Use of Proceeds........................................................... 24
6. Changes in Capital Stock of Majority Owned Subsidiaries........................................ 24
F. Payment of Dividends out of Capital or Unearned Surplus by ComEd, PECO or Exelon.................... 25
1. Request for Authority to Pay Dividends......................................................... 25
2. Reasons for Reductions in Retained Earnings.................................................... 26
3. Standards for Approval of Request.............................................................. 29
G. Rule 53 and Rule 54 Analysis........................................................................ 31
1. Rule 53 Requirements........................................................................... 31
2. Exelon's Compliance with Rule 53 Requirements.................................................. 32
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3. Exelon Rule 53 Undertakings.................................................................... 43
4. Rule 54 Analysis............................................................................... 44
H. Dividend Reinvestment Plan.......................................................................... 44
I. Employee Stock-Based Plans.......................................................................... 44
J. Tax Allocation Agreement............................................................................ 47
K. Filing of Certificates of Notification.............................................................. 48
Item 2. Fees, Commissions and Expenses...................................................................... 50
Item 3. Applicable Statutory Provisions..................................................................... 50
Item 4. Regulatory Approvals................................................................................ 50
Item 5. Procedure........................................................................................... 51
Item 6. Exhibits and Financial Statements................................................................... 51
A. Exhibits............................................................................................ 51
B. Financial Statements................................................................................ 54
Item 7. Information as to Environmental Effects............................................................. 54
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Item 1. Description of the Proposed Transaction
A. Introduction and General Request
1. Introduction
Exelon Corporation, a Pennsylvania Corporation ("Exelon"), filed
an Application-Declaration on Form U-1 (File No.70-09645) (the "Merger U-1") on
March 16, 2000 with the Securities and Exchange Commission (the "Commission")
under Section 9(a)(2) and Section 10 of the Public Utility Holding Company Act
of 1935, as amended (the "Act"), seeking approvals relating to the proposed
acquisition by Exelon of all the common stock of Commonwealth Edison Company
("ComEd"), an electric utility company, and currently a subsidiary of Unicom
Corporation ("Unicom"); of PECO Energy Company ("PECO"), an electric and gas
utility company; of Exelon Generation Company, LLC ("Genco"), to which the
generating assets of ComEd and PECO will be transferred, each of which will be
an electric utility company; and, indirectly of the public utility subsidiaries
of ComEd and PECO. Exelon will register as a holding company under the Act upon
the consummation of the proposed acquisition contemplated in the Merger U-1. The
transaction contemplated in the Merger U-1 are referred to therein as the Merger
and the Restructurings and those terms are used herein with the same meanings.
Each of the entities that will be directly or indirectly owned
subsidiaries of Exelon upon consummation of the acquisition described in the
Merger U-1 is referred to herein individually as a "Subsidiary" and collectively
as "Subsidiaries." For purposes of sections E.4., "Non-Utility Subsidiaries,"
and E.5., "Guarantees," and E.6., "Changes in Capital Stock of Wholly Owned
Subsidiaries," the terms "Subsidiary" and "Subsidiaries" shall also include
other direct or indirect subsidiaries that Exelon may form after the Merger with
the approval of the Commission, pursuant to the Rule 58 exemption or pursuant to
Sections 32, 33 or 34 of the Act. Exelon and the Subsidiaries are sometimes
hereinafter collectively referred to as the "Exelon System" or as the
"Applicants." For purposes of section E.5., "Money Pool," the term "Subsidiary"
or "Subsidiaries" shall include only the companies specifically referred to on
the cover and named on the signature page of this Application/Declaration. The
Commission is asked to reserve jurisdiction over the participation in the
relevant money pool of future companies formed by Exelon until a specific
post-effective amendment is filed, naming the subsidiary to be added as a
participant in the relevant money pool.
2. General Request
This Application/Declaration seeks the authorization and approval
of the Commission with respect to the ongoing financing activities, the
provision of intra-system services and guarantees, and other matters pertaining
to Exelon and its Subsidiaries after giving effect to the Merger and
registration of Exelon as a holding company./1/ Specifically, this Application-
Declaration seeks the following authorizations and approvals of the Commission:
______________________________
/1/ Exelon will file a separate Application-Declaration on Form U-1 (the
"Investment U-1") seeking authorization to make certain acquisitions in non-
utility subsidiaries and related matters.
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. In order to ensure that the Exelon System is able to meet its
capital requirements immediately following registration and plan
its future financing, Exelon and its Subsidiaries hereby request
authorization for financing transactions for the period beginning
with the effective date of an order issued pursuant to this
filing and continuing for a period of three (3) years from the
date of such order (the "Authorization Period").
. Exelon also requests that the Commission approve the issuance of
21 million shares of common stock under dividend reinvestment
and stock-based management incentive and employee benefit plans
pursuant to Sections 6(a) and 7 of the Act, all as more
specifically described below.
. Exelon also requests the Commission approve the aggregate
financing request in the amount of $8 billion outstanding at any
time, representing financing authorizations relating to equity
securities, preferred securities and debt, plus an aggregate $2.7
billion outstanding at any time in short-term financing capacity
for the Utility Subsidiaries as more fully described in this
Application-Declaration for Exelon and its Subsidiaries.
. Exelon also requests the Commission approve the issuance by
Exelon and certain Subsidiaries of guarantees in an aggregate
amount not to exceed $4.5 billion outstanding at any time in
exposure as more fully described below.
. Exelon also requests the authorization and approval of the
Commission under other sections of the Act and applicable rules
and regulations of the Commission promulgated thereunder with
respect to intra-system guarantees, the formation and operation
of a Utility Money Pool and a Non-Utility Money Pool and the
payment of dividends out of capital or unearned surplus by Exelon
and certain Subsidiaries as more fully described in this
Application-Declaration.
. Exelon also requests that the Commission approve an exemption
from Rule 45 with respect to Exelon's agreement for the
allocation of consolidated tax among Exelon and the Subsidiaries
(the "Tax Allocation Agreement").
B. Description of the Parties to the Transaction
Following the consummation of the Merger and Restructurings, Exelon
will have three principal operating public utility company subsidiaries (the
"Utility Subsidiaries")/2/:
. PECO, a public utility company engaged (i) in the transmission,
distribution and sale of electricity and (ii) in the purchase and sale
of natural gas in Pennsylvania;
______________________________
/2/ For purposes of this filing, "Utility Subsidiaries" also includes
Commonwealth Edison Company of Indiana, Peco Energy Power Company, Susquehanna
Power Company and Susquehanna Electric Company.
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. ComEd, a public utility company engaged in the transmission,
distribution and sale of electricity in Illinois;
. Genco, a public utility company engaged in the generation and sale of
electricity in Pennsylvania, Illinois and elsewhere./3/
In addition, Exelon will have the following other principal
Subsidiaries/4/:
. Exelon Business Services Company ("Exelon Services"), the service
company for the Exelon System;
. Exelon Ventures Company ("Ventures"), a non-utility company and a
first tier Subsidiary of Exelon which will have as wholly-owned
subsidiaries, Genco and Exelon Enterprises Company, LLC
("Enterprises")/5/; and
. Enterprises, the principal Subsidiary through which Exelon will
conduct its non-utility businesses. Enterprises will have as
subsidiaries the existing non-utility subsidiaries of Unicom and PECO,
other than PECO's interest in AmerGen.
A list of Exelon's other Subsidiaries is set forth in the Merger U-1 and
the exhibits thereto. All of Exelon's direct and indirect Subsidiaries, other
than the Utility Subsidiaries, are herein called the "Non-Utility Subsidiaries."
C. Overview of the Financing Request
The Applicants hereby request authorization to engage in the financing
transactions set forth herein during the Authorization Period. The approval by
the Commission of this Application/Declaration will give the Applicants the
flexibility that will allow them to respond quickly and efficiently to their
financing needs and to changes in market conditions, allowing them to
efficiently and effectively carry on competitive business activities designed to
provide benefits to customers and shareholders. Approval of this
Application/Declaration is consistent with existing Commission precedent, both
for newly registered holding company systems/6/ and holding company systems that
have been registered for a longer period of time./7/
______________________________
/3/ See the Merger U-1 regarding the corporate structure of Genco.
/4/ In the Merger U-1, Exelon seeks authority to create Exelon Energy Delivery
Company which would own the common stock of ComEd and PECO.
/5/ As described in the Merger U-1, Ventures is necessary to achieve the desired
corporate reorganization of the Unicom non-utility Subsidiaries and the PECO
non-utility Subsidiaries without incurring substantial income tax liability.
/6/ See e.g., New Century Energies, Inc., Holding Co. Act Release No. 35-26750
(Aug. 1, 1997); Ameren Corporation, Holding Co. Act Release No. 35-26809 (Dec.
30, 1997); Conectiv, Inc., Holding Co. Act Release No. 35-26833 (Feb. 26, 1998);
Dominion Resources, Inc., Holding Co. Act Release No. 35-27112 (Dec. 15, 1999);
and SCANA Corporation, Holding Co. Act Release No. 35-27135 (Feb. 14, 2000).
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The financing authorizations requested herein relate to:
1. (a) external issuances by Exelon of common stock, preferred stock
and preferred stock equivalent securities (collectively
"preferred securities") long-term debt, short-term debt, and
other securities for cash, (b) guarantees of obligations of
affiliated or unaffiliated persons in favor of other unaffiliated
persons, and (c) the entering into by Exelon of transactions to
manage interest rate risk ("hedging transactions");/8/
2. issuances of securities, guarantees and the entering into of
hedging transactions by the Utility Subsidiaries to the extent
not exempt pursuant to Rule 52;
3. issuances by Non-Utility Subsidiaries of securities and authority
to enter into hedging transactions which are not exempt pursuant
to Rule 52;
4. the establishment of a utility money pool (the "Utility Money
Pool") and a non-utility money pool (the "Non-Utility Money
Pool") and the issuance of intra-system guarantees by Exelon and
the Non-Utility Subsidiaries on behalf of the Subsidiaries;
5. the continuation of existing intra-system debt and guarantees;
6. the ability of 50% or more owned Subsidiaries to alter their
capital stock in order to engage in financing transactions with
their parent company;
7. the ability of Exelon and its Subsidiaries to pay dividends out
of capital or unearned surplus; and
8. the formation of financing entities and the issuance by such
entities of securities otherwise authorized to be issued and sold
pursuant to this Application/Declaration or pursuant to
applicable exemptions under the Act, including intra-system
guarantees of such securities and the retention of existing
financing entities.
________________________________________________________________________________
/7/ See e.g., The Columbia Gas System, Inc., Holding Co. Act Release No.
35-26634 (Dec. 23, 1996); Gulf States Utilities Company, Holding Co. Act Release
No. 35-26451 (Jan. 16, 1996).
/8/ "Hedging Transactions" include only those transactions related to financing
activities. Engaging in futures trading and other commodity related risk
management by Exelon and its subsidiaries constitute part of their normal
business activities and as such do not require Commission approval. See Southern
Energy, Inc., Holding Co. Act Release No. 35-27020 (May 13, 1999); Entergy
Corp., Holding Co. Act Release No. 35-26812 (Jan. 6, 1998); New Century
Energies, Holding Co. Act Release No. 35-26748 (Aug. 1, 1997); National Fuel Gas
Co., Holding Co. Act Release No. 35-2666 (Feb. 12, 1997).
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D. Parameters for Financing Authorization
Authorization is requested herein to engage in certain financing
transactions during the Authorization Period for which the specific terms and
conditions are not at this time known, and which may not be covered by Rule 52,
without further prior approval by the Commission. The following general terms
will be applicable where appropriate to the financing transactions requested to
be authorized hereby:
1. Effective Cost of Money.
The effective cost of money on long-term debt borrowings occurring
pursuant to the authorizations granted under this Application/Declaration will
not exceed the greater of (a) 350 basis points over the comparable term U.S.
Treasury securities or (b) a gross spread over U.S. Treasuries that is
consistent with similar securities of comparable credit quality and maturities
issued by other by other companies. The effective cost of money on short-term
debt borrowings pursuant to authorizations granted under this
Application/Declaration will not exceed the greater of (a ) 350 basis points
over the comparable term London Interbank Offered Rate ("LIBOR") or (b) a gross
spread over LIBOR that is consistent with similar securities of comparable
credit quality and maturities issued by other companies./9/ The dividend rate on
any series of preferred securities will not exceed the greater of (a) 500 basis
points over the yield to maturity of a U.S. Treasury security having a remaining
term equal to the term of such series of preferred securities and (b) a rate
that is consistent with similar securities of comparable credit quality and
maturities issued by other companies.
2. Maturity of Debt and Final Redemption on Preferred Securities.
The maturity of indebtedness will not exceed 50 years. All preferred
securities will be redeemed no later than 50 years after the issuance thereof.
3. Issuance Expenses.
The underwriting fees, commissions or other similar remuneration paid
in connection with the non-competitive issue, sale or distribution of a security
pursuant to this Application/Declaration (not including any original issue
discount) will not exceed 5% of the principal or total amount of the security
being issued.
4. Use of Proceeds.
The proceeds from the sale of securities in external financing
transactions will be used for general corporate purposes including:
. the financing, in part, of the capital expenditures of the Exelon
System,
. the financing of working capital requirements of the Exelon System,
___________________________
/9/ See The Southern Company, Holding Company Act Release No. 35-27134 (Feb. 9,
2000).
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. the acquisition, retirement or redemption pursuant to Rule 42 of
securities previously issued by Exelon or its Subsidiaries without the
need for prior Commission approval, and
. other lawful purposes, including direct or indirect investment in
companies authorized under the Merger U-1 and under the Investment U-
1, including Rule 58 companies, other subsidiaries approved by the
Commission, Exempt Wholesale Generators ("EWGs"), Foreign Utility
Companies ("FUCOs") and Exempt Telecommunications Companies
("ETCs")./10/ The Applicants represent that no such financing proceeds
will be used to acquire or form a new subsidiary unless such financing
is consummated in accordance with an order of the Commission or an
available exemption under the Act.
5. Financial Condition
Exelon's principal utility operating subsidiaries -- ComEd and
PECO are financially sound and each have investment grade ratings from major
national rating agencies. Exelon will also be a financially sound company./11/
Furthermore, Exelon expects to have an investment grade rating upon consummation
of the Merger based on its strong balance sheet, strong cash flows and other
factors. The anticipated consolidated common equity of Exelon when it is formed
in the Merger, excluding the securitization indebtedness of the Utility
Subsidiaries, is 46% of total capitalization./12/ Exelon represents that, at all
times during the Authorization Period, its common equity (as reflected on the
balance sheets contained in its most recent 10-K or 10-Q filed with the
Commission pursuant to the 1934 Act) will be at least 30% of its Adjusted
Consolidated Capitalization (common equity, preferred stock and long-term debt
adjusted to exclude securitization debt./13/ The Commission has recognized that
it is appropriate to exclude securitization from the calculation of
capitalization to determine compliance with its traditional
__________________________
/10/ The Investment U-1 contemplates that Exelon will make additional
investments in EWGs and FUCOs during the Authorization Period. Accordingly,
Rules 53 and 54 apply to this Application-Declaration. Compliance with these
rules is addressed below.
/11/ As a newly formed company, Genco may not have a rating from nationally
recognized rating agencies immediately when it commences operations. As noted
herein, the absence of an investment grade rating will likely increase the
necessity for Genco to receive financial support from Exelon.
/12/ See footnote 14 below for the reasons it is appropriate to exclude
securitization debt for purposes of consideration of the financial condition of
Exelon and its Utility Subsidiaries. The anticipated consolidated capitalization
takes into account the adjustments resulting from purchase accounting for the
Merger and the affects of the Restructuring transactions. The anticipated
post-Merger consolidated common equity ratio for Exelon, including
securitization debt as indebtedness, is 31%. The anticipated common equity ratio
for ComEd, excluding securitization debt is 39% and including securitization
---------
debt is 30%, while the anticipated common equity ratio for PECO, excluding
---------
securitization debt is 40% and including securitization debt is 15%.
/13/ All of the outstanding securitization bonds of ComEd and PECO are currently
rated "AAA." The structure of these financings, the orders of the respective
State commissions and the statutory provisions of each State ensure that there
will be sufficient cash flow from a dedicated portion of payments made by
utility customers to at all times provide for principal and interest on the
securitization bonds. The rates paid by customers are subject to adjustment in
accordance with procedures of the respective states to ensure that amount
collected are sufficient to meet debt service and other requirements under the
securitization financings. See Utility Stranded Costs: Rating the Securitization
of Transition Tariffs, Special Report, FitchIBCA (September 24, 1998)(available
at www.FitchIBCA.com).
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test of a minimum equity component of capitalization of 30%./14/ Exelon
represents that it also will be in compliance with its Modified Rule 53 Test as
described in Item 1.G. below. A detailed discussion of the financial condition
of the Exelon System is presented below.
E. Description of Specific Types of Financing
1. Exelon External Financing
Exelon requests authorization to obtain funds externally through sales
of common stock, preferred securities, long-term debt and short-term debt
securities. With respect to common stock, Exelon also requests authority to
issue common stock to third parties in consideration for the acquisition by
Exelon or a Non-Utility Subsidiary of equity or debt securities of a company
being acquired pursuant to Rule 58 or Sections 32, 33 or 34 of the Act. In
addition, Exelon seeks the flexibility to enter into certain hedging
transactions to manage rate risk and for other lawful purposes.
(a) Common Stock
Exelon is authorized under its restated articles of incorporation to
issue 500,000,000 shares of common stock (no par value)./15/ Exelon will issue
approximately 328,000,000 shares of common stock in connection with the
Merger/16/. The aggregate amount of financing obtained by Exelon during the
Authorization Period from issuance and sale of common stock (other than for
employee benefit plans or stock purchase and dividend reinvestment plans as
discussed below and other than shares issued in the Merger), when combined with
the long-term debt, short-term debt and preferred securities issued and then
outstanding, as described in this section, shall not exceed $8 billion for the
uses set forth in Item.1.D. above.
_________________________
/14/ See West Penn Power Co., Holding Co. Act Release No. 35-27091 (Oct. 19,
1999) (exemption from 30% equity standard granted where utility's equity ratio
was 15% because of transition bonds and other factors; excluding transition
bonds, utility would satisfy 30% test). This approach is consistent with the
rating agencies analysis of the impact of securitization on a utility's capital
structure. In its September 23, 1999 rating review of PECO, Moody's noted: "The
major advantages of securitization from a credit perspective are the lower
financing costs of higher rated securities and the greater certainty of recovery
of stranded costs. As we analyze PECO post-securitization, Moody's will treat
the securitized debt as fully non-recourse to the company. Moody's has grown
comfortable with this analytical approach despite the fact that the Securities
and Exchange Commission's guidelines require the debt to appear on the company's
balance sheet. Under this approach, we will adjust cash flow downward to account
for the setting aside of cash flows derived from collection of reimbursable
transition charges to serve the fixed charges associated with the securitization
bonds. This approach, we believe, better reflects the cash flow streams
available for protection of PECO's traditional fixed income investors."
/15/ Under its Restated Articles of Incorporation, Exelon is authorized to issue
600,000,000 shares consisting of 500,000,000 shares of common stock and
100,000,000 shares of preferred stock.
/16/ This figure assumes all options and restricted stock will be exercised for
outstanding shares of PECO and Unicom, as the case may be and converted to
Exelon shares in the Merger. To the extent these options or restricted shares do
not result in the issuance of Unicom or PECO common stock prior to the Merger,
the number of shares issued in the Merger will be lower.
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i. General
Subject to the foregoing, Exelon may issue and sell common stock or
options, warrants or other stock purchase rights exercisable for common stock.
Exelon may also buy back shares of such stock or such options during the
Authorization Period in accordance with Rule 42.
Common stock financings may be effected pursuant to underwriting
agreements of a type generally standard in the industry. Public distributions
may be pursuant to private negotiation with underwriters, dealers or agents as
discussed below or effected through competitive bidding among underwriters. In
addition, sales may be made through private placements or other non-public
offerings to one or more persons. All such common stock sales will be at rates
or prices and under conditions negotiated or based upon, or otherwise determined
by, competitive capital markets.
Exelon may sell common stock covered by this Application-Declaration
in any one of the following ways: (i) through underwriters or dealers; (ii)
through agents; (iii) directly to a limited number of purchasers or a single
purchaser; or (iv) directly to employees (or to trusts established for their
benefit), shareholders and others through its employee benefit plans or stock
purchase and dividend reinvestment plans. If underwriters are used in the sale
of the securities, such securities will be acquired by the underwriters for
their own account and may be resold from time to time in one or more
transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale. The securities may be
offered to the public either through underwriting syndicates (which may be
represented by a managing underwriter or underwriters designated by Exelon) or
directly by one or more underwriters acting alone. The securities may be sold
directly by Exelon or through agents designated by Exelon from time to time. If
dealers are utilized in the sale of any of the securities, Exelon will sell such
securities to the dealers as principals. Any dealer may then resell such
securities to the public at varying prices to be determined by such dealer at
the time of resale. If common stock is being sold in an underwritten offering,
Exelon may grant the underwriters thereof a "green shoe" option permitting the
purchase from Exelon at the same price of additional shares then being offered
solely for the purpose of covering over-allotments.
ii. Acquisitions
Under the terms of the orders to be issued in the Merger U-1, and
under Rule 58 and Sections 32, 33 and 34 of the Act, Exelon is or will be
authorized to acquire securities of companies engaged in functionally related
businesses, "energy-related businesses" as described in Rule 58, EWGs, FUCOs and
ETCs. Exelon may also issue common stock or options, warrants or other stock
purchase rights exercisable for common stock in public or privately-negotiated
transactions as consideration for the equity securities or assets of other
companies, provided that the acquisition of any such equity securities or assets
has been authorized in the
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Investment U-1 proceeding or in a separate proceeding or is exempt under the Act
or the rules thereunder./17/
(b) Preferred Securities.
Exelon seeks to have the flexibility to issue its authorized preferred
stock or other types of preferred securities (including, without limitation,
trust preferred securities or monthly income preferred securities) directly or
indirectly through one or more special-purpose financing subsidiaries organized
by Exelon specifically for such purpose as authorized by the order to be issued
in the Investment U-1. The aggregate amount of financing obtained by Exelon
during the Authorization Period from issuance and sale of preferred securities,
when combined with the amount of common stock (other than for benefit plans or
stock purchase and dividend reinvestment plans and other than shares issued in
the Merger), short-term debt and long-term debt issued and then outstanding, as
described in this section, shall not exceed $8 billion for the uses set forth in
Item. 1.D. above. The proceeds of preferred securities would provide an
important source of future financing for the operations of and investments in
non-utility businesses which are exempt under the Act or have been approved by
the Commission./18/ Preferred stock or other types of preferred securities may
be issued in one or more series with such rights, preferences, and priorities as
may be designated in the instrument creating each such series, as determined by
Exelon's board of directors. Dividends or distributions on preferred securities
will be made periodically and to the extent funds are legally available for such
purpose, but may be made subject to terms which allow the issuer to defer
dividend payments for specified periods. Preferred securities may be convertible
or exchangeable into shares of Exelon common stock of indebtedness.
Preferred securities may be sold directly through underwriters or
dealers in connection with an acquisition in a manner similar to that described
for common stock in E. 1 (a) above.
(c) Long-Term Debt
The aggregate amount of financing obtained by Exelon during the
Authorization Period from issuance and sale of long-term debt securities, when
combined with the common stock (other than for benefit plans or stock purchase
and dividend reinvestment plans and other
________________________
/17/ The Commission has previously approved the issuance of common stock as
consideration for the acquisition of a new business in an exempt transaction or
transaction that has been approved in a separate proceeding. See e.g., SCANA
Corp., Holding Co. Act Release No. 35-27135 (Feb. 14, 2000).
/18/ Recently, the Commission approved a similar financing application filed by
Southern Company in which Southern Company requested approval to issue preferred
securities and long-term debt, directly or indirectly through special-purpose
financing entities. See The Southern Company, Holding Co. Act Release No.
35-27134 (Feb. 9, 2000). In that case, the Commission took account of the
changing needs of registered holding companies for sources of capital other than
common equity and short-term debt brought about primarily by the elimination of
restrictions under the Act on investments in various types of non-core
businesses (e.g., EWGs, FUCOs, ETCs and businesses allowed by Rule 58). The
Commission noted that, without the ability to raise capital in external markets
that is appropriate for such investments, registered holding companies would be
at a competitive disadvantage to other energy companies that are not subject to
regulation under the Act.
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than shares issued in the Merger), short-term debt and preferred securities
issued and then outstanding, as described in this section, shall not exceed $8
billion for the uses set forth in Item1.D. above. Issuances of securities by
Genco shall count against such aggregate limitation as set forth in Item 1.E.3.b
below. Such long-term debt securities would be comprised of bonds, notes,
medium-term notes or debentures under one or more indentures (each, the "Exelon
Indenture") or long-term indebtedness under agreements with banks or other
institutional lenders.
Any long-term debt security would have such designation, aggregate
principal amount, maturity, interest rate(s) or methods of determining the same,
terms of payment of interest, redemption provisions, sinking fund terms and
other terms and conditions as Exelon may determine at the time of issuance. Any
long-term debt (a) may be convertible into any other securities of Exelon, (b)
will have maturities ranging from one to 50 years, (c) may be subject to
optional and/or mandatory redemption, in whole or in part, at par or at various
premiums above the principal amount thereof, (d) may be entitled to mandatory or
optional sinking fund provisions, (e) may provide for reset of the coupon
pursuant to a remarketing arrangement, (f) may be subject to tender or the
obligation of the issuer to repurchase at the election of the holder or upon the
occurrence of a specified event, (g) may be called from existing investors by a
third party and, (h) may be entitled to the benefit of positive or negative
financial or other covenants.
The maturity dates, interest rates, redemption and sinking fund
provisions, tender or repurchase and conversion features, if any, with respect
to the long-term securities of a particular series, as well as any associated
placement, underwriting or selling agent fees, commissions and discounts, if
any, will be established by negotiation or competitive bidding.
Borrowings from the banks and other financial institutions may be
unsecured and pari passu with debt securities issued under the Exelon Indenture
and the short-term credit facilities (as described below). Long-term debt may be
secured by property of Exelon. Specific terms of any borrowings will be
determined by Exelon at the time of issuance and will comply in all regards with
the parameters on financing authorization set forth in Section D above.
The request for authorization for Exelon to issue long-term debt
securities is consistent with authorization that the Commission has granted to
other holding companies./19/
(d) Short-Term Debt
Exelon seeks authority to issue short-term debt to provide for the
reissuance of pre-Merger letters or lines of credit or commercial paper and to
provide financing for general corporate purposes, working capital requirements
and temporary financing of Subsidiary capital
_____________________________
/19/ See National Grid Group, Holding Co. Act Release No. 35-27154 (Mar. 15,
2000); SCANA Corporation, Holding Co. Act Release No. 35-27135 (Feb. 14, 2000);
The Southern Company, Holding Co. Act Release No. 35-27134 (Feb. 9, 2000);
Dominion Resources, Inc., Holding Co. Act Release No. 35-27112 (Dec. 15, 1999)
(authorizing the issuance of debt securities by the registered holding company,
including the refinancing of $4.5 billion of acquisition indebtedness); Cinergy
Corp., Holding Co. Act Release No. 35-26909 (Aug. 21, 1998) (authorizing the
issuance of up to $400 million of unsecured debt securities); Conectiv, Inc.,
Holding Co. Act Release No. 35-26921 (Sept. 28, 1998) (authorizing issuance of
up to $250 million of debentures).
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expenditures. The aggregate amount of financing obtained by Exelon during the
Authorization Period from issuance and sale of short-term debt, when combined
with common stock (other than for employee benefit plans or stock purchase and
dividend reinvestment plans as discussed below and other than shares issued in
the Merger), long-term debt, and preferred securities issued and then
outstanding, as described in this section, shall not exceed $8 billion for the
uses set forth in Item1.D. above.
Any short-term debt outstanding or credit facility existing at the
time of the Merger may be assumed by Exelon./20/ Existing financing arrangements
at PECO will not be assumed by Exelon. See item I.E.3 below. However, Genco is
expected to assume the outstanding pollution control loan obligations of PECO
($369 million outstanding at March 31, 2000) which financed facilities located
at generating stations that will be transferred to Genco by PECO. None of
ComEd's financing obligations will be assumed by Genco.
Exelon may also sell commercial paper, from time to time, in
established domestic or European commercial paper markets. Such commercial paper
would be sold to dealers at the discount rate or the coupon rate per annum
prevailing at the date of issuance for commercial paper of comparable quality
and maturities sold to commercial paper dealers generally. It is expected that
the dealers acquiring commercial paper from Exelon will reoffer such paper at a
discount to corporate, institutional and, with respect to European commercial
paper, individual investors. Institutional investors are expected to include
commercial banks, insurance companies, pension funds, investment trusts,
foundations, colleges and universities and finance companies.
Exelon may, without counting against the limit set forth above,
maintain back up lines of credit in connection with a commercial paper program
in an aggregate amount not to exceed the amount of authorized commercial paper.
Credit lines may be set up for use by Exelon for general corporate
purposes in addition to credit lines to support commercial paper as described in
this subsection. Exelon will borrow and repay under such lines of credit, from
time to time, as it is deemed appropriate or necessary.
(e) Total Financing Sought
The aggregate amount of equity, preferred securities, long-term debt
and short-term debt financing to be obtained by Exelon during the Authorization
Period (excluding securities issued during the Authorization Period to refund
then outstanding securities) shall be not greater than $ 8 billion. In addition,
Exelon shall have the authority to issue guarantees up to $4.5 billion. As set
forth below, Exelon's authority will be aggregated with Genco for purposes of
the $8 billion limitation on financing and the $4.5 billion limitation on
guarantees.
(f) Other Securities
____________________
/20/ Unicom currently guaranties committed lines of bank credit available to a
Non-Utility Subsidiary for $400 million (from a group of 20 banks) which expire
on December 15, 2000. This facility and guarantee may remain in place at Exelon
following the Merger.
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In addition to the specific securities for which authorization is
sought herein, Exelon may also find it necessary or desirable to minimize
financing costs or to obtain new capital under then-existing market conditions
to issue and sell other types of securities from time to time during the
Authorization Period. The issuance of any such securities would be subject to
the aggregate $8 billion limit on equity, preferred securities, long-term debt
and short-term debt discussed in Section E.1(d), and to the parameters on
financing authorization set forth in Section D above. Exelon requests that the
Commission reserve jurisdiction over the issuance of additional types of
securities. Exelon also will undertake to file a post-effective amendment in
this proceeding which will describe the general terms of each such security and
the amount to be issued and to request a supplemental order of the Commission
authorizing the issuance thereof by Exelon. Exelon requests that each
supplemental order be issued by the Commission without further public notice.
(g) Financing Risk Management Devices
i. Interest Rate Risk. Exelon requests authority to enter into,
perform, purchase and sell financial instruments intended to reduce or manage
the volatility of interest rates, including but not limited to interest rate
swaps, caps, floors, collars and forward agreements or any other similar
agreements. Hedges may also include issuance of structured notes (i.e., a debt
instrument in which the principal and/or interest payments are indirectly linked
to the value of an underlying asset or index), or transactions involving the
purchase or sale, including short sales, of U.S. Treasury or Agency (e.g., FNMA)
obligations or LIBOR based swap instruments (collectively referred to as "Hedge
Instruments"). The transactions would be for fixed periods and stated notional
amounts. Exelon would employ interest rate derivatives as a means of prudently
managing the risk associated with any of its outstanding debt issued pursuant to
this authorization or an applicable exemption by, in effect, synthetically (i)
converting variable rate debt to fixed rate debt, (ii) converting fixed rate
debt to variable rate debt and (iii) limiting the impact of changes in interest
rates resulting from variable rate debt. In no case will the notional principal
amount of any interest rate swap exceed the greater of the value of the
underlying debt instrument or the present market value of the underlying debt
instrument and related interest rate exposure. Transactions will be entered into
for a fixed or determinable period. Thus, Exelon will not engage in speculative
transactions unassociated with its financing needs and activities. Exelon will
only enter into agreements with counterparties ("Approved Counterparties") whose
senior debt ratings, as published by a national recognized rating agency are
greater than or equal to "BBB," or an equivalent rating.
ii. Anticipatory Hedges. In addition, Exelon and the
Subsidiaries request authorization to enter into interest rate hedging
transactions with respect to anticipated debt offerings (the "Anticipatory
Hedges"), subject to certain limitations and restrictions. Such Anticipatory
Hedges would only be entered into with Approved Counterparties, and would be
utilized to fix and/or limit the interest rate risk associated with any new
issuance through (i) a forward sale of exchange-traded Hedge Instruments (each a
"Forward Sale"), (ii) the purchase of put options on Hedge Instruments (a "Put
Options Purchase"), (iii) a Put Options Purchase in combination with the sale of
call options on Hedge Instruments (a "Zero Cost Collar"), (iv) transactions
involving the purchase or sale, including short sales, of Hedge Instruments, or
(v) some combination of a Forward Sale, Put Options Purchase, Zero Cost Collar
and/or other derivative or cash transactions, including, but not limited to
structured notes, caps and collars, appropriate for the
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Anticipatory Hedges. Anticipatory Hedges may be executed on-exchange ("On-
Exchange Trades") with brokers through the opening of futures and/or options
positions traded on the Chicago Board of Trade ("CBOT"), the opening of
over-the-counter positions with one or more counterparties ("Off-Exchange
Trades"), or a combination of On-Exchange Trades and Off-Exchange Trades. Exelon
or Subsidiary will determine the optimal structure of each Anticipatory Hedge
transaction at the time of execution. Exelon or a Subsidiary may decide to lock
in interest rates and/or limit its exposure to interest rate increases./21/
iii. Accounting Standards. Exelon and its Subsidiaries will
comply with Statement of Financial Accounting Standards ("SFAS") 80 ("Accounting
for Futures Contracts"), SFAS 133 ("Accounting for Derivatives Instruments and
Hedging Activities"), when effective in January 2001 or such other standards
relating to accounting for derivative transactions as are adopted and
implemented by the Financial Accounting Standards Board ("FASB").
2. Financing Subsidiaries
Exelon and the Subsidiaries request authority to acquire, directly or
indirectly, the equity securities of one or more corporations, trusts,
partnerships or other entities created specifically for the purpose of
facilitating the financing of the authorized and exempt activities (including
exempt and authorized acquisitions) of Exelon and the Subsidiaries through the
issuance of long-term debt preferred securities or equity securities, to third
parties and the transfer of the proceeds of such financings to Exelon or such
Subsidiaries./22/ Exelon or a Subsidiary may, if required, guarantee or enter
into support or expense agreements in respect of the obligations of any such
Financing Subsidiaries. Subsidiaries may also provide guarantees and enter into
support or expense agreements, if required, on behalf of such entities pursuant
to Rules 45(b)(7) and 52, as applicable. If the direct parent company of a
Financing Subsidiary is authorized in this proceeding or any subsequent
proceeding to issue long-term debt or preferred or equity securities, then the
amount of such securities issued by that Financing Subsidiary would count
against the limitation applicable to its parent for those securities. In such
cases, however, the guarantee by the parent of that security issued by its
Financing Subsidiary would not be counted against the limitations on Exelon
Guarantees or Subsidiary Guarantees, as the case may be, set forth in Item I.E.5
below. In other cases, in which the parent company is not authorized herein or
in a subsequent proceeding to issue similar types of securities, the amount of
any guarantee not exempt pursuant to Rules 45(b)(7) and 52 that is entered into
by the parent company with respect to securities issued by its Financing
Subsidiary would be counted against
---------------------------------------
/21/ The proposed terms and conditions of the Interest Rate Hedges and
Anticipatory Hedges are substantially the same as the Commission has approved in
other cases. See SCANA Corporation, Holding Co. Act Release No. 35-27135 (Feb.
14, 2000); New Century Energies, Inc., et al., Holding Co. Act Release No. 35-
27000 (April 7, 1999); and Ameren Corp., et al., Holding Co. Act Release No. 35-
27053 (July 23, 1999). See note 8 above regarding risk management activities of
Genco.
/22/ One of the special purpose subsidiaries already in existence at PECO or
Unicom, such as PECO-Energy Transition Trust or ComEd Transitional Funding Trust
may be used for these purposes as well.
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the limitation on Exelon Guarantees or Non-Utility Subsidiary Guarantees, as the
case may be. Each of the Subsidiaries also requests authorization to enter into
an expense agreement with its respective financing entity, pursuant to which it
would agree to pay all expenses of such entity. Any amounts issued by such
financing entities to third parties pursuant to this authorization will be
included in the overall external financing limitation authorized herein for the
immediate parent of such financing entity. However, the underlying intra-system
mirror debt and parent guarantee shall not be so included./23/
3. Utility Subsidiary Financing
As indicated on Exhibits M-1 and M-2 hereto, certain Utility
Subsidiaries currently have financing arrangements in place. These arrangements
will remain in place following the Merger and are described in more detail in
Exhibits M-1 and M-2 hereto.
Rule 52 provides an exemption from the prior authorization
requirements of the Act for most of the issuances and sales of securities by the
Utility Subsidiaries because they must be approved by the relevant state public
utility commission, which, in the case of PECO is the Pennsylvania Public
Utility Commission (the "Pennsylvania Commission") and in the case of ComEd is
the Illinois Commerce Commission (the "Illinois Commission")./24/
However, certain external financings by the Utility Subsidiaries for
which authorization is requested herein may be outside the Rule 52 exemption. In
particular, Genco is not subject to the jurisdiction of any state commission in
respect of securities issuances. The authority herein sought excludes financings
exempt under Rule 52. Financings obtained under this authorization will be used
for general corporate purposes and working capital requirements, including
contributions to the Utility Money Pool. These financings may be made under
instruments in place at the time of the Merger or new agreements so long as any
such instrument or agreement complies with the limitations described herein.
(a) Short-Term Debt
Authority is requested for ComEd, PECO and Genco to issue commercial
paper and establish and borrow under credit lines in the aggregate amount of
$2.7 billion to be outstanding at any one time during the Authorization Period.
ComEd currently has $1.2 billion and PECO $1.5 billion of short-term financing
authority from the Federal Energy Regulatory Commission under Section 204 of the
Federal Power Act. Because the generating activities of ComEd and PECO will be
transferred to Genco in the Restructurings and it cannot be determined
---------------------------
/23/ The authorization sought herein with respect to financing entities is
substantially the same as that given to New Century Energies, Inc., Holding Co.
Act Release No. 35-26750 (Aug. 1, 1997); Conectiv, Holding Co. Act Release No.
35-26833 (Feb. 26, 1998); Cinergy Corp., Holding Co. Act Release No. 35-26984
(Mar. 1, 1999); Dominion Resources, Inc., Holding Co. Act Release No. 35-27112
(Dec. 15, 1999) and SCANA Corporation, Holding Co. Act Release No. -35-27135
(Feb. 14, 2000).
/24/ In general, all securities issuances by ComEd must be approved by the
Illinois Commission other than indebtedness with a final maturity of less than
one year, renewable for a period of not more than two years. 220 ILCS 5/6-102.
Similarly, all securities issuances by PECO must be approved by the Pennsylvania
Commission, other than securities with a maturity of one year or less or having
no fixed maturity but payable on demand. 66 Pa.C.S.1901(b)(4)and (5).
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at this time what levels of short-term debt may be needed by ComEd, PECO and
Genco, Exelon requests that the aggregate short-term borrowing limitation now in
place for ComEd and PECO ($2.7 billion outstanding at any time) be the
applicable limitation on an aggregate basis for all three Utility Subsidiaries.
The above-named Utility Subsidiaries request authority to sell
commercial paper, from time to time, in established domestic commercial paper
markets in a manner similar to Exelon as discussed above. Such Utility
Subsidiaries may, without counting against the limit set forth above, maintain
back up lines of credit in connection with a commercial paper program in an
aggregate amount not to exceed the amount of authorized commercial paper.
Credit lines may be set up for use by the Utility Subsidiaries for
general corporate purposes in addition to credit lines to support commercial
paper as described in this subsection. The Utility Subsidiaries will borrow and
repay under such lines of credit, from time to time, as it is deemed appropriate
or necessary. Subject to the limitations described herein, each such Utility
Subsidiary may engage in other types of short-term financings as it may deem
appropriate in light of its needs and market conditions at the time of issuance.
(b) Genco Financing and Assumption of Indebtedness
Although Genco is an "electric utility company" under the Act, it will
not be subject to the jurisdiction of any State commission in connection with
the issuance of securities./25/ Accordingly, all securities issuances for Genco
will require approval of the Commission.
The request for Genco to engage in short-term financing is included
above. The aggregate amount of common equity, preferred securities, long-term
debt and short-term debt financing to be obtained by Genco during the
Authorization Period (excluding indebtedness issued during the Authorization
Period to refund then outstanding indebtedness) shall be not greater than $ 5.5
billion. Any issuance of securities by Genco under this authorization will
reduce, dollar for dollar, the aggregate limitation applicable to Exelon.
Genco is expected to assume the obligations on about $369 million of
pollution control loan obligations of PECO issued in connection with facilities
located at the generating stations to be transferred to Genco from PECO.
Further, PECO currently provides a $100 million guarantee ensuring the safety of
the nuclear stations owned by AmerGen in the event of an outage. Genco seeks
authority to assume that guarantee following the Merger (with or without the
release of PECO).
Preferred stock or other types of preferred securities may be issued
in one or more series with such rights, preferences, and priorities as may be
designated in the instrument creating each such series, as determined by Genco's
board of directors. Dividends or distributions on preferred securities will be
made periodically and to the extent funds are legally
------------------------
/25/ By virtue of Section 318 of the Federal Power Act, Genco will not be
subject to the jurisdiction of FERC in connection with the issuance of
securities because it will be subject to the Commission's jurisdiction in that
regard.
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available for such purpose, but may be made subject to terms which allow the
issuer to defer dividend payments for specified periods.
Preferred securities may be sold directly through underwriters or
dealers in connection with an acquisition in a manner similar to that described
for common stock in E. 1 (a) above.
Long-term debt securities would be comprised of bonds, notes medium-
term notes or debentures under one or more indentures (each a "Genco Indenture")
or long-term indebtedness under agreements with banks or other institutional
lenders.
Any long-term debt security would have such designation, aggregate
principal amount, maturity, interest rate(s) or methods of determining the same,
terms of payment of interest, redemption provisions, sinking fund terms and
other terms and conditions as Genco may determine at the time of issuance. Any
long-term debt (a) may be convertible into any other securities of Genco, (b)
will have maturities ranging from one to 50 years, (c) may be subject to
optional and/or mandatory redemption, in whole or in part, at par or at various
premiums above the principal amount thereof, (d) may be entitled to mandatory or
optional sinking fund provisions, (e) may provide for reset of the coupon
pursuant to a remarketing arrangement, (f) may be subject to tender to the
issuer for repurchase or be subject to the obligation of the issuer to
repurchase at the election of the holder or upon the occurrence of a specified
event, (g) may be called from existing investors by a third party and (h) may be
entitled to the benefit of positive or negative financial or other covenants.
The maturity dates, interest rates, redemption and sinking fund
provisions and conversion features, if any, with respect to the long-term
securities of a particular series, as well as any associated placement,
underwriting or selling agent fees, commissions and discounts, if any, will be
established by negotiation or competitive bidding.
Borrowings from the banks and other financial institutions may be
unsecured and will rank pari passu with debt securities issued under the Genco
Indenture and the short-term credit facilities (as described below). Long-term
debt may be secured by property of Genco. Specific terms of any borrowings will
be determined by Genco at the time of issuance and will comply in all regards
with the parameters on financing authorization set forth in Section D above.
Authority is requested for Genco to issue commercial paper and
establish credit lines. Genco requests authority to sell commercial paper, from
time to time, in established domestic commercial paper markets in a manner
similar to Exelon as discussed above. Genco may, without counting against the
limit set forth above, maintain back up lines of credit in connection with a
commercial paper program in an aggregate amount not to exceed the amount of
authorized commercial paper.
Credit lines may be set up for use by Genco for general corporate
purposes in addition to credit lines to support commercial paper as described in
this subsection. Genco will borrow and repay under such lines of credit, from
time to time, as it is deemed appropriate or necessary. Subject to the
limitations described herein, Genco may engage in other types of short-term
financings as it may deem appropriate in light of its needs and market
conditions at the time of issuance.
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Authority is sought for Genco to enter into guarantees of the
obligations of its Subsidiaries ("Genco Guarantees") as set forth below in Item
1.E.5.
(c) Financing Risk Management Devices. To the extent not exempt under
Rule 52, the Utility Subsidiaries requests authority to enter into, perform,
purchase and sell interest rate management devices and Anticipatory Hedges
subject to the limitations and requirements applicable to Exelon described in
Item I.E.1.(g).
4. Non-Utility Subsidiary Financings
As noted on Exhibits M-1 and M-2 hereto, certain Non-Utility
Subsidiaries have financing arrangements in place. These arrangements are
expected to remain in place following consummation of the Merger. Certain
guarantees in favor of a direct or indirect Non-Utility Subsidiary issued by
another Subsidiary may be replaced by Exelon guarantees as described below. In
addition, the Merger U-1 contemplates, and the order permitting the Investment
U-1 to become effective will authorize, the formation or retention of other Non-
Utility Subsidiaries named therein which do not currently have outstanding debt.
It is expected that future financing by all such Non-Utility Subsidiaries will
be made pursuant to the terms of Rule 52.
The Non-Utility Subsidiaries are engaged in and expect to continue to
be active in the development and expansion of their existing energy-related or
otherwise functionally-related, non-utility businesses. They will be competing
with large, well-capitalized companies in different sectors of the energy
industry and other industries. In order to quickly and effectively invest in
such competitive arenas, it will be necessary for the Non-Utility Subsidiaries
to have the ability to engage in financing transactions which are commonly
accepted for such types of investments. These financings will include issuance
by Non-Utility Subsidiaries of common stock or other equity, preferred
securities or debt in capital raising transactions and to be used to acquire
stock or assets in then existing unaffiliated companies which will become
Affiliates or Subsidiaries so long as such acquisitions are consistent with the
Non-Utility Subsidiaries' then existing business in accordance with Rule 52(b)
and Rule 58. The majority of such financings will be exempt from prior
Commission authorization pursuant to Rule 52(b).
The Non-Utility Subsidiaries may engage, from time to time, in other
types of security financing with non-affiliates that are not exempt from prior
Commission approval. The Non-Utility Subsidiaries, therefore, (i) request that
the Commission reserve jurisdiction over the issuance of such additional types
of securities and the amounts thereof and (ii) will undertake to cause a post-
effective amendment to be filed in this proceeding which will request a
supplemental order of the Commission authorizing the issuance thereof by the
subject Non-Utility Subsidiary.
In order to be exempt under Rule 52(b), any loans by Exelon to a Non-
Utility Subsidiary or by one Non-Utility Subsidiary to another must have
interest rates and maturities that are designed to parallel the lending
company's effective cost of capital. However, in the limited circumstances where
the Non-Utility Subsidiary making the borrowing is not wholly owned by Exelon,
directly or indirectly, authority is requested under the Act for Exelon or a
Non-Utility Subsidiary, as the case may be, to make such loans to such
subsidiaries at interest rates and maturities designed to provide a return to
the lending company of not less than its
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effective cost of capital./26/ If such loans are made to a Non-Utility
Subsidiary, such company will not sell any services to any associate Non-Utility
Subsidiary unless such company falls within one of the categories of companies
to which goods and services may be sold on a basis other than "at cost," as
described in the Merger U-1. Furthermore, in the event any such loans are made,
Exelon will include in the next certificate filed pursuant to Rule 24 in this
proceeding substantially the same information as that required on Form U-6B-2
with respect to such transaction.
5. Guarantees, Intra-system Advances and Intra-System Money Pool
(a) Guarantee and Intra-system Advances
Exelon requests authorization to enter into guarantees, obtain letters
of credit, enter into support or expense agreements or otherwise provide credit
support with respect to the obligations of its Subsidiaries as may be
appropriate or necessary to enable such Subsidiaries to carry on in the ordinary
course of their respective businesses in an aggregate principal amount, and to
enter into guarantees of non-affiliated third parties/27/ obligations in the
ordinary course of Exelon's business ("Exelon Guarantees") in an amount,
together with Genco Guaranties and Non-Utility Subsidiary Guaranties (defined
below), not to exceed $4.5 billion outstanding at any one time (not taking into
account obligations exempt pursuant to Rule 45). Included in this amount are
guarantees and other credit support mechanisms by Unicom and PECO Energy in
favor of their respective Subsidiaries which were previously issued. Any such
guarantees shall also be subject to the limitations of Rule 53(a)(1) or Rule
58(a)(1), as applicable. Exelon and Genco propose to charge each Subsidiary a
fee for each guarantee provided on its behalf that is comparable to those
obtainable by the beneficiary of the guarantee from third parties.
A substantial amount of the guarantees proposed to be issued by Exelon
will be in connection with the business of Genco. At the time of the
Restructurings, Genco will be a newly formed business consisting of the
generating assets formerly held by ComEd and PECO. Genco will also conduct the
power marketing and trading operations previously conducted by ComEd and PECO.
For various business reasons, including the relative ratings of Exelon and
Genco, Exelon may wish to provide credit support in connection with Genco's
obligations to independent power producers to purchase the output of generating
units for a long-term period, in connection with the trading positions of Genco
entered into in the ordinary course of Genco's energy marketing and trading
business and for other purposes. Exelon may wish to provide guarantees to Genco
up to this amount for reasons that are not unusual in today"s increasingly
competitive electricity markets./28/
-------------------------
/26/ The Commission has granted similar authority to another registered holding
company. See Entergy Corporation, et al., Holding Co. Act Release No. 35-27039
(June 22, 1999).
/27/ For example, as one of the founding members of the Midwest System Operator
("MISO"), Unicom issued guaranties to creditors on behalf of MISO to assist
MISO's start-up operations.
/28/ PECO is currently the top holding company and operating utility and also
engages directly in the power trading business. Because this trading operation
is carried on at PECO there is no need for PECO to guaranty the trading
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As part of the proposed corporate restructuring, multiple large power
purchase contracts will be transferred to Genco from PECO and ComEd. Some of
these long-term contracts are agreements to purchase the entire output of
merchant plants being developed by independent power producers, or of the entire
output of existing plants purchased by independent power producers. The
financing for these projects is secured by the current power purchase contracts
with PECO or ComEd, and the expected stream of revenues to be derived therefrom.
The terms of certain of the power purchase contracts require lender consent
before the contracts may be assigned, even among affiliated entities. The
lenders acting as the ultimate financiers of the projects will not consent to
the assignment of the contracts unless they believe they will be as financially
secure (or more financially secure) post-assignment than they were pre-
assignment. Based on discussions with the lenders, Exelon"s understanding of
these arrangements, and custom and practice in the industry, Genco expects the
lenders to require the provision of substantial guarantees by Exelon. The second
reason for the requested level of guarantee authority is that many of the
counterparties with whom Genco will buy and sell power on a short-term basis may
demand that Genco provide substantial credit support, as its credit rating may
not be as strong as the present credit ratings of ComEd or PECO.
The provision of parent guarantees by holding companies to affiliates
in the generation and power marketing business is a standard industry practice.
Given the substantial volume of Genco"s business, Exelon"s $4.5 billion request
for authority to issue guarantees, including the guarantees relating to Genco,
is reasonable and appropriate under current industry practice. Exelon expects
Genco to grow quickly and obtain its own investment grade rating at some time
after the Restructuring. To the extent Genco has such a rating, the need for
support from Exelon will be reduced. However, in that situation, Genco will
likely be required to offer its guarantee in connection with the business
activities of its Subsidiaries through which Exelon's generation business
(additional EWGs and/or FUCOs) will be developed. Consequently, Exelon and Genco
seek an aggregate limitation for guarantees of $4.5 billion (which limit also
includes Non-Utility Subsidiary Guarantees).
The existing intra-system guarantees and support provided by Unicom or
PECO, which are expected to remain in place following the Merger, are as
follows:
Unicom: At March 31, 2000, Unicom had authorized guarantees of $802
million including guarantees relating to obligations of Unicom Thermal
Technologies, Unicom Energy, Inc., Unicom Energy Ohio, Unicom Enterprises and
the Midwest Independent System Operator. ComEd and Unicom Investment, Inc.
entered into an intercompany agreement relating to the sale of certain fossil
generating stations by ComEd under which Unicom Investment executed a 12 year
promissory note to ComEd for $2.5 billion./27/
-------------------------------------------------------------------------------
obligations of any subsidiary. Unicom has entered into substantial guarantees on
behalf of its Subsidiaries in connection with their energy trading and related
activities, but has not found it necessary or desirable to guarantee obligations
in connection with ComEd activities.
/29/ See note 4 to notes to financial statements in Unicom's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000.
19
<PAGE>
PECO: At March 31, 2000 PECO had $110 million in outstanding
guarantees or commitments, including a $100 million obligation in favor of
AmerGen/30/ and $10 million in favor of its Exelon Infrastructure Services
subsidiaries.
Exelon requests that this guarantee authority include the ability to
guarantee debt. The debt guaranteed will comply with the parameters for
financing authorization set forth in Section D above. Any guarantees or other
credit support arrangements outstanding at the end of the Authorization Period
will continue until expiration or termination in accordance with their terms.
(b) Non-Utility Subsidiary Guarantees.
In addition to guarantees that may be provided by Exelon, Non-Utility
Subsidiaries request authority to provide to other Non-Utility Subsidiaries
guarantees and other forms of credit support ("Non-Utility Subsidiary
Guarantees"). The Non-Utility Subsidiary Guaranties, together with Genco
Guaranties and Exelon Guaranties will not exceed $4.5 billion outstanding at any
one time in an aggregate principal amount, exclusive of any guarantees and other
forms of credit support that are exempt pursuant to Rule 45(b) and Rule 52(b),
provided however, that the amount of Non-Utility Guarantees in respect of
obligations of any Rule 58 Subsidiaries shall remain subject to the limitations
of Rule 58(a)(1). The Non-Utility Subsidiary providing any such credit support
may charge its associate company a fee for each guarantee provided on its behalf
determined in the same manner as specified above.
(c) Authorization and Operation of the Money Pools.
Exelon and the Utility Subsidiaries hereby request authorization to
establish the Utility Money Pool, and the Utility Subsidiaries, to the extent
not exempted by Rule 52, also request authorization to make unsecured short-term
borrowings from the Utility Money Pool and to contribute surplus funds to the
Utility Money Pool and to lend and extend credit to (and acquire promissory
notes from) one another through the Utility Money Pool. In addition to the
Utility Subsidiaries, Exelon requests existing utility related financing
entities be allowed to participate in the Utility Money Pool as a result of its
financing relationship with ComEd or PECO, respectively. Thus, for purposes of
this Section E.5(b) only, the term Utility Subsidiaries shall include those
entities. In addition, Exelon and the remaining Subsidiaries, all of which are
Non-Utility Subsidiaries, hereby request authorization to establish the Non-
Utility Money Pool. The Non-Utility Money Pool activities of all of the Non-
Utility Subsidiaries are exempt from the prior approval requirements of the Act
under Rule 52. Exelon is requesting authorization to contribute surplus funds
and to lend and extend credit to: (i) the Utility Subsidiaries through the
Utility Money Pool and (ii) the Non-Utility Subsidiaries through the Non-Utility
Money Pool. While Exelon is requesting the authorization in this part (c), it
may not implement either the Utility or Non-Utility Money Pool immediately upon
effectiveness of the Merger for various reasons including requirements for state
regulatory commission approvals.
The Applicants believe that the cost of the proposed borrowings
through the two Money Pools will generally be more favorable to the borrowing
participants than the comparable cost of external short-term borrowings, and the
yield to the participants contributing available funds to the two Money Pools
will generally be higher than the typical yield on short-term investments.
----------------------------
/30/ PECO has issued letter agreements to provide funding up to a total of $100
million to be available to AmerGen in connection with the operation and
maintenance of all of the commercial nuclear power reactors acquired or to be
acquired by AmerGen.
20
<PAGE>
i. Utility Money Pool
Under the proposed terms of the Utility Money Pool, short-term funds
would be available from the following sources for short-term loans to the
Utility Subsidiaries from time to time: (1) surplus funds in the treasuries of
Utility Money Pool participants other than Exelon, (2) surplus funds in the
treasury of Exelon, and (3) proceeds from bank borrowings by Utility Money Pool
participants or the sale of commercial paper by Exelon or the Utility
Subsidiaries for loan to the Utility Money Pool ("External Funds"). Funds would
be made available from such sources in such order as the administrator of the
Utility Money Pool (likely Exelon Services) may determine would result in a
lower cost of borrowing, consistent with the individual borrowing needs and
financial standing of the companies providing funds to the pool. The
determination of whether a Utility Money Pool participant at any time has
surplus funds to lend to the Utility Money Pool or shall lend funds to the
Utility Money Pool would be made by such participant's chief financial officer
or treasurer, or by a designee thereof, on the basis of cash flow projections
and other relevant factors, in such participant's sole discretion. See Exhibit
J-1 for a copy of the Form of Utility Money Pool Agreement.
As discussed in more detail below, a separate Non-Utility Money Pool
will be established by Exelon with certain Non-Utility Subsidiary companies of
Exelon./31/
Utility Money Pool participants that borrow would borrow pro rata from
each company that lends, in the proportion that the total amount loaned by each
such lending company bears to the total amount then loaned through the Utility
Money Pool. On any day when more than one fund source (e.g., surplus treasury
funds of Exelon and other Utility Money Pool participants ("Internal Funds") and
External Funds), with different rates of interest, is used to fund loans through
the Utility Money Pool, each borrower would borrow pro rata from each such fund
source in the Utility Money Pool in the same proportion that the amount of funds
provided by that fund source bears to the total amount of short-term funds
available to the Utility Money Pool.
Borrowings from the Utility Money Pool would require authorization by
the borrower's chief financial officer or treasurer, or by a designee thereof.
No party would be required to effect a borrowing through the Utility Money Pool
if it is determined that it could (and had authority to) effect a borrowing at
lower cost directly from banks or through the sale of its own commercial paper.
No loans through the Utility Money Pool would be made to, and no borrowings
through the Utility Money Pool would be made by, Exelon.
The cost of compensating balances, if any, and fees paid to banks to
maintain credit lines and accounts by Utility Money Pool participants lending
External Funds to the Utility Money Pool would initially be paid by the
participant maintaining such line. A portion of such costs -- or all of such
costs in the event a Utility Money Pool participant establishes a line of credit
solely for purposes of lending any External Funds obtained thereby into the
Utility Money Pool -- would be retroactively allocated every month to the
companies borrowing such External
-----------------------
/31/ Such other subsidiaries consist of each of the Non-Utility Subsidiaries
including Exelon Service.
21
<PAGE>
Funds through the Utility Money Pool in proportion to their respective daily
outstanding borrowings of such External Funds.
If only Internal Funds make up the funds available in the Utility
Money Pool, the interest rate applicable and payable to or by Subsidiaries for
all loans of such Internal Funds will be the rates for high-grade unsecured 30-
day commercial paper sold through dealers by major corporations as quoted in The
Wall Street Journal.
If only External Funds comprise the funds available in the Utility
Money Pool, the interest rate applicable to loans of such External Funds would
be equal to the lending company's cost for such External Funds (or, if more than
one Utility Money Pool participant had made available External Funds on such
day, the applicable interest rate would be a composite rate equal to the
weighted average of the cost incurred by the respective Utility Money Pool
participants for such External Funds).
In cases where both Internal Funds and External Funds are concurrently
borrowed through the Utility Money Pool, the rate applicable to all loans
comprised of such "blended" funds would be a composite rate equal to the
weighted average of (a) the cost of all Internal Funds contributed by Utility
Money Pool participants (as determined pursuant to the second-preceding
paragraph above) and (b) the cost of all such External Funds (as determined
pursuant to the immediately preceding paragraph above). In circumstances where
Internal Funds and External Funds are available for loans through the Utility
Money Pool, loans may be made exclusively from Internal Funds or External Funds,
rather than from a "blend" of such funds, to the extent it is expected that such
loans would result in a lower cost of borrowings.
Funds not required by the Utility Money Pool to make loans (with the
exception of funds required to satisfy the Utility Money Pool's liquidity
requirements) would ordinarily be invested in one or more short-term
investments, including:(i) interest-bearing accounts with banks; (ii)
obligations issued or guaranteed by the U.S. government and/or its agencies and
instrumentalities, including obligations under repurchase agreements; (iii)
obligations issued or guaranteed by any state or political subdivision thereof,
provided that such obligations are rated not less than "A" by a nationally
recognized rating agency; (iv) commercial paper rated not less than "A-1" or "P-
1" or their equivalent by a nationally recognized rating agency; (v) money
market funds; (vi) bank certificates of deposit, (vii) Eurodollar funds; and
(viii) such other investments as are permitted by Section 9(c) of the Act and
Rule 40 thereunder.
The interest income and investment income earned on loans and
investments of surplus funds would be allocated among the participants in the
Utility Money Pool in accordance with the proportion each participant's
contribution of funds bears to the total amount of funds in the Utility Money
Pool and the cost of funds provided to the Utility Money Pool by such
participant.
Each Applicant receiving a loan through the Utility Money Pool would
be required to repay the principal amount of such loan, together with all
interest accrued thereon, on demand and in any event not later than one year
after the date of such loan. All loans made through the Utility Money Pool may
be prepaid by the borrower without premium or penalty.
22
<PAGE>
ii. Non-Utility Money Pool
The Non-Utility Money Pool will be operated on the same terms and
conditions as the Utility Money Pool, except that Exelon funds made available to
the Money Pools will be made available to the Utility Money Pool first and
thereafter to the Non-Utility Money Pool. No loans through the Non-Utility Money
Pool would be made to, and no borrowings through the Non-Utility Money Pool
would be made by, Exelon. See Exhibit J-2 for a copy of the form of Non-Utility
Money Pool Agreement. All contributions to, and borrowings from, the Non-Utility
Money Pool are exempt pursuant to the terms of Rule 52 under the Act, except
contributions and extensions of credit by Exelon, authorization for which is
hereby requested.
iii. Other Contributions to Money Pool
Exelon and the Utility Subsidiaries may contribute funds from the
issuance of short term debt as authorized above to the Utility Money Pool.
Exelon may contribute funds from the issuance of short term debt to the Non-
Utility Money Pool and the Non-Utility Subsidiaries may contribute funds from
the issuance of short term debt to the Non-Utility Money Pool.
iv. Operation of the Money Pools and Administrative Matters.
Operation of the Utility and Non-Utility Money Pools, including record
keeping and coordination of loans, will be handled by Exelon Service under the
authority of the appropriate officers of the participating companies. Exelon
Service will administer the Utility and Non-Utility Money Pools on an "at cost"
basis and will maintain separate records for each money pool. Surplus funds of
the Utility Money Pool and the Non-Utility Money Pool may be combined in common
short-term investments, but separate records of such funds shall be maintained
by Exelon Service as administrator of the pools, and interest thereon shall be
separately allocated, on a daily basis, to each money pool in accordance with
the proportion that the amount of each money pool's surplus funds bears to the
total amount of surplus funds available for investment from both money pools.
v. Use of Proceeds
Proceeds of any short term borrowings by the Non-Utility Subsidiaries
may be used by each such Non-Utility Subsidiary (i) for the interim financing of
its construction and capital expenditure programs; (ii) for its working capital
needs; (iii) for the repayment, redemption or refinancing of its debt and
preferred stock; (iv) to meet unexpected contingencies, payment and timing
differences, and cash requirements; and (v) to otherwise finance its own
business and for other lawful general corporate purposes. PECO ComEd and Genco
may borrow up to $1 billion in the aggregate at any one time outstanding from
the Utility Money Pool. The
23
<PAGE>
use of proceeds from the financings would be limited
to use in the operations of the respective businesses in which such Subsidiaries
are already authorized to engage./32/
6. Changes in Capital Stock of Majority Owned Subsidiaries
The portion of an individual Subsidiary's aggregate financing to be
effected through the sale of stock to Exelon or other immediate parent company
during the Authorization Period pursuant to Rule 52 and/or pursuant to an order
issued pursuant to this file cannot be ascertained at this time. It may happen
that the proposed sale of capital securities (i.e., common stock or preferred
stock) may in some cases exceed the then authorized capital stock of such
Subsidiary. In addition, the Subsidiary may choose to use capital stock with no
par value.
As needed to accommodate such proposed transactions and to provide for
future issues, request is made for authority to change the terms of any 50% or
more owned Subsidiary's authorized capital stock capitalization or other equity
interest by an amount deemed appropriate by Exelon or other intermediate parent
company. This request for authorization is limited to Exelon's 50% or more owned
Subsidiaries and will not affect the aggregate limits or other conditions
contained herein. A Subsidiary would be able to change the par value, or change
between par value and no-par stock, without additional Commission approval. Any
such action by a Utility Subsidiary would be subject to and would only be taken
upon the receipt of any necessary approvals by the state commission in the state
or states where the Utility Subsidiary is incorporated and doing business./33/
Each 50% or more owned Subsidiary also requests authorization to
borrow from its parent company. Such inter-company loans would be on terms and
conditions not materially less favorable than those obtainable by Exelon from
third parties.
F. Payment of Dividends out of Capital or Unearned Surplus by ComEd, PECO
or Exelon
1. Request for Authority to Pay Dividends
Section 12 of the 1935 Act, and Rule 46 thereunder, generally prohibit
the payment of dividends out of "capital or unearned surplus" except pursuant to
an order of the Commission. The legislative history explains that this provision
was intended to "prevent the milking of operating companies in the interest of
the controlling holding company groups." S. Rep. No. 621, 74th Cong., 1st Sess.
34 (1935)./34/ In determining whether to permit a registered
--------------------------------
/32/ The authorization sought herein is substantially the same as that given in
recent cases. See SCANA Corporation, Holding Co. Act Release No. 35-27135 [Feb.
14, 2000); New Century Energies, Inc., Holding Co. Act Release No. 35-26750
(Aug. 1, 1997) and Conectiv, Holding Co. Act Release No. 35-26833 (Feb. 26,
1998).
/33/ See New Century Energies, Inc., Holding Co. Act Release No. 35-26750 (Aug.
1, 1997); Conectiv, Inc., Holding Co. Act Release No. 35-6833 (Feb. 26, 1998);
Dominion Resources, Inc., Holding Co. Act Release No. 35-27112 (Dec. 15, 1999);
SCANA Corporation, Holding Co. Act Release No. 35-27135 (Feb. 14, 2000).
/34/ Compare Section 305(a) of the Federal Power Act.
24
<PAGE>
holding company to pay dividends out of capital surplus, as discussed in the
1991 case involving Eastern Utilities Associates ("EUA"), the Commission
considers various factors, including: (i) the asset value of the company in
relation to its capitalization, (ii) the company's prior earnings, (iii) the
company's current earnings in relation to the proposed dividend, and (iv) the
company's projected cash position after payment of a dividend./35/ In recent
cases, the Commission has determined that holding company systems may continue
to pay dividends although retained earnings have been reduced or eliminated
because of write-offs associated with State utility regulation restructuring
legislation or because of application of generally accepted accounting
principles to a merger involving two previously unaffiliated companies./36/
For extraordinary reasons related to the adoption of utility
restructuring legislation in Illinois and Pennsylvania, and because of the
accounting for the Merger under generally accepted accounting principles, Unicom
and PECO have, and Exelon will have on a pro forma basis, unusual reductions in
retained earnings which would make it difficult in some cases to continue to pay
dividends at historical levels without such dividends being paid from
paid-in-capital.
Exelon requests authority to pay dividends out of additional
paid-in-capital up to the amount of $500 million. Exelon's primary source of
income and cash flow will be the earnings and cash flow of its subsidiary
companies, including ComEd and PECO. Exelon requests authority for ComEd to pay
dividends out of additional paid-in capital up to the amount of $500 million,
representing its expected retained earnings as of March 31, 2000 which will be
eliminated in the merger as described below.
2. Reasons for Reductions in Retained Earnings
Upon the consummation of the Merger, the retained earnings of
Exelon will consist of the retained earnings of PECO as the acquiring company
for accounting purposes. PECO"s retained earnings were significantly reduced in
1997 as a result of one-time, non-cash accounting write-offs upon the
discontinuance of regulatory accounting practices. This reduction in retained
earnings reduces the amount that will be available for Exelon dividends.
Further, ComEd will not have retained earnings available for dividend payments
at the time of the Merger because of the application of the purchase method of
accounting to the Merger. All of Exelon's initial retained earnings will be the
retained earnings of PECO -- the Utility Subsidiary.
____________________
/35/ See Eastern Utilities Associates, Holding Co. Act Release No. 35-25330
(June 13, 1991) ("EUA"), and cases cited therein. Further, the payment of the
dividend must be "appropriate in the public interest." Id., citing Commonwealth
& Southern Corporation, 13 S.E.C. 489, 492 (1943).
/36/ See, e.g., National Grid USA, Holding Co. Act Release No. 35-27166 (April
14, 2000)("push down" accounting eliminates retained earnings of acquired
company); National Grid Group, Holding Co. Act Release No. 35-27154 (Mar. 15,
2000) ("capitalization ratio is not the true measure of [holding company's]
financial strength"); Northeast Utilities, Holding Co. Act. Release No. 35-27147
(Mar. 7, 2000) (restructuring legislation, asset divestitures and securitization
resulted in EWG investments in excess of 50% of retained earnings and necessity
to paying dividends out of capital); SCANA Corporation, Holding Co. Act Release
No. 35-27135 (Feb. 14, 2000)(application of "push down" accounting eliminated
retained earnings of acquired company); Conectiv, Holding Co. Act Release
No. 35-27126 (Jan. 28, 2000)(charges to retained earnings resulting from un-
recovered stranded costs).
25
<PAGE>
PECO Energy Reductions to Retained Earnings. In 1997,
regulatory and legislative actions in Pennsylvania enacted with the objective of
developing more competitive markets for generation supply led PECO to conclude
that it no longer met the criteria for application of regulatory accounting
principles to the generation portion of its businesses. As a result, PECO
recorded an extraordinary loss of $1.833 billion (after-tax) due to the
write-off of unrecoverable generation assets, including net regulatory assets.
The extraordinary loss exceeded PECO's retained earnings balance and at the end
of 1997 PECO's capital accounts reflected an accumulated deficit of $781
million. Since 1997, steady earnings growth and a low dividend payout ratio have
increased PECO's common equity accounts to eliminate the accumulated deficit and
to achieve retained earnings of $14 million as of March 31, 2000.
ComEd's Retained Earnings Balances. In the fourth quarter of
1997, as a result of utility restructuring legislation in Illinois and the
discontinuation of regulatory accounting, Unicom recorded an after tax reduction
to net income and retained earnings of $760 million. The reduction resulted from
the write off of regulatory assets ($810 million) offset by the net effect of
other items relating to the restructuring legislation (change in method of
revenue recognition, writedown of uranium investments, obsolete materials and a
customer refund). Partially in recognition of the changing utility industry,
Unicom also recognized a loss of $522 million in the fourth quarter of 1997
relating to the early retirement of its Zion Nuclear Station. These write-offs
reduced Unicom's retained earnings from $1.278 billion at September 30, 1997 to
a deficit of $21.2 million at December 31, 1997. At March 31, 2000, Unicom's
retained earnings were $485 million.
As a result of the application of the purchase method of
accounting to the Merger, the current retained earnings of Unicom will be
recharacterized as additional paid-in-capital. In addition, the Merger will give
rise to a substantial level of goodwill, the difference between the aggregate
fair values of all identifiable tangible and intangible (non-goodwill) assets on
the one hand, and the total consideration to be paid by PECO for Unicom for
accounting purposes and the fair value of the liabilities assumed, on the other.
In accordance with the Commission's Staff Accounting Bulletin No. 54, Topic 5J
("Staff Accounting Bulletin"), the goodwill will be "pushed down" to Unicom's
subsidiaries, principally ComEd and reflected as additional paid-in-capital on
ComEd's financial statements. The effect of these accounting practices will be
to leave ComEd with no retained earnings, the traditional source of dividend
payment, but, nevertheless, a strong balance sheet showing a significant equity
level./37/
In purchase accounting, the total value of the acquisition,
which must be assigned to ComEd's assets, is the total consideration to be paid
for Unicom, plus the fair value of all liabilities assumed in the acquisition.
Generally, goodwill is the residual balance of the total value remaining after
fair values have been assigned to all of Unicom's identifiable assets (both
tangible and non-goodwill intangible assets). Accordingly, the excess of the
purchase consideration over the fair market value of the acquired assets of
Unicom will be assigned to goodwill for generally accepted accounting purposes.
___________________
/37/ See National Grid USA, Holding Co. Act Release No. 35-27166 (April 14,
2000)("push down" accounting eliminates retained earnings of acquired company);
SCANA Corporation, Holding Co. Act Release No. 35-27135 (Feb. 14,
2000)(application of "push down" accounting eliminated retained earnings of
acquired company).
26
<PAGE>
As indicated in the Staff Accounting Bulletin, registrants
that have substantially all (generally defined as in excess of 95%) of their
common stock acquired by a third party, in a business combination accounted for
under the purchase method, should reflect the push-down of goodwill in the
registrant's post-acquisition financial statements. For any post-acquisition
reporting of the consolidated Exelon and ComEd financial statements, push down
accounting will be reflected in those statements and the full amount of goodwill
associated with the ComEd acquisition will be reflected.
As a result of the application of purchase accounting, the
common equity of ComEd will be adjusted as follows:
. Common stock - will continue to reflect the par
value of the common stock issued.
. Paid-in-capital - will reflect a value consistent
with the purchase price minus the par value recorded in the
common stock line.
. Retained earnings - will be reset to zero.
The resulting common shareholders' equity will equal the total consideration
paid for the entity.
Based on 1999 financial information and preliminary estimates
of the purchase price allocation, the application of these accounting principles
to the Merger will result in following adjustments to ComEd's books:
<TABLE>
<CAPTION>
($ in thousands) 1999 Adjustment Adjustment Adjustment Restated
(1) (2) (3)
<S> <C> <C> <C> <C> <C>
Common stock $2,677,995 $2,677,995
Paid-in-capital 2,194,750 $440,540 2,000,000 4,635,290
Retained earnings 433,001 (433,001) -
Accumulated comprehensive 7,539 (7,539) -
income, net
Treasury stock (10,370) (2,000,000) - (2,010,370)
Total equity $5,302,915 ($2,000,000) $2,000,000 $5,302,915
</TABLE>
Adjustment 1 - Repurchase of common stock prior to Merger
Adjustment 2 - Retained earnings accounts are restated as
Paid-in-Capital.
Adjustment 3 - Goodwill is added to Paid-in-Capital.
The goodwill created in connection with the Merger must be
amortized in accordance with generally accepted accounting principles. This
amortization will cause non-
27
<PAGE>
cash deductions from income before the determination of net income and earnings
which would result in increases to retained earnings. Because of the additional
charge caused by amortization, it will be more difficult for ComEd to sustain
earnings corresponding to its historical level. However, given the anticipated
payout ratio for both ComEd and PECO (i.e., the percentage of earnings paid as
dividends) Exelon believes that Com Ed and PECO will be able to pay dividends
which will allow Exelon to pay its anticipated common stock dividend./38/
3. Standards for Approval of Request
In support of their request, Exelon asserts that each of the
standards of Section 12(c) of the 1935 Act enunciated in the EUA case are
satisfied:
. After the Merger, and giving effect to the push down of
goodwill, Exelon's pro forma common equity as a percentage
of total capitalization will be 31%, consistent with the
traditional levels of common equity capitalization that
the Commission has authorized for other registered holding
company systems. Exelon's commitment to maintain its
consolidated capitalization at or above 30% common equity
(adjusted to exclude securitization debt as discussed in
the following paragraph) should result in a capital
structure consistent with industry norms.
. The capital structures of ComEd and PECO will include
approximately $2.6 billion and $4.8 billion, respectively
of bonds rated AAA when issued and which securitized the
future cash flows provided for by restructuring
legislation in Illinois and Pennsylvania. Although the
issuance of these bonds increased the debt ratio of both
companies, credit rating agencies view the issuance of the
bonds as enhancing the overall credit quality of the
utility because of (a) the firm statutory framework and
the elimination of uncertainty about future stranded cost
recovery and (b) the use by ComEd and PECO of the proceeds
of these securitization financings to retire higher cost
debt and preferred stock and to reduce the costly equity
component of their capital structures consistent with the
goals of the State restructuring legislation./39/
___________________
/38/ Compare National Grid USA, Holding Co. Act Release No. 35-27166 (April 14,
2000).
/39/ For example, the May 1999 Standard & Poor's credit report for PECO provided
as follows: "Financial strength is derived from healthy internal cash
generation, rapid debt reduction which is accelerated by the securitization
financing, and aggressive cost controls. PECO Energy has an initial leverage
target of about 60% following application of its securitization proceeds to
shrink capitalization, but this ratio is expected to decline in the next two to
three years to about 45%. Adjusted funds from operations to interest coverage
and funds from operations to total debt are expected to strengthen rapidly
because of he company's cash-generating ability." The report also noted that
"PECO Energy's withdrawal of $3.3 billion of retired bond credits related to the
company's securitization is the primary reason for raising the secured rating."
28
<PAGE>
The anticipated pro-forma capital structures considering the Merger and the
Restructurings for the companies are as follows/40/:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Company Common Equity-- Common Equity--
Including Securitized Excluding Securitized
Debt Debt
----------------------------------------------------------------------------
<S> <C> <C>
Exelon 31% 46%
----------------------------------------------------------------------------
ComEd 30% 39%
----------------------------------------------------------------------------
PECO 15% 40%
----------------------------------------------------------------------------
</TABLE>
. ComEd and PECO each have a favorable history of prior earnings
and each has a long record of consistent dividend payments./41/
. Applicants anticipate that ComEd's and Peco's cash flow after the
Merger will not differ significally from its pre-Merger cash flow
and that earnings should remain stable post-Merger (even with the
amortization of goodwill that
___________________________
/40/ As shown in the table, Exelon, ComEd and PECO are expected to have a
common equity ratio consistent with the Commission's generally applicable
standard of at least 30% except in the case PECO when the effect of
securitization bonds are included in the capitalization ratio calculation. The
Commision has approved disregarding securitization bonds for purposes of the
capitalization ratio calculation. West Penn Power Co., Holding Co. Act Release
No. 35-27091 (Oct. 19, 1999) (equity component of capitalization was 15%
including securization bonds and pollution control bonds). The calculations of
capitalization in this Application-Declaration include the transfer of
approximately $369 million of pollution control bonds from PECO to Genco. See
note 12 above.
/41/ In recent years, Unicom's net income and dividends have been:
<TABLE>
<CAPTION>
Year Net Income (Loss Dividends Paid
($ millions) ($ millions)
<S> <C> <C>
1995 717 410
1996 743 407
1997 (773) 403
1998 594 398
1999 624 351
</TABLE>
In recent years, PECO's net income and common and preferred dividends have been:
<TABLE>
<CAPTION>
Year Net Income (Loss Dividends Paid
($ millions) ($ millions)
<S> <C> <C>
1995 610 390
1996 517 412
1997 (1,497) 417
1998 513 236
1999 582 208
</TABLE>
<PAGE>
will be necessary as a result of the merger). Based on the
anticipated dividend for Exelon and estimated earnings for 2001,
dividends paid out of future earnings will reflect a dividend
payout ratio of between 30% and 40% of consolidated net income
(calculated after the non-cash deductions required for
amortization of goodwill). Exelon believes this payout ratio will
be sufficient to pay Exelon's expected annual dividend of $1.69
per share while retaining significant amounts of earnings to fund
future growth in Exelon's business and provide additional equity
cushion against future unforeseen events.
. The projected cash position of Exelon, ComEd and PECO after the
Merger will be adequate to meet the obligations of each company
and all these companies expect to have adequate cash to pay
dividends in the amounts currently contemplated. The annual
dividend requirement of Exelon, assuming a dividend of $1.69 per
share and the number of shares of common stock with will be
issued in the Merger is $533 million. Exelon is expected to have
free cash flow (cash from operations less capital expenditures
and dividends) well in excess of the dividend requirement.
. The proposed dividend payments are in the public interest. ComEd
and PECO are in sound financial condition as indicated by their
credit ratings. ComEd's senior secured bonds were rated Baa2 by
Moody's Investors Service, Inc. prior to announcement of the
Merger and, following announcement, were upgraded to Baa1. PECO's
senior secured bonds are rated Baa1 by Moody's Investors Service,
Inc. The expectations of continued strong credit ratings by ComEd
and PECO should allow them and Exelon to continue to access the
capital markets to finance operations and growth. Further, Exelon
expects to have an investment grade rating following the Merger.
In addition, the dividend payments are consistent with investor
interest. Dividends typically comprise a significant part of
shareholder total return for utility stocks and a decrease in the
rate of dividend or the elimination of dividends could have an
adverse affect on Exelon's stock price. Exelon has announced that
the anticipated dividend for Exelon following the Merger will be
$1.69 per share.
G. Rule 53 and Rule 54 Analysis
1. Rule 53 Requirements.
Rule 53 provides that, if each of the conditions of paragraph (a)
thereof is met, and none of the conditions of paragraph (b) thereof is
applicable, then the Commission may not make a finding that the issuance or sale
of a security by a registered holding company for the purposes of financing the
acquisition of an EWG or the guarantee of a security of an EWG by a registered
holding company is not reasonably adapted to the earning power of such company
or to the security structure of the companies in the holding company system, or
that the circumstances are such as to constitute the making of such guarantee an
improper risk for the company. Generally, paragraph (a) limits the aggregate
amount invested in EWGs and FUCOs to not more than 50% of the holding company's
consolidated retained earnings. Paragraph (b)
<PAGE>
relates to certain events of bankruptcy and recent significant declines in the
amount of consolidated retained earnings.
At March 31, 2000, the pro forma consolidated amount of
Exelon's aggregate investment in EWGs and FUCOs as that term is defined in Rule
53 was $151.4 million./42/ At that date, the pro forma consolidated retained
earnings of Exelon, as defined, was negative while the March 31, 2000 number was
$14 million./43/ Consequently, Exelon will not satisfy the safe harbor
requirement of Rule 53(a). As outlined in this Application-Declaration, however,
Exelon is seeking authority to use up to $5.5 billion of the proceeds of
financings authorized herein to acquire additional investments in EWGs and/or
FUCOs. For the reasons outlined below, Exelon seeks authority to apply the
proceeds of financings authorized herein to the acquisition of additional
investments in EWGs and FUCOs so long as its aggregate investment in EWGs and
FUCOs (as that term is defined in Rule 53) does not exceed the sum of (a) 100%
of retained earnings and (b) $5.5 billion (the "Modified Rule 53 Test")./44/
As of the date hereof, the only interest in EWGs of the Exelon
System is through PECO's investment in AmerGen./45/ AmerGen, which is 50% owned
by PECO, is an EWG that owns the Clinton Power Station and the Three Mile Island
Unit 1 Nuclear Generating Facility. AmerGen is in the process of acquiring the
Vermont Yankee Nuclear Power Station and Oyster Creek Nuclear Generating
Station. It is anticipated that AmerGen will acquire ownership of the Vermont
Yankee and Oyster Creek facilities by December 31, 2000. Exelon is expected to
have no investments in FUCOs at the date of the Merger.
2. Exelon's Compliance with Rule 53 Requirements.
Giving effect to the proposals contained herein Exelon will
satisfy all of the conditions of Rule 53(a) except for clause (1) thereof, which
requires that the aggregate at risk investment of the registered holding company
in EWGs and FUCOs not exceed 50% of the holding company system's consolidated
retained earnings./46/ None of the conditions specified in
-----------------------------------
/42/ The definition of Aggregate investment in EWGs and FUCOs includes all
amounts invested, or committed to be invested, in EWGs and FUCOs for which there
is recourse, directly or indirectly, to Exelon. The only existing EWG investment
is PECO's investment in AmerGen which was recorded at $51.4 million at March 31,
2000. In addition, PECO has issued letter agreements to prove funding up to a
total of $100 million to be available to AmerGen in connection with the
operation and maintenance of all of the commercial nuclear power reactors
acquired or to be acquired by AmerGen.
/43/ Consolidated retained earnings is the average of reported consolidated
retained earnings over the four quarters ended March 31, 2000.
/44/ For this purpose, retained earnings would be calculated in accordance with
generally accepted accounting principles and would not include amounts relating
to write-offs as discussed above in connection with the payment of dividends out
of capital.
/45/ Exelon seeks authority to finance for further investments in EWGs and FUCOs
as described herein.
/46/ The other requirements of Rule 53(a) provide (1) that the holding company
keep certain books and records relating to EWGs and FUCOs in accordance with
generally accepted accounting principles, (2) limitations on the number of
employees of a domestic public utility company in the holding company system who
may provide services for the EWGs and FUCOs and (3) for the holding company to
make certain filings. Exelon undertakes to comply with the forgoing
requirements. However, as noted in the Merger U-1, Genco, a "domestic public
utility" will seek authority to provide certain services to EWGs and FUCOs.
Genco seeks a waiver of the limitation on the number of employees providing such
services. See "Insulation from Risk" below.
31
<PAGE>
Rule 53(b) is or will be applicable./47/ Exelon will demonstrate below why
complying with its proposed Modified Rule 53 Test will not result in any adverse
consequences to Exelon, its Utility Subsidiaries or Exelon investors.
As described above in Item 1.F., for extraordinary reasons
related to the adoption of utility restructuring legislation in Illinois and
Pennsylvania, and because of the accounting for the Merger under generally
accepted accounting principles, Unicom and PECO have, and Exelon will have on a
pro forma basis, unusual reductions in retained earnings. But for the
extraordinary write-offs necessitated by utility restructuring legislation in
Illinois and Pennsylvania, Unicom and PECO would have had retained earnings that
would have supported aggregate investments in EWGs and FUCOs of $8 billion --
significantly more than the amount being requested for Exelon./48/ The
Commission has considered, in determining to approve investments in EWGs an
excess of the Rule 53 limit, similar situations where previously significant
amounts of retained earnings were eliminated because of extraordinary
events./49/ Most importantly, as noted above, Exelon will be a financially sound
holding company with significant equity. The Commission has recognized in
similar circumstances that investments in EWGs and FUCOs in excess of the
limitations imposed under Rule 53 would not result in a substantial adverse
impact on the financial integrity of the registered holding company system./50/
Rule 53(c) states that, in connection with a proposal to issue
and sell securities to finance an investment in an EWG, or to guarantee the
securities of an EWG, a registered holding company that is unable to satisfy,
among other provisions, the provision that such investments may not exceed 50%
of consolidated retained earnings, must "affirmatively demonstrate" that such
proposal:
(i) will not have a substantial adverse impact upon the
financial integrity of the registered holding company system;
and
(ii) will not have an adverse impact on any utility subsidiary
of the registered holding company, or its customers, or on the
ability of State commissions to protect such subsidiary or
customers.
The Commission has considered the "no substantial adverse
impact" in two types of circumstances: (1) where a holding company has not
satisfied the safe harbor because of
-----------------------------
/47/ Rule 53(b) makes the safe harbor unavailable if (1) the holding company or
certain subsidiaries have been in bankruptcy, (2) the holding company's
consolidated retained earnings have declined more than 10% from the prior year
measured as provided in the rule or (3) the holding company has reported
operating losses related to its EWG or FUCO investments.
/48/ Adjusted to exclude the extraordinary losses in 1997 for restructuring
charges, PECO's retained earning balance as of March 31, 2000 would be $1.85
billion. Adjusted to exclude the extraordinary losses in 1997 for restructuring
charges, Unicom's retained earnings balance as of March 31, 2000 would be $1.37
billion. In National Grid USA, Holding Co. Act Release No. 35-27166 (April 14,
2000) the Commission approved an aggregate investment of about 250% of retained
earnings. Applying this percentage to Unicom's adjusted retained earnings would
produce an aggregate investment limit of $3.4 billion. Applying the percentage
to PECO's adjusted retained earnings would produce a limit of $4.6 billion.
While, as noted herein, the accounting for the Merger would eliminate Unicom's
retained earnings, the PECO amount alone constitutes a substantial portion of
Exelon's requested limitation.
/49/ Conectiv, Holding Co. Act Release No. 35-27111 (Dec. 14, 1999).
/50/ See, e.g., Northeast Utilities, Holding Co. Act Release No. 35-27148 (Mar.
7, 2000); Conectiv, Holding Co. Act Release No. 35-27111 (Dec. 14, 1999) (write-
offs resulting from de-regulation legislation and previous merger eliminating
acquired company's retained earnings).
32
<PAGE>
extraordinary circumstances and (2) where a holding company has sought to
increase its aggregate investment beyond the 50% of consolidated retained
earnings safe harbor.
The Commission has dealt with several cases recently where a
holding company system's consolidated retained earnings were reduced because of
changes brought about by state utility law restructuring or deregulation./51/
Write-offs reducing retained earnings have been caused by stranded costs,
disposition of generating assets, the purchase accounting required in certain
mergers and other factors. The Commission has recognized that these are
extraordinary events and, while retained earnings have been reduced, the changes
causing such reduction have not adversely affected the fundamental financial
strength of the holding company system. As described in Item 1.F.2. above,
Exelon is in a similar situation because of State utility regulation
restructuring in Illinois and Pennsylvania and other factors.
The second major area where the Commission has performed an
analysis of the requirements of Rule 53(c) is with respect to
applications/declarations filed by a number of the registered holding companies
seeking authority to increase their aggregate investment in EWGs and FUCOs to
100% of consolidated retained earnings./52/ In these 100% cases, and in the
situations of reduced retained earnings caused by extraordinary situations, the
Commission has examined various factors indicating that non-compliance with the
Rule 53(a) safe harbor should not prevent Commission approval of additional
financing for EWGs and FUCOs.
As noted in the Merger U-1, there have been significant
changes to the electric utility industry in recent years. One profound change
has been the divestiture by many traditional vertically integrated utilities of
their generation. Generation is developing as a viable business which may, but
need not be, associated with transmission and distribution companies. The
generation business is a key to Exelon's business strategy. The creation of
Genco will combine all the generating resources of Exelon, including the
investment in AmerGen. Exelon wishes to have the flexibility to acquire
additional generation resources in the United States as they become available.
Further, Exelon has plans to develop additional "greenfield" generation which
will add to the nation's energy supply and enhance competition in generation
markets. These factors suggest that the Commission should not be constrained by
the very conservative approach taken in Rule 53. At the time that rule was
adopted (1993), the market for electricity generation was just beginning to
develop and State deregulation activity had not commenced (California's landmark
deregulation legislation was in 1996). The Commission should not adopt a policy
that will hamper the continued development of a competitive market for electric
generation and the resulting benefits to consumers.
------------------------------
/51/ Northeast Utilities, Holding Co. Act Release No. 35-27148 (Mar. 7, 2000);
Northeast Utilities, Holding Co. Act Release No. 35-27147 (Mar. 7, 2000)
(restructuring legislation, asset divestitures and securitization resulted in
EWG investments in excess of 50% of retained earnings and necessity to paying
dividends out of capital); Conectiv, Holding Co. Act Release No. 35-27126
(Jan. 28, 2000) (charges to retained earnings resulting from un-recovered
stranded costs).
/52/ See The Southern Company ("Southern"), Holding Co. Act Release No. 35-26501
(April 1, 1996); Central and South West Corporation ("CSW"), Holding Co. Act
Release No. 35-26653 (Jan. 24, 1997); GPU, Inc. ("GPU"), Holding Co. Act Release
No. 35-26779 (Nov. 17, 1997); Cinergy, Inc. ("Cinergy"), Holding Co. Act Release
No.35-26848 (March 23, 1998); American Electric Power Company, Inc. ("AEP"),
Holding Co. Act Release No. 35-26864 (April 27, 1998); and New Century Energies,
Inc. ("New Century"), Holding Co. Act Release No. 35-26982 (February 26, 1999)
(collectively, the "100% Orders").
33
<PAGE>
In the U.S., competition and deregulation are redefining the
utility industry. The prototype "utility company" (vertically integrated,
operating entirely on a local or regional basis, deriving substantially all
earnings from regulated, monopoly sales) is, or soon will be, defunct. To
prepare for the onset of fully competitive markets, utilities are "reinventing"
themselves - restructuring their businesses, including through asset sales
(whether voluntarily or as a result of state or other regulatory mandates),
pursuing mergers and acquisitions including "convergence" gas/electric
transactions, and diversifying into non-traditional businesses, such as
wholesale energy marketing and foreign utility acquisitions. To compete
effectively in this new environment, Exelon must have the opportunity to build
scale and scope in these non-traditional "nonutility" businesses which are now
not only commonplace, but integral and vital. One of the most significant
industry dynamics is the growing divestiture of generating assets in the U.S. by
traditional electric utilities, in many cases under legislative or regulatory
mandates. Since 1997, U.S. investor-owned electric utilities have sold
approximately 70 gigawatts ("GW") of generating assets. The combination of these
completed sales, together with pending sales transactions at December 31, 1999,
cover 24% of the total installed generation capacity owned by U.S. investor-
owned electric utilities at December 31, 1997. If transfers or proposed
transfers to unregulated affiliates are also included, the total rises to
31.6%./53/
The limitation of Rule 53, covering investments in both U.S.
wholesale generating facilities and foreign utility assets, would prevent Exelon
from actively participating as a buyer or bidder in even one of these markets,
much less both. The reason is the large dollar investments required to close
major transactions, as compared to the investment capacity available under Rule
53. The capability to bid on the full range of available opportunities in both
markets, including especially the larger, more significant transactions, is
vital to Exelon's growth strategies, just as it is for Exelon's competitors. To
survive in the restructured utility industry, Exelon needs to compete on an
equal footing with other participants. Some competitors are not subject to the
limitations of the Act; others are subject to the Act but have authority to
invest in EWGs and FUCOs in amounts in excess of the Rule 53 limitation.
Additional investments in EWGs and FUCOs and financing for
such purposes will not have a "substantial adverse impact" on the financial
integrity of the Exelon System. The lack of any "substantial adverse impact" on
Exelon's financial integrity can be demonstrated in several ways:
. Exelon will be created by the merger of two companies
which have not been subject to the Act. PECO, which has
substantially all of the investment in EWGs and FUCOs
applicable to Exelon, was recognized as a financially
sound company notwithstanding the reductions to its
retained earnings caused by the factors outlined above.
. The investment in EWGs has a history of positive impact on
PECO's operating results. The equity in the earnings of
AmerGen for the quarter ended
-----------------------
/53/ Edison Electric Institute, "Divestiture Action & Analysis" January 2000
Issue.
34
<PAGE>
March 31, 2000 was $12 million (the first full quarter in
which AmerGen was in operation)./54/
. The generating stations operated by AmerGen, which
will constitute substantially all of the Exelon's
investments in EWGs immediately after the Merger,
represent unique investment opportunities in nuclear power
plants in good physical condition with experienced nuclear
operating organizations that have the potential to operate
as baseload units at a high capacity factor producing low
cost power over an extended period of time. For example,
the Three Mile Island-1 plant is widely regarded as one of
the top performing pressurized water reactor (PWR) plants
in the country and the Clinton plant is a relatively new
boiling water reactor (BWR) plant which was shutdown for
an extended period and has over 25 years remaining on its
original NRC operating license. The coordinated operation
of multiple plants within a larger nuclear organization,
rather than as stand-alone plants, offers the potential
for greater operational efficiencies and economies of
scale. The sharing of best management, safety,
maintenance, and operating practices within such an
organization, coupled with a diversity of reactor designs
and plant locations, also reduces the risk and potential
impact of prolonged outages due to technical problems or
local regulatory concerns.
. Although pro forma retained earnings at March 31, 2000 are
only $14 million, Exelon's retained earnings are expected
to increase steadily during the Authorization Period as a
result of a conservative payout ratio. Exelon is seeking
authorization only to increase its aggregate investment by
an amount equal to 100% of this increase in retained
earnings -- a percentage the Commission has approved on
numerous occasions./55/
. On a pro forma basis, Exelon's financial condition and
anticipated financial performance will be within the range
found acceptable by the Commission in other cases as
demonstrated below.
The following paragraphs provide data analyzing the impact of
the investments in EWGs and FUCOs on the Exelon System in light of the tests
developed by the staff in the course of adopting the 100% Orders. These tests
involve analysis of:
Ratios of EWG/FUCO investment to:
. Consolidated Capitalization
. Consolidated Net Utility Plant
. Total Consolidated Assets
. Market Value of Outstanding Stock
. Growth in consolidated retained earnings
Stock price to earnings ratio
Market to book ratio
Dividend payout ratio
------------------
/54/ AmerGen commenced operations in December 1999 with the acquisition of
Clinton and Three Mile Island stations. PECO recorded an equity loss of $486,000
in 1999 reflecting PECO's 50% share of AmerGen's start-up costs.
/55/ See the "100% Orders" referred to above.
35
<PAGE>
Capitalization ratios
Capitalization Ratios. Exelon's proposed aggregate
----------------------
investment in EWGs would represent a reasonable commitment of Exelon capital for
a company the size of Exelon, based on various financial ratios at March 31,
2000/56/ For example, investments of this amount would be equal to only
approximately:
26.1% of Exelon's total consolidated capitalization ($21.2
billion)/57/,
31.9% of consolidated net utility plant ($17.2 billion),
15.3% of total consolidated assets ($36 billion), and
38.7% of the pro forma market value of Exelon's outstanding
common stock ($14.2 billion)/58/
The table below illustrates that Exelon's exposure to EWG/FUCO
investments will be comparable to the companies who received the 100% Orders. In
several categories, the percentage applicable to Exelon is well below the
highest percentage found reasonable by the Commission in the 100% Orders.
Investments in EWGs and FUCOs as a percentage of:
-------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
Company Consolidated Consolidated Net Consolidated Total Market Value of
Capitalization Utility Plant Assets Common Stock
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------
Southern 16.3 15.4 11.0 20.4
------------------------------------------------------------------------------------------------------------------------
CSW 23.0 23.0 14.0 31.0
------------------------------------------------------------------------------------------------------------------------
GPU 24.9 34.2 19.4 49.8
------------------------------------------------------------------------------------------------------------------------
Cinergy 16.0 16.0 11.0 19.0
------------------------------------------------------------------------------------------------------------------------
AEP 16.0 13.8 9.8 18.5
------------------------------------------------------------------------------------------------------------------------
Average 18.6 19.2 12.5 25.4
------------------------------------------------------------------------------------------------------------------------
</TABLE>
---------------------
/56/ For purposes of the analysis an aggregate investment of $5.5 billion is
used because the amount related to retained earnings cannot be determined at
this time.
/57/ This calculation of pro forma capitalization includes securitization debt.
The figure excluding securitization debt would be about $14.3 billion and the
aggregate investment would be about 39%.
/58/ The market value of Exelon common stock is calculated using an assumed
value of $45.18 per share times the number of shares of Exelon common stock
expected to be outstanding following the merger. The closing price of DECO on
that date was $45.18. Unicom's closing price on that date was $42.875.
36
<PAGE>
<TABLE>
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Exelon Aggregate 26.1 31.9 15.3 38.7
Investment ($5.5
billion)
------------------------------------------------------------------------------------------------------------------------
</TABLE>
Consolidated Retained Earnings Growth. As a result of
-------------------------------------
declining payout ratios, preferred stock redemptions and excluding the
extraordinary losses in 1997, the retained earnings balances of both Unicom and
PECO had been increasing since 1994. Adjusted to exclude the extraordinary
losses in 1997 for restructuring charges, PECO's retained earning balance as of
March 31, 2000 would be $1.85 billion, or a 128% increase since 1994. Adjusted
to exclude the extraordinary losses in 1997 for restructuring charges, Unicom's
retained earnings balance as of March 31, 2000 would be $1.37 billion, or a 145%
increase since 1994. Excluding the effects of the write-offs in 1997, Unicom and
PECO had earnings consistent with this performance and have seen strong earnings
growth in recent years:
<TABLE>
Unicom PECO
------ ----
--------------------------------------------------------------------------------------------------------------------
1998 over 1997 1999 over 1998 1998 over 1997 1999 over 1998
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income growth (%) 18.8 11.7 56.3 14.1
--------------------------------------------------------------------------------------------------------------------
Earnings per share 17.6 11.5 55.6 29.9
growth (%)
--------------------------------------------------------------------------------------------------------------------
</TABLE>
Share Price to Earnings Ratio. The financial strength
-----------------------------
anticipated for Exelon is reflected in the current Price/Earnings ratios of
Unicom and PECO, both of which exceed industry averages. Unicom's P/E ratio as
of May 16, 2000 was 13.2 and PECO's was 12.5, compared to the average for
utilities in the Standard & Poor's Electric Utility Index of 11.6.
Market to Book Ratio. Exelon's market to book ratio is
--------------------
currently 2.13 based on a pro forma book value of $ 21.10 per share as of March
31, 2000 and an assumed market price of $46 per share. This ratio is above the
industry average, which was 1.68 as of May 25, 2000 according to First Call
consensus estimates.
Dividend Payout Ratio. Unicom's current payout ratio is 48%
---------------------
based on First Call consensus estimates for 2000. PECO's current payout ratio is
28%. Based on the anticipated dividend and estimates for 2001 earnings Exelon's
payout ratio will be approximately 30% to 40%. This range is below the industry
average of 64.2% reflecting Exelon's response to increasing competition and
other challenges facing the industry. A payout ratio at this level will enable
Exelon to build its equity cushion to support future growth.
Capitalization Ratios. The credit ratings from major
---------------------
nationally recognized rating agencies for Unicom and ComEd and PECO are set out
the in the table below. All three rating agencies that rate ComEd's securities
raised their ratings in 1999. Exelon will seek ratings from
37
<PAGE>
Standard & Poor's, Moody's and FitchIBCA (which merged with Duff & Phelps
effective June 1, 2000).
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Company and type S&P Moody's Fitch Duff & Phelps
of rating
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unicom BBB Baa3 NA BBB
-----------------------------------------------------------------------------------------------------------
ComEd -- -- -- --
-----------------------------------------------------------------------------------------------------------
. Secured BBB+ Baa1 NA A-
-----------------------------------------------------------------------------------------------------------
. Unsecured BBB Baa2 NA BBB+
-----------------------------------------------------------------------------------------------------------
. Preferred Stock BBB- baa2 NA BBB
-----------------------------------------------------------------------------------------------------------
. Commercial Paper A-2 P-2 NA D-1
-----------------------------------------------------------------------------------------------------------
PECO -- -- -- --
-----------------------------------------------------------------------------------------------------------
. Corporate A- Baa1 A- A-
-----------------------------------------------------------------------------------------------------------
. Secured A Baa1 A- A-
-----------------------------------------------------------------------------------------------------------
. Unsecured BBB+ Baa2 BBB+ BBB+
-----------------------------------------------------------------------------------------------------------
. Preferred Stock BBB baa2 BBB+ BBB
-----------------------------------------------------------------------------------------------------------
. Commercial Paper A-2 P-2 F-2 D-1
-----------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
Rule 53(b) Factors. With respect to the relevant financial benchmarks
-------------------
specifically contemplated by Rule 53(b), none is applicable:
. there has been no bankruptcy of Unicom or any of its associate
companies or of PECO or any of its associate companies. (Rule
53(b)(1));
. pro forma average consolidated retained earnings for the four most
recent quarterly periods have not decreased by more than 10% from
the average for the preceding four quarterly periods (Rule
53(b)(2));
. Exelon's aggregate investment in EWGs and FUCOs at March 31, 2000,
did not exceed 2% of Exelon's pro forma consolidated capital
invested in utility operations; and
. in the previous fiscal year, neither Unicom nor PECO reported
operating losses attributable to its direct or indirect investments
in EWGs and FUCOs that exceeded an amount equal to 5% of their
consolidated retained earnings (Rule 53(b)(3))./59/
Exelon undertakes to notify the Commission by filing a post-effective
amendment in this proceeding in the event that any of the circumstances
described in Rule 53(b) arise during the Authorization Period.
Impact of Investments in EWGs and FUCOs on Utility Subsidiaries.
---------------------------------------------------------------
Exelon's request in this Application/Declaration to authorize the existing and
proposed investments in EWGs and FUCOs will not have an "adverse impact" on
either ComEd or PECO, their
-------------------------
/59/ AmerGen commenced operations in December 1999 with the acquisition of
Clinton and Three Mile Island stations. PECO recorded an equity loss of $486,000
in 1999 reflecting PECO's 50% share of AmerGen's start-up costs.
39
<PAGE>
respective customers, or on the ability of the Illinois Commission or the
Pennsylvania Commission to protect such Utility Subsidiaries or such
customers./60/
This conclusion is supported by (i) the insulation of ComEd and PECO
and their customers from potential direct adverse effects of Exelon's
investments in EWGs and FUCOs; (ii) the effects of utility regulation
restructuring in Illinois and Pennsylvania, including the retail rate caps and
rate freeze imposed on ComEd and PECO and the opening of the energy supply
business to retail customer choice, (iii) ComEd's and PECO's current financial
health and (iv) the proven effectiveness of state commission oversight over
ComEd and PECO.
Insulation from Risk. All of Exelon's investments in EWGs and FUCOs
--------------------
are, and in the future will remain, segregated from ComEd and PECO. Any losses
that may be incurred by such EWGs and FUCOs would have no effect on the rates of
ComEd or PECO -- even after the rate caps and rate freezes now in effect expire.
Exelon represents that it will not seek recovery through higher rates from ComEd
or PECO utility customers in order to compensate Exelon for any possible losses
that it or any Subsidiary may sustain on the investment in EWGs or FUCOs or for
any inadequate returns on such investments.
Moreover, to the extent that there may be indirect impacts on ComEd or
PECO from Exelon's EWG and FUCO investments through effects on Exelon's capital
costs, the Illinois Commission and the Pennsylvania Commission have broad
discretion to set the cost of capital for the utility subject to their
jurisdiction by a variety of accepted means and are free to exclude any adverse
impacts due to EWGs and FUCOs. Therefore, the state commissions have the
authority and the mechanisms to prevent any adverse effects on the cost of
capital due to investments in EWGs and FUCOs from being passed on to utility
customers.
Exelon will comply with the requirements of Rule 53(a)(3) regarding
the limitation on the use of ComEd and PECO employees in connection with
providing services to EWGs and FUCOs. The restructuring of ComEd and PECO and
the creation of Genco is not anticipated to have any major impact on utilization
of Utility Subsidiary employees, except for personnel adjustments related to the
integration of two previously independent organizations. Neither ComEd nor PECO
will increase staffing levels to support the operations of any EWG or FUCO.
AmerGen operations will be conducted by those employees currently engaged in
that business. Development of new EWG or FUCO projects will be conducted through
Genco, one or more Subsidiaries of Genco and/or Exelon Services./61/
-----------------------
/60/ No other Utility Subsidiary is subject to rate regulation by a state
commission. Genco is not a public utility for state law purposes and none of the
other Utility Subsidiaries (the Indiana Company and the Conowingo Companies) has
any retail customers. References to PECO refer to its distribution and
transmission function only because its generating assets will be distributed to
Genco.
/61/ In the Merger U-1, Exelon is seeking authorization for Genco to provide
services to AmerGen related to, among other things, nuclear operations. One of
the primary economies and benefits of combining all generating operations in
Genco is the ability to adopt best practices and otherwise improve the
operations of nuclear stations while enhancing safety. While Genco is a
"public-utility company" under the Act, it is not a traditional rate regulated
utility and has no retail customers. All Genco's sales, including those to ComEd
and PECO are subject to FERC
40
<PAGE>
As noted in the Merger U-1, Genco will seek authority to render
certain services to EWGs and FUCOs, especially relating to nuclear operations.
While Genco is a "domestic public utility" for purposes of Rule 53, it is not
subject to State rate regulation. Further, while it will sell power to ComEd and
PECO, the rate payers of those companies are fully protected by existing rate
freezes and caps and the ability to choose their energy supplier directly. Thus
ComEd and PECO ratepayers are not captive to the charges of Genco. Consequently,
there is no reason that ComEd and PECO ratepayers need to be "protected" from
the diversion of Genco employees time and attention to the activities of EWGs
and FUCOs. Consequently, Exelon requests that the limit on use of Genco
employees in connection with EWGs and FUCOs not apply.
Finally, Exelon will comply with the other conditions of Rule 53(a)
providing specific protections to customers of ComEd and PECO and their state
commissions, in particular, the requirements of Rule 53(a)(2) regarding the
preparation and making available of books and records and financial reports
regarding EWGs and FUCOs, and the requirements of Rule 53(a)(4) regarding filing
of copies of applications and reports with other regulatory commissions.
Financial Health of ComEd and PECO. As indicated earlier in this
----------------------------------
Application/Declaration, the reduced retained earnings of Unicom and PECO are
mainly the result of accounting changes mandated by State restructuring
legislation and the push-down accounting for the Merger. Notwithstanding these
events, ComEd and PECO are financially strong companies with stable earnings and
cash flows. As noted above, ComEd and PECO have sound investment grade ratings
by the major nationally recognized rating agencies. These ratings have been
evaluated in light of the proposed Merger. At March 31, 2000, ComEd's capital
structure (excluding securitization debt) was 48% common equity, 4% preferred
stock and 48% long term debt. At that date, PECO's capital structure (excluding
securitization debt) was 44% common equity, 7% preferred stock and 49% long
term debt./62/
Exelon's current and proposed investments in EWGs and FUCOs will not
have any negative impact on ComEd's and PECO's ability to fund operations and
growth. Current projections indicate that ComEd and PECO will continue to fund
operations and construction expenditures primarily from internal sources of cash
and credit facilities. Neither ComEd nor PECO anticipate any further major asset
sales or any significant additional securitization./63/ Moreover, there is
ongoing evidence that ComEd and PECO can access capital markets as
----------------------
jurisdiction. Accordingly, to the extent necessary Genco seeks a waiver of the
requirement of Rule 53 that would limit the number of its employees who can
render services to EWGs and FUCOs.
/62/ The ComEd ratios, including securitization debt, were common equity, 35%,
preferred stock, 3 and long-term debt, 62%. The PECO ratios, including
securitization debt, were common equity, 23%, preferred stock, 4% and long-term
debt, 73%.
/63/ PECO anticipates that it will refinance during 2001 up to the full
outstanding principal amount of its transition bonds due March 1, 2004 and due
September 1, 2007 with additional transition bonds. The refinancing will be
pursuant to the financing order of the Pennsylvania Commission and thus will be
exempt under Rule 52. PECO will use the same financing structure with PECO
Energy Transition Trust (or similar entity) as the issuer. See PECO Energy
Transition Trust Form S-3 Registration Statement, File No. 333-31646.
41
<PAGE>
needed, although their ability to issue debt and preferred equity securities in
the future depends upon earnings coverages and market factors at the time such
securities are issued.
Adequacy Of State Commission Oversight. Only two state commissions
--------------------------------------
have jurisdiction over the operations of the principal Utility Subsidiaries --
ComEd and PECO -- the Illinois Commission and the Pennsylvania Commission
(collectively, "State Commissions"). The State Commissions are able to protect
utility customers within their respective states. Importantly, the rates now
paid by retail customers in Illinois and Pennsylvania may not be increased for
several years in accordance with state utility regulation restructuring
legislation and State Commission actions. Pursuant to legislation in both
states, the State Commissions are actively encouraging competition in the
industry. The State Commissions have jurisdiction over the transfer of
generating assets to Genco. The Pennsylvania Commission has granted this
approval./64/ The Illinois Commission has the transfer under review. The State
Commissions each have considerable authority to regulate transactions between
ComEd and PECO, respectively, and their affiliates to ensure that customers of
the utility are not harmed by such transactions. For these reasons, the State
Commissions will have adequate authority to protect ComEd and PECO customers
from any adverse effect associated with Exelon's existing and proposed
investments in EWGs and FUCOs.
Accordingly, Exelon asks the Commission to grant it an exception to
the requirements of Rule 53(a)(1) in connection with the proposed financing for
the purpose of additional investments in EWGs and FUCOs subject to the
limitation that Exelon's aggregate investment in EWGs and FUCOs will not exceed
the sum of (a) 100% of retained earnings and (b) $5.5 billion during the
Authorization Period.
3. Exelon Rule 53 Undertakings.
Exelon hereby undertakes to file a report with the Commission within
60 days after the end of each calendar quarter beginning with the first quarter
ending at least 45 days following the date of the Commission's order in this
proceeding, providing:
. A computation in accordance with rule 53(a) of Exelon's aggregate
investment in all EWGs and FUCOs;
. Consolidated capitalization ratio of Exelon as of the end of that
quarter, with consolidated debt to include all short-term debt and
non-recourse debt of all EWGs and FUCOs;
. Analysis of the growth in consolidated retained earnings which
segregates total earnings growth of EWGs and FUCOs from that
attributable to other subsidiaries of Exelon;
. A statement of revenues and net income for each EWG and FUCO for
the twelve months ending as of the end of that quarter.
------------------
/64/ Pa. PUC, Docket Nos. R-00973953 and P-0091265, Final Order, para. 2,
p. 10; Joint Petition for Full Settlement of PECO Energy Company's Restructuring
Plan and Related Appeals and Application for a Qualified Rate Order and
Application of Transfer of Generation Assets, April 29, 1998, para. 28.
42
<PAGE>
4. Rule 54 Analysis.
Rule 54 promulgated under the Act states that in determining whether
to approve the issue or sale of a security by a registered holding company for
purposes other than the acquisition of an EWG or FUCO, or other transactions by
such registered holding company or its subsidiaries other than with respect to
EWGs or FUCOs, the Commission shall not consider the effect of the
capitalization or earnings of any subsidiary which is an EWG or FUCO upon the
registered holding company system if Rules 53(a), (b) and (c) are satisfied.
Neither Unicom nor PECO currently own any FUCOs. As described above in detail,
Exelon will not be in compliance with all of the provisions of Rule 53 safe
harbor. Exelon believes that, for the reasons set out above, the Commission
should approve additional financing for the purpose of making additional
investments in EWGs and FUCOs up to the Modified Rule 53 Limitation. For those
same reasons, Exelon urges the Commission to make no adverse findings under Rule
54 in connection with the financing approval sought herein for other purposes.
H. Dividend Reinvestment Plan
Exelon will establish a dividend reinvestment plan which is expected
to incorporate the existing features of the plans currently offered by Unicom
and PECO. Upon consummation of the Merger, the dividend reinvestment plans of
Unicom and PECO will be terminated (or one company's plan will be adopted by
Exelon) and participants will be eligible to become participants in the Exelon's
new or adopted plan ("Exelon DRP").
Exelon proposes, from time to time during the Authorization Period, to
issue and/or acquire in open market transactions or by some other method which
complies with applicable law and Commission interpretations then in effect up to
21 million shares of Exelon common stock under the Exelon DRP, certain incentive
compensation plans and certain other employee benefit plans described below./65/
Exelon will file with the Commission an amendment to this
Application/Declaration providing the details of the Exelon DRP. In the event
those details are unknown at the time the Commission is otherwise prepared to
issue an order in this matter, Exelon will request the Commission retain
jurisdiction over the terms of the Exelon DRP pending completion of the record.
I. Employee Stock-Based Plans
Exelon proposes, from time to time during the Authorization Period, to
issue and/or acquire in open market transactions or by some other method which
complies with applicable law and Commission interpretations then in effect up to
21 million shares of Exelon common stock under the Exelon DRP and the employee
stock-based plans described below./66/
Prior to the Merger, Unicom will (i) adjust the terms of all
outstanding Unicom Employee Stock Options to provide that, at the Merger
Effective Time (as defined in the Merger Agreement), each Unicom Employee Stock
Option outstanding immediately prior to the Merger Effective Time shall be
deemed to constitute an option to acquire, on the same terms and conditions as
were applicable under such Unicom Employee Stock Option, the same number of
-------------------
/65/ The open market acquisitions for purpose of this plan will be made pursuant
to Rule 42.
/66/ The open market acquisitions for purpose of these plans will be made
pursuant to Rule 42.
43
<PAGE>
shares of Exelon Common Stock as the holder of such Unicom Employee Stock Option
would have been entitled to receive pursuant to the Merger had such holder
exercised such Unicom Employee Stock Option in full immediately prior to the
Merger Effective Time, except that this adjustment will be made as if the
exchange ratio were 0.95 instead of 0.875 and the $3.00 per cash consideration
will be disregarded, (ii) make such other changes to the Unicom Stock Plans and
the terms of any Unicom Employee Stock Options as it deems appropriate to give
effect to the Merger (subject to the approval of PECO, which shall not be
unreasonably withheld); and (iii) ensure that, after the Merger Effective Time,
no Unicom Employee Stock Options may be granted under any Unicom Stock Plan.
Prior to the Merger, PECO will: (i) adjust the terms of all
outstanding PECO Employee Stock Options to provide that, at the Exchange
Effective Time (as defined in the Merger Agreement), each PECO Employee Stock
Option outstanding immediately prior to the Exchange Effective Time shall be
deemed to constitute an option to acquire, on the same terms and conditions as
were applicable under such PECO Employee Stock Option, the same number of shares
of Exelon Common Stock as the holder of such PECO Employee Stock Option would
have been entitled to receive pursuant to the Merger had such holder exercised
such PECO Employee Stock Option in full immediately prior to the Exchange
Effective Time; (ii) make such other changes to the PECO Stock Plans and the
terms of outstanding PECO Employee Stock Options as it deems appropriate to give
effect to the Merger (subject to the approval of Unicom, which shall not be
unreasonably withheld); and (iii) ensure that, after the Exchange Effective
Time, no PECO Employee Stock Options may be granted under any PECO Stock Plan.
Upon completion of the Merger, Exelon will assume all the obligations
of Unicom under the Unicom Stock Plans, each outstanding Unicom Employee Stock
Option and the agreements evidencing the grants thereof. Exelon will comply with
the terms of the Unicom Stock Plans and ensure, to the extent required by, and
subject to the provisions of, such Unicom Stock Plans, that the Unicom Employee
Stock Options that qualified as qualified stock options prior to the Merger
Effective Time continue to qualify as qualified stock options after the Merger
Effective Time.
Upon completion of the Merger, Exelon will also assume all the
obligations of PECO under the PECO Stock Plans, each outstanding PECO Employee
Stock Option and PECO SAR and the agreements evidencing the grants thereof.
Exelon will comply with the terms of the PECO Stock Plans and ensure, to the
extent required by, and subject to the provisions of, such PECO Stock Plans,
that the PECO Employee Stock Options that qualified as qualified stock options
prior to the Exchange Effective Time continue to qualify as qualified stock
options after the Exchange Effective Time.
With respect to each employee or director benefit or compensation
plan, program or arrangement, other than the Unicom Stock Plans and the PECO
Stock Plans, under which Unicom Common Stock or PECO Common Stock is required to
be used for purposes of the payment of benefits, grant of awards or exercise of
options (each, a "Stock Plan"), (i) Unicom and the PECO shall take such action
as may be necessary so that, after the Merger Effective Time, such Stock Plan
shall provide for issuance or purchase in the open market only of Exelon Common
Stock rather than Unicom Common Stock or PECO Common Stock, as the case may be,
and otherwise to amend such Stock Plans to reflect the Merger, and (ii) Exelon
shall take all corporate action necessary or appropriate to obtain shareholder
approval with respect to such Stock Plan to the extent such approval is required
for purposes of the Internal Revenue Code or
44
<PAGE>
other applicable law. Exelon shall take all corporate action necessary to
reserve for issuance a sufficient number of shares of Exelon Common Stock for
delivery upon exercise of the Unicom Employee Stock Options and PECO Employee
Stock Options assumed as described above or the payment of benefits, grant of
awards or exercise of options under such Stock Plans. As soon as reasonably
practicable after the Merger Effective Time, Exelon shall file one or more
registration statements on Form S-8 (or any successor or other appropriate form)
with respect to the shares of Exelon Common Stock subject to such Unicom
Employee Stock Options and PECO Employee Stock Options or to such Stock Plans
and shall use its reasonable best efforts to maintain the effectiveness of such
registration statement or registration statements (and maintain the current
status of the prospectus or prospectuses contained therein or related thereto)
for so long as such Unicom Employee Stock Options and PECO Employee Stock
Options or such benefits or grants of awards remain payable or such options
remain outstanding. For purposes of the above:
. "Unicom Employee Stock Option" means any option to purchase Unicom
Common Stock granted under any Unicom Stock Plan.
. "Unicom Stock Plans" means the Long-Term Incentive Plan of Unicom
as amended from time to time.
. "PECO Employee Stock Option" means any option to purchase PECO
Common Stock granted under any PECO Stock Plan.
. "PECO Stock Plans" means the PECO Energy Company 1989 Long-Term
Incentive Plan and the PECO Energy Company 1998 Stock Option Plan.
. "PECO SAR" means any stock appreciation right linked to the price
of PECO Common Stock and granted under any PECO Stock Plan.
The total number of shares awarded or issued from the plans referred to
above in 1999, and average for 1998 and 1999, was as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Company/67/ Total 1999 Average 1998-1999
--------------------------------------------------------------------------------
<S> <C> <C>
PECO -- --
----
--------------------------------------------------------------------------------
. Stock options granted 2,049,789 2,568,674 avg.
--------------------------------------------------------------------------------
. Shares issued on 0 new shares issued 0 new shares issued
exercise of options
568,000 options exercised 1,349,372 avg. options
exercised
--------------------------------------------------------------------------------
. Shares issued for other 120,300 restricted shares 63,650 avg. restricted
awards granted shares granted
--------------------------------------------------------------------------------
Unicom -- --
------
--------------------------------------------------------------------------------
. Stock options granted 1,848,050 1,613,787
--------------------------------------------------------------------------------
. Shares issued on 0 0
exercise of options
--------------------------------------------------------------------------------
. Shares issued for other 451,501 472,902
awards
--------------------------------------------------------------------------------
</TABLE>
Exelon anticipates that it will adopt the PECO Energy Company 1989
Long-Term Incentive Plan for purposes of making awards to employees of Exelon
and its Subsidiaries following the Merger. The provisions of this plan are
described on pages 60 and 61 of the Joint Proxy Statement/Prospectus of Unicom
and PECO dated May 15, 2000 filed as Exhibit C-2 hereto.
J. Tax Allocation Agreement
The Applicants ask the Commission to approve the Tax Allocation
Agreement. Approval is necessary because the Tax Allocation Agreement provides
for the retention by
----------------
/67/ In the case of shares issued pursuant to plans, the number excludes shares
acquired in the open market or treasury shares used to satisfy the award or
option.
45
<PAGE>
Exelon of certain payments for tax losses that it has incurred, rather than the
allocation of such losses to Subsidiaries without payment as would otherwise be
required by Rule 45(c)(5). Exhibit B-2 is a copy of the proposed Tax Allocation
Agreement.
Provisions in a tax allocation agreement between a registered
holding company and its subsidiaries must comply with Section 12 of the Act and
Rule 45 thereunder. Rule 45(a) of the Act generally prohibits any registered
holding company or subsidiary company from, directly or indirectly, lending or
in any manner extending its credit to or indemnifying, or making any donation or
capital contribution to, any company in the same holding company system, except
pursuant to a Commission order. Rule 45(c) provides that no approval is required
for a tax allocation agreement between eligible associate companies in a
registered holding company system, that "provides for allocation among such
associate companies of the liabilities and benefits arising from such
consolidated tax return for each tax year in a manner not inconsistent with" the
conditions of the rule. Of interest here, Rule 45(c)(5) provides that:
The agreement may, instead of excluding members as
provided in paragraph (c)(4), include all members of
the group in the tax allocation, recognizing negative
corporate taxable income or a negative corporate tax,
according to the allocation method chosen. An agreement
under this paragraph shall provide that those associate
companies with a positive allocation will pay the
amount allocated and those subsidiary companies with a
negative allocation will receive current payment of
their corporate tax credits. The agreement shall
provide a method for apportioning such payments, and
for carrying over uncompensated benefits, if the
consolidated loss is too large to be used in full. Such
method may assign priorities to specified kinds of
benefits.
Under the rule, only "subsidiary companies," as opposed to "associate companies"
(which includes the holding company in a holding company system), are entitled
to be paid for corporate tax credits. However, if a tax allocation agreement
does not fully comply with the provisions of Rule 45(c), it may nonetheless be
approved by the Commission under Section 12(b) and Rule 45(a).
In connection with the 1981 amendments to Rule 45, the
Commission explained that the distinction between associate companies, on the
one hand, and subsidiary companies, on the other, represented a policy decision
to preclude the holding company from sharing in consolidated return savings. The
Commission noted that exploitation of utility companies by holding companies
through the misallocation of consolidated tax return benefits was among the
abuses examined in the investigations underlying the enactment of the 1935 Act.
Holding Co. Act Release No. 21968 (March 25, 1981), citing Sen. Doc. 92, Part
72A, 70th Congress, 1st Sess. at 477-482. It must be noted, however, that the
result in Rule 45(c)(5) is not dictated by the statute and, as the Commission
has recognized, there is discretion on the part of the agency to approve tax
allocation agreements that do not, by their terms, comply with Rule 45(c) -- so
long as the policies and provisions of the Act are otherwise satisfied.
Accordingly, the Applicants request that the Commission approve the Tax
Allocation Agreement.
46
<PAGE>
The Tax Allocation Agreement will be submitted to the Illinois
Commission and the Pennsylvania Commission for approval to the extent required
under applicable State law.
Applicants have attached a copy of a Tax Allocation Agreement
among Exelon and the Subsidiaries as Exhibit B-2.
K. Filing of Certificates of Notification
It is proposed that, with respect to Exelon, the reporting
systems of the Securities Exchange Act of 1934, as amended (the "1934 Act") and
the 1933 Act be integrated with the reporting system under the Act. This would
eliminate duplication of filings with the Commission that cover essentially the
same subject matters, resulting in a reduction of expense for both the
Commission and Exelon. To effect such integration, the portion of the 1933 Act
and 1934 Act reports containing or reflecting disclosures of transactions
occurring pursuant to the authorizations granted in this proceeding would be
incorporated by reference into this proceeding through Rule 24 certificates of
notification. The certificates would also contain all other information required
by Rule 24, including the certification that each transaction being reported on
had been carried out in accordance with the terms and conditions of and for the
purposes represented in this Application/Declaration. Such certificates of
notification would be filed within 60 days after the end of the last calendar
quarter, in which transactions occur.
A copy of relevant document (e.g., underwriting agreements,
indentures, bank agreements) for the relevant quarter will be filed with, or
incorporated by reference from 1993 Act or 1934 Act filings in such Rule 24
certificates.
The Rule 24 certificates will contain the following
information:
(a) If sales of common stock by Exelon are reported, the
purchase price per share and the market price per share at the date of the
agreement of sale;
(b) The total number of shares of Exelon common stock issued
or issuable pursuant to options granted during the quarter under employee
benefit plans and dividend reinvestment plans including any employee benefit
plans or dividend reinvestment plans hereafter adopted;
(c) If Exelon common stock has been transferred to a seller of
securities of a company being acquired, the number of shares so issued, the
value per share and whether the shares are restricted in the hands of the
acquiror;
(d) If a guarantee is issued during the quarter, the name of the
guarantor, the name of the beneficiary of the guarantee and the amount, terms
and purpose of the guarantee;
(e) The amount and terms of any short-term debt issued by any
Utility Subsidiary during the quarter;
(f) The amount and terms of any financings consummated by any
Utility Subsidiary that are not exempt under Rule 52;
47
<PAGE>
(g) A list of U-6B-2 forms filed with the Commission during the
quarter, including the name of the filing entity and the date of filing;
(h) Consolidated balance sheets as of the end of the quarter
and separate balance sheets as of the end of the quarter for each company,
including Exelon, that has engaged in jurisdictional financing transactions
during the quarter; and
(i) Future registration statements filed under the 1933 Act
with respect to securities that are subject of the Application/Declaration will
be filed or incorporated by reference as exhibits to the next certificate filed
pursuant to Rule 24.
Item 2. Fees, Commissions and Expenses
Estimated Legal Fees and Expenses/68/ $100,000
Estimated Miscellaneous Expenses 50,000
---------
Total $150,000
---------
Item 3. Applicable Statutory Provisions
Sections 6(a), 7, 9(a), 10, 12 and 13 of the Act and Rules 42,
43, 45, 52, 53 and 54 are considered applicable to the proposed transactions.
To the extent that the proposed transactions are considered by
the Commission to required authorization, exemption or approval under any
section of the Act or the rules and regulations other than those set forth
above, request for such authorization, exemption or approval is hereby made.
Item 4. Regulatory Approvals
The Pennsylvania Commission has jurisdiction over issuances of
securities by PECO, other than securities payable within one year of the date of
issuance or upon demand of the holder. The Illinois Commission has jurisdiction
over issuances of securities by ComEd, other than securities payable within one
year of the date of issuance or the renewal of short-term obligations for a
two-year or shorter period.
Securities issued by the Utility Subsidiaries which are not
subject to approval by the Commission are not subject to approval by the FERC
under the Federal Power Act because of Section 318 of the Federal Power Act.
Except as stated above, no state or federal regulatory agency
other than the Commission under the Act has jurisdiction over the proposed
transactions.
__________________
/68/ Fees and expenses relating to financing transactions for which approval is
sought herein cannot be estimated at this time. Fees for the placement of
securities will be limited as provided in Item 1.D.
48
<PAGE>
Item 5. Procedure
The Applicants hereby request that there be no hearing on this
Application-Declaration and that the Commission issue its order as soon as
practicable after the filing hereof. The Commission is requested to issue and
publish the requisite notice under Rule 23 with respect to this
Application-Declaration by July 10; such notice specifying August 10, 2000 as
the date by which comments may be entered and the date on which an order of the
Commission granting and permitting the Application/Declaration to become
effective may be entered by the Commission. The Applicants hereby (i) waive a
recommended decision by a hearing officer, (ii) waive a recommended decision by
any other responsible officer or the Commission, (iii) consent that the Division
of Investment Management may assist in the preparation of the Commission's
decision and (iv) waive a 30-day waiting period between the issuance of the
Commission's order and the date on which it is to become effective.
Item 6. Exhibits and Financial Statements
A. Exhibits
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Exhibit No. Description of Document Method of Filing
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
A-1 Restated Articles of Incorporation of Exelon Incorporated by reference to S-4
Registration Statement, Exhibit
C-1
------------------------------------------------------------------------------------------------------------
A-2 Restated Articles of Incorporation of ComEd Incorporated by reference; File
effective February 20, 1985, including Statements No. 1-1839, Unicom Form 10-K for
of Resolution Establishing Series, relating to the
year ended December 31, 1994, the establishment of
three new series of ComEd Exhibit (3)-2.
preference stock known as the "$9.00 Cumulative
Preference Stock," the "$6.875 Cumulative
Preference Stock" and the "$2.425 Cumulative
Preference Stock."
------------------------------------------------------------------------------------------------------------
A-3 Restated Articles of Incorporation of PECO Incorporated by reference; File
No. 1-1401, PECO 1993 Form 10-K,
Exhibit 3-1
------------------------------------------------------------------------------------------------------------
B-1 Amended and Restated Agreement and Plan of Incorporated by reference; Annex
Exchange and Merger (Merger Agreement) 1 to Exhibit C-1
------------------------------------------------------------------------------------------------------------
B-2 Form of Tax Sharing Agreement Filed by amendment
------------------------------------------------------------------------------------------------------------
C-1 Registration Statement of Exelon on Form S-4 Incorporated by reference;
Registration Statement No.
333-37082.
------------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Exhibit No. Description of Document Method of Filing
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
C-2 Joint Proxy Statement and Prospectus of Unicom Incorporated by reference;
and PECO included in Exhibit C-1
------------------------------------------------------------------------------------------------------------
D-1.1 Joint Application of ComEd and PECO to FERC re Incorporated by reference to
Merger (excluding exhibits and testimony which Exhibit D-1.1 to Form U-1 in File
Applicant will supply upon request of the No. 70-9645 ("Merger U-1")
Commission)
------------------------------------------------------------------------------------------------------------
D-1.2 Direct Testimony of Dr. William H. Heironymous Incorporated by reference to
(Exhibit No. APP-300 to FERC Joint Application). Exhibit D-1.2 to Merger U-1
------------------------------------------------------------------------------------------------------------
D-1.3 Order of FERC approving the Merger Incorporated by reference to
Exhibit D-1.3 to Merger U-1
------------------------------------------------------------------------------------------------------------
D-1.4 Application of ComEd to FERC for Authority to Incorporated by reference to
Transfer Jurisdictional Assets ("Restructurings Exhibit D-1.4 to Merger U-1
Filing") (excluding exhibits and testimony which
Applicant will supply upon request of the
Commission)
------------------------------------------------------------------------------------------------------------
D-1.5 Application of PECO to FERC for Authority to Incorporated by reference to
Transfer Jurisdictional Assets ("Restructurings Exhibit D-1.5 to Merger U-1
Filing") (excluding exhibits and testimony
which Applicant will supply upon request of
the Commission)
------------------------------------------------------------------------------------------------------------
D-2.1 Application of PECO before the Pennsylvania Incorporated by reference to
Commission regarding the Merger (excluding Exhibit D-2.1 to Merger U-1
exhibits and testimony which Applicant will
supply upon request of the Commission)
------------------------------------------------------------------------------------------------------------
D-2.2 Order of the Pennsylvania Commission approving Filed by amendment
the Merger
------------------------------------------------------------------------------------------------------------
D-2.3 Application of PECO before Pennsylvania Incorporated by reference to
Commission regarding Restructurings (excluding Exhibit D-2.3 to Merger U-1
exhibits and testimony which Applicant will
supply upon request of the Commission)
------------------------------------------------------------------------------------------------------------
D-3.1 Notice of ComEd to the Illinois Commission Incorporated by reference to
regarding the Merger (excluding exhibits and Exhibit D-3.1 to Merger U-1
attachments which Applicant will supply upon
request of the Commission)
------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Exhibit No. Description of Document Method of Filing
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
D-3.2 Application of ComEd to the Illinois Commission Incorporated by reference to
regarding Restructurings (excluding exhibits Exhibit D-3.2 to Merger U-1
and testimony which Applicant will supply upon
request of the Commission)
------------------------------------------------------------------------------------------------------------
D-4.1 Application of PECO, ComEd and AmerGen to the NRC Incorporated by reference to
regarding transfer of nuclear generating Exhibit D-4.1 to Merger U-1
operating licenses
------------------------------------------------------------------------------------------------------------
D-4.2 Order of the NRC finding that the transfer of Filed by amendment
certain operating licenses in connection with
the Merger is in compliance with The Atomic
Energy Act and consenting to such transfers
------------------------------------------------------------------------------------------------------------
E-1 Maps of service area and transmission system of Filed in paper under Form SE with
ComEd Merger U-1
------------------------------------------------------------------------------------------------------------
E-2 Maps electric and gas service areas and Filed in paper under Form SE with
transmission system of PECO Merger U-1
------------------------------------------------------------------------------------------------------------
E-3 Unicom corporate chart Filed in paper under Form SE with
Merger U-1
------------------------------------------------------------------------------------------------------------
E-4 PECO corporate chart Filed in paper under Form SE with
Merger U-1
------------------------------------------------------------------------------------------------------------
E-5 Exelon Company corporate chart Filed in paper under Form SE with
Merger U-1
------------------------------------------------------------------------------------------------------------
F-1 Preliminary opinion of counsel to Exelon Filed by amendment
------------------------------------------------------------------------------------------------------------
F-2 Past-tense opinion of counsel to Exelon Filed by amendment
------------------------------------------------------------------------------------------------------------
G Intentionally left available
------------------------------------------------------------------------------------------------------------
H-1 Annual Report of Unicom on Form 10-K for the year Incorporated by reference, File
ended December 31, 1999 No. 1-11375
------------------------------------------------------------------------------------------------------------
H-2 Annual Report of PECO on Form 10-K for the year Incorporated by reference, File
ended December 31, 1999 No. 1-1401
------------------------------------------------------------------------------------------------------------
H-3 Quarterly Reports of Unicom on Form 10-Q for the Incorporated by reference, File
quarter ended March 31, 2000 No. 1-11375
------------------------------------------------------------------------------------------------------------
H-4 Quarterly Reports of PECO on Form 10-Q for the Incorporated by reference, File
quarter ended March 31, 2000 No. 1-1401
------------------------------------------------------------------------------------------------------------
I-1 List and Description of Subsidiaries and Incorporated by reference to
Investments Of Unicom Corporation (Other than Exhibit I-1 to Merger U-1
"Public-Utility" Companies)
------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Exhibit No. Description of Document Method of Filing
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
I-2 List and Description of Subsidiaries and Incorporated by reference to
Investments Of PECO Energy (Other than Exhibit I-2 to Merger U-1
"Public-Utility" Companies)
------------------------------------------------------------------------------------------------------------
J-1 Form of Utility Money Pool Agreement Filed herewith
------------------------------------------------------------------------------------------------------------
J-2 Form of Non-Utility Money Pool Agreement Filed herewith
------------------------------------------------------------------------------------------------------------
K Intentionally left available
------------------------------------------------------------------------------------------------------------
L-1 Form of Notice of filing Filed by amendment
------------------------------------------------------------------------------------------------------------
M-1 Description of Existing Financing Arrangements of Filed herewith
Unicom
------------------------------------------------------------------------------------------------------------
M-2 Description of Existing Financing Arrangements of Filed herewith
PECO
------------------------------------------------------------------------------------------------------------
</TABLE>
B. Financial Statements
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Statement No. Description Method of Filing
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FS-1 Historical consolidated financial statements of Incorporated by reference to
Unicom Annual Reports on Form 10-K for
the years ended 1999, 1998 and 1997
------------------------------------------------------------------------------------------------------------
FS-2 Historical consolidated financial statements of Incorporated by reference to
PECO Annual Reports on Form 10-K for
the years ended 1999, 1998 and 1997
------------------------------------------------------------------------------------------------------------
FS-3 Unaudited Pro Forma Financial Statements of Incorporated by reference; S-4
Exelon, giving effect to the Merger Registration Statement, Exhibit
C-1
------------------------------------------------------------------------------------------------------------
</TABLE>
Item 7. Information as to Environmental Effects
The proposed transaction involves neither a "major federal
action" nor "significantly affects the quality of the human environment" as
those terms are used in Section 102(2)(C) of the National Environmental Policy
Act, 42 U.S.C. Sec. 4321 et seq. No federal agency is preparing an environmental
impact statement with respect to this matter.
52
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the Applicants have duly caused this
Application/Declaration to be signed on their behalf by the undersigned
thereunto duly authorized.
Date: June 9, 2000
--------------------------------------------------------------------------------
Exelon Corporation
By /s/ Corbin A. McNeill, Jr.
---------------------------
Name: Corbin A. McNeill, Jr.
Title: Chairman, Chief Executive
Officer and President
--------------------------------------------------------------------------------
Exelon Business Services Company
Exelon Ventures Company
Exelon Enterprises Company, LLC
Exelon Generation Company, LLC
By Exelon Corporation
By /s/ Corbin A. McNeill, Jr.
---------------------------
Name: Corbin A. McNeill, Jr.
Title: Chairman, Chief Executive
Officer and President
--------------------------------------------------------------------------------
Commonwealth Edison Company
By /s/ Rebecca J. Lauer
---------------------------
Name: Rebecca J. Lauer
Title: Vice President and
General Counsel
PECO Energy Company
By /s/ Corbin A. McNeill, Jr.
---------------------------
Name: Corbin A. McNeill, Jr.
Title: Chairman, President
and CEO
--------------------------------------------------------------------------------
53
