ComEd 2002 Annual Report Download - page 118

Notes To Consolidated Financial Statements
exelon corporation and subsidiary companies
116
The United States Environmental Protection Agency (EPA)
has advised Cotter thatit is potentially liable in connection with
radiological contamination at a site known as the West Lake
Landfill in Missouri. Cotter is alleged to have disposed of
approximately 39,000 tons of soils mixed with 8,700 tons of
leached barium sulfate atthe site.Cotter,along with three other
companies identified by the EPA as potentially responsible
parties (PRPs), has submitted a draft feasibility study address-
ing options for remediation of the site. The PRPs are also
engaged in discussions with the State of Missouri and the EPA.
The estimated costs of remediation for the site range from $0
million to $87 million. Once a remedy is selected, it is expected
that the PRPs will agree on an allocation of responsibility for the
costs.Until an agreement is reached,Generation cannot predict
its share of the costs.
Raytheon Arbitration. In March 2001, two subsidiaries of Sithe
New England Holdings (now Exelon New England Holdings)
brought an action in the New York Supreme Court against
Raytheon Corporation (Raytheon) relating to its failure to honor
its guaranty with respect to the performance of the Mystic and
Fore River projects, as a result of the abandonment of the proj-
ects by the turnkey contractor. In a related proceeding, in May
2002,Raytheon submitted claims to the International Chamber
of Commerce Court of Arbitration seeking equitable relief
and damages for alleged owner caused performance delays in
connection with the Fore River Power Plant Engineering,
Procurement & Construction Agreement (EPC Agreement). The
EPC Agreement,executed by a Raytheon subsidiary and guaran-
teed by Raytheon,governs the design,engineering,construction,
start-up, testing and delivery of an 800-MW combined-cycle
power plant in Weymouth, Massachusetts. Raytheon recently
amended its claim and now seeks 141 days of schedule relief
(which would reduce Raytheon’s liquidated damage payment
for late delivery by approximately $25.4 million) and additional
damages of $15.6 million.Raytheon also has asserted a claim for
loss of efficiency and productivity as a result of an alleged con-
structive acceleration,for which a claim has not yet been quan-
tified. Generation believes the Raytheon assertions are without
merit and is vigorously contesting these claims.Hearings by the
International Chamber of Commerce Court of Arbitration with
respect to liability were held in January and February 2003. A
decision on liability is expected to be issued in May 2003 and,if
necessary, additional hearings will be held on damages in May
and June of 2003.
Real Estate Tax Appeals. Generation is involved in tax appeals
regarding a number of its nuclear facilities,Limerick Generating
Station (Montgomery County, PA), Peach Bottom Atomic Power
Station (York County, PA), and Quad Cities Station (Rock Island
County, IL). Generation is also involved in the tax appeal for
Three Mile Island (Dauphin County, PA) through AmerGen.
Generation does not believe the outcome of these matters will
have a material adverse effect on Generation’s results of opera-
tions or financial condition.
General. Exelon is involved in various other litigation matters.
The ultimate outcome of such matters, as well as the matters
discussed above, while uncertain, are not expected to have a
material adverse effect on its respective financial condition or
results of operations.
Credit Contingencies
Generation is a counterparty to Dynegy in various energy trans-
actions. In early July 2002, the credit ratings of Dynegy were
downgraded by two credit rating agencies to below investment
grade.As of December 31, 2002,Generation had a net receivable
from Dynegy of approximately $3 million, and consistent with
the terms of the existing credit arrangement, has received col-
lateral in support of this receivable. Generation also has credit
risk associated with Dynegy through Generation’s equity invest-
ment in Sithe.Sithe is a 60% owner of the Independence gener-
ating station,a 1,040-MW gas-fired qualified facility that has an
energy-only long-term tolling agreement with Dynegy, with a
related financial swap arrangement. As of December 31, 2002,
Sithe had recognized an asset on its balance sheet related to the
fair market value of the financial swap agreement with Dynegy
that is marked-to-market under the terms of SFAS No. 133. If
Dynegy is unable to fulfill the terms of this agreement, Sithe
would be required to impair this financial swap asset.We esti-
mate, as a 49.9% owner of Sithe, that the impairment would
result in an after-tax reduction of our equity earnings of
approximately $10 million.
In addition to the impairment of the financial swap asset, if
Dynegy was unable to fulfill its obligations under the financial
swap agreement and the tolling agreement, we would likely
incur a further impairment associated with the Independence
plant. Depending upon the timing of Dynegy’s failure to fulfill
its obligations and the outcome of any restructuring initiatives,
Exelon could realize an after-tax charge of between $0 and
$130 million. In the event of a sale of our investment in Sithe
to a third party, proceeds from the sale could be negatively
impacted by approximately $120 million, which would repre-
sent an after-tax loss of approximately $65 million.
Additionally, the future economic value of AmerGen’s
purchased power arrangement with Illinois Power,a subsidiary
of Dynegy, could be impacted by events related to Dynegy’s
financial condition.