ComEd 2003 Annual Report Download - page 64

62 Management’s Discussion and Analysis of Financial Condition and Results of Operations
EXELON CORPORATION AND SUBSIDIARY COMPANIES
within Generation’s Consolidated Balance Sheet was $3.0 bil-
lion. Decommissioning expenditures are expected to occur
primarily after the plants are retired and are currently esti-
mated to begin in 2029 for plants currently in operation. To
fund future decommissioning costs, Generation held $4.7
billion of investments in trust funds, including net unreal-
ized gains and losses, at December 31, 2003. See Note 13 of
the Notes to Consolidated Financial Statements for further
discussion of Generation’s decommissioning obligation.
See Note 19 of the Notes to Consolidated Financial State-
ments for discussion of Exelon’s commercial commitments
as of December 31, 2003.
IRS Refund Claims
ComEd and PECO have entered into several agreements with
a tax consultant related to the filing of refund claims with
the Internal Revenue Service (IRS) and have made refundable
prepayments of $11 million and $5 million, respectively, for
potential fees associated with these agreements. The fees for
these agreements are contingent upon a successful outcome
and are based upon a percentage of the refunds recovered
from the IRS, if any. As such, ultimate net cash flows to Ex-
elon related to these agreements will either be positive or
neutral depending upon the outcome of the refund claim
with the IRS. These potential tax benefits and associated fees
could be material to our financial position, results of oper-
ations and cash flows. ComEd’s tax benefits for periods prior
to the Merger would be recorded as a reduction of goodwill
pursuant to a reallocation of the Merger purchase price. We
cannot predict the timing of the final resolution of these
refund claims.
Variable Interest Entities
Sithe. We are a 50% owner of Sithe and account for the
investment as an unconsolidated equity investment. Based
on our interpretation of FIN No. 46-R, it is reasonably possi-
ble that we will consolidate Sithe as of March 31, 2004. At
December 31, 2003, Sithe had total assets of $1.5 billion
(including the $90 million note from Generation) and total
debt of $1.0 billion. The $1.0 billion of debt includes $588 mil-
lion of subsidiary debt incurred in prior years primarily to
finance the construction of six new generating facilities,
$419 million of subordinated debt, $43 million of current
portion of long-term debt, but excludes $469 million of non-
recourse project debt associated with Sithe’s equity invest-
ments. For the year ended December 31, 2003, Sithe had
revenues of $690 million and incurred a net loss of approx-
imately $72 million. As of December 31, 2003, we had a $47
million investment in Sithe. We contractually do not own
any interest in Sithe International, a subsidiary of Sithe. As
such, a portion of Sithe’s net assets and results of operations
would be eliminated from our Consolidated Balance Sheets
and Consolidated Statements of Income through a minority
interest if Sithe is consolidated under FIN No. 46-R as of
March 31, 2004.
On November 25, 2003, Generation, Reservoir and Sithe
completed a series of transactions resulting in Generation
and Reservoir each indirectly owning a 50% interest in Sithe.
This series of transactions is described below. Immediately
prior to these transactions, Sithe was owned 49.9% by Gen-
eration, 35.2% by Apollo Energy, LLC (Apollo), and 14.9% by
subsidiaries of Marubeni Corporation (Marubeni).
On November 25, 2003, entities controlled by Reservoir
purchased certain Sithe entities holding six U.S. generating
facilities, each a qualifying facility under the Public Utility
Regulatory Policies Act, in exchange for $37 million ($21 mil-
lion in cash and a $16 million two-year note); and entities
controlled by Marubeni purchased all of Sithe’s entities and
facilities outside of North America (other than Sithe Energies
Australia (SEA) of which it purchased a 49% interest on No-
vember 24, 2003 for separate consideration) for $178 million.
Marubeni agreed to acquire the remaining 51 % of SEA in 90
days if a buyer is not found, although discussions regarding
an extension are ongoing.
Following the sales of the above entities, Generation
transferred its wholly owned subsidiary that held the Sithe
investment to a newly formed holding company. The sub-
sidiary holding the Sithe investment acquired the remaining
Sithe interests from Apollo and Marubeni for $612 million
using proceeds from a $580 million bridge financing and
available cash. Generation sold a 50% interest in the newly
formed holding company for $76 million to an entity con-
trolled by Reservoir on November 25, 2003. On November 26,
2003, Sithe distributed $580 million of available cash to its
parent, which then utilized the distributed funds to repay
the bridge financing.
In connection with this transaction, Generation recorded
obligations related to $39 million of guarantees in accord-
ance with FIN No. 45 “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness to Others”. These guarantees were issued to
protect Reservoir from credit exposure of certain counter-
parties through 2015 and other indemnities. In determining
the value of the FIN No. 45 guarantees, we utilized a proba-
bilistic model to assess the possibilities of future payments
under the guarantees.
Both Generation and Reservoir’s 50% interests in Sithe
are subject to put and call options that could result in either
party owning 100% of Sithe. While our intent is to fully divest
Sithe, the timing of the put and call options vary by acquirer
and can extend through March 2006. The pricing of the put
and call options is dependent on numerous factors, such as
the acquirer, date of acquisition and assets owned by Sithe
at the time of exercise. Any closing under either the put or