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40,000MEGAWATTS
A MEASURE OF OUR STRENGTH
Exelon Corporation 2001 Annual Report

Table of contents

  • Page 1
    40,000 MEGAWATTS A MEASURE OF OUR STRENGTH Exelon Corporation 2001 Annual Report

  • Page 2
    ... of Exelon's power. Exelon provides billions of kilowatt hours of service to customers each year, meeting a wide variety of power needs. Introduction Letter to Shareholders Generation Energy Delivery Enterprises Business Services Company Employees Environmental Performance Senior Officers Board of...

  • Page 3
    ... you go about your business on any given day in North America, you are likely to encounter the power of Exelon and not even know it. If you are one of Exelon's five million customers of northern Illinois or southeastern Pennsylvania, your homes and offices are filled with our energy. Or perhaps you...

  • Page 4
    AN INNOVATIVE LEADER

  • Page 5
    ... all generators' authority to sell power at market based rates, at least until rapid progress is made with respect to regional transmission organizations. At Exelon, we faced the challenge of putting our two companies together while meeting our corporate goals and financial commitments. We worked...

  • Page 6
    ... collapse of Exelon Enterprises' markets in the telecommunications industry, lower than expected wholesale electricity prices, and lower than expected demand. We achieved a 15% increase over pro forma 2000 earnings of $1,247 million, or $3.86 earnings per share (EPS), assuming the merger occurred on...

  • Page 7
    ... supply portfolio of over 40,000 megawatts balanced by fuel type, dispatch flexibility and geography. Our assets are located strategically in the Chicago, Philadelphia, Boston and Dallas/Fort Worth regions (4 of the 10 largest U.S. cities). - A retail load base of approximately 5 million customers...

  • Page 8
    ... across the industry value chain with a strong balance sheet and improving risk management capabilities. - Management skills with demonstrated abilities to shape the evolution of regulatory and industry structures. - The nation's largest, superbly operated nuclear fleet and operating improvement in...

  • Page 9
    ... at a reasonable cost. We made great strides in 2001 in our ability to keep this commitment. We plan on continued improvement in this area in the future. Exelon, as the largest nuclear generator in the United States, has a special responsibility to operate our nuclear power plants safely-above...

  • Page 10
    ...generation, wholesale marketing, and trading strategies. Finally, we will exercise discipline to confine our investments to opportunities that create real value for our shareholders. We will apply a high degree of financial rigor in any and all investment opportunities we evaluate- projected returns...

  • Page 11
    ... Message from Corbin A. McNeill, Jr. In February I announced my plans to retire from Exelon at the conclusion of this year's annual meeting on April 23. At that time John Rowe will become the Company's chairman and sole chief executive officer. The Company is now at a stage where it will benefit...

  • Page 12
    14,591,970 CONTINUOUS KILOWATT HOURS

  • Page 13
    ...Company's profitability by ensuring optimum use of generating assets. Our strong reliability record has established Exelon as a preferred supplier for customers in every region of the country. Power Team's traders help develop the strategies for acquisitions and contracts for supply and transmission...

  • Page 14
    23,287,671 SPINNING DRYERS

  • Page 15
    ... of energy to its customers, Exelon Energy Delivery is working to achieve industry top-quartile performance in customer satisfaction, cost, and employee safety. A new, comprehensive consolidation initiative supports the Exelon corporate growth strategy in three distinct ways: - Improves the Company...

  • Page 16
    525,600 EFFICIENT MINUTES

  • Page 17
    ... and full energy supply management; Exelon Services, which offers products and services designed to reduce the risk and conserve energy related to building systems and infrastructure; Exelon Thermal Technologies, one of North America's leading district energy companies; and Exelon Capital Partners...

  • Page 18
    212.0 DEGREES FAHRENHEIT

  • Page 19
    ... Company Business Services Company (BSC) is a direct, wholly-owned subsidiary of Exelon Corporation. With nearly 700 employees located in Chicago and Philadelphia, BSC provides Exelon's businesses with services in the areas of information technology, financial, human resources, legal, supply chain...

  • Page 20
    29,000 BRIGHT MINDS

  • Page 21
    .... Exelon employees are guided by the Company's four core values: Boldness - surprising competitors with our imagination and execution, and customers with our commitment and service; Creativity - developing new solutions to meet customers' needs across an ever growing range of market opportunities...

  • Page 22
    360,000,000 ENERGY REVOLUTIONS

  • Page 23
    ...: being one of the largest marketers of wind power in North America in 2001; an innovative agreement with Environmental Resources Trust to supply the City of Chicago with EcoPower SM Renewable Energy Certificates, enabling the City to directly support renewable energy use and development; and a 42...

  • Page 24
    ... Senior Vice President and General Counsel Ruth Ann M. Gillis Senior Vice President and Chief Financial Officer John W. Rowe President and Co-Chief Executive Officer Elizabeth A. Moler Senior Vice President, Government Affairs and Policy George H. Gilmore Oliver D. Kingsley, Jr. Executive Vice...

  • Page 25
    ... and General Manager Nuclear Services Division Gilbert/Commonwealth, Inc. Corbin A. McNeill, Jr. Chairman and Co-Chief Executive Officer Exelon Corporation (Retiring as of April 23, 2002) M. Walter D'Alessio Chairman, President and Chief Executive Officer Legg Mason Real Estate Services John...

  • Page 26
    ... Report of Independent Accountants Consolidated Statements of Income Consolidated Statements of Cash Flows Consolidated Balance Sheets Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Comprehensive Income Notes to Consolidated Financial Statements Security...

  • Page 27
    ... Companies in millions, except for per share data 2001 2000(a) 1999 For the Years Ended December 31, 1998 1997 Statement of Income Data: Operating Revenues Operating Income Income before Extraordinary Items and Cumulative Effect of Changes in Accounting Principles Extraordinary Items (net...

  • Page 28
    ... of Philadelphia. - Generation, consisting of electric generating facilities, energy marketing operations and equity interests in Sithe Energies, Inc. (Sithe) and AmerGen Energy Company, LLC (AmerGen). - Enterprises, consisting of competitive retail energy sales, energy and infrastructure services...

  • Page 29
    ... and general costs as a result of increased allocation of costs previously recorded at Corporate, and $18 million for employee severance costs associated with the Merger, partially offset by a decrease in customer costs. Higher purchased power costs for 2001 include charges for energy losses...

  • Page 30
    ... generation supplier, partially offset by a decrease in revenues of $145 million from customers in Illinois electing to purchase energy from an alternative retail electric supplier (ARES) or the power purchase option (PPO), under which customers can purchase power from ComEd at a market- based rate...

  • Page 31
    ... expiration of wholesale contracts that were offered by ComEd from June 2000 to May 2001 to support the open access program in Illinois, partially offset by increased transmission service revenue and the reversal of a $15 million reserve for revenue refunds to ComEd's municipal customers as a result...

  • Page 32
    ... margins on market and affiliate wholesale energy sales, coupled with decreased operating costs at the nuclear plants, partially offset by additional depreciation and amortization. During the first five months of 2001, Generation benefited from increases in wholesale market prices, particularly in...

  • Page 33
    ... income tax rate due to operations in Illinois subsequent to the Merger, reduced impact of investment tax credit amortization and a favorable annual tax return adjustment recorded in 2001. Extraordinary Items In 2000, Exelon incurred extraordinary charges aggregating $6 million ($4 million, net of...

  • Page 34
    ... selecting PECO as their electric generation supplier and rate adjustments partially offset by lower summer volume. Energy Delivery's operating expenses and other increased due to higher administrative and general costs as a result of increased allocation of costs previously recorded at Corporate...

  • Page 35
    ...474 million and the Merger added $277 million. Operating revenues attributable to normal operations increased $530 million as a result of thirteen infrastructure services company acquisitions in 2000 and 1999, partially offset by reduced retail energy sales. Enterprises' operating and other expenses...

  • Page 36
    ... a change in accounting method for nuclear outage costs by PECO in conjunction with the synchronization of accounting policies in connection with the Merger. Liquidity and Capital Resources Exelon's capital resources are primarily provided by internally generated cash flows from operations and, to...

  • Page 37
    ...Total capital expenditures for nuclear refueling outages are expected to increase in 2002 over 2001 by $24 million. Exelon has committed to provide AmerGen with capital contributions equivalent to 50% of the purchase price of any acquisitions AmerGen makes in 2002. Exelon anticipates that Generation...

  • Page 38
    ...new dividend rate represents about a 50% payout of the expected 2002 earnings per share from Exelon's regulated electricity delivery businesses. Exelon intends to grow the dividend to about a 60% payout of earnings from regulated operations based on cash flow and earnings growth prospects for Energy...

  • Page 39
    ... its nuclear power plants. Exelon's current estimate of decommissioning costs for its owned nuclear plants is $7.2 billion in current year (2002) dollars. Nuclear decommissioning activity occurs primarily after the plants retirement and is currently estimated to begin in 2045. At December 31, 2001...

  • Page 40
    ... obligations of pension and postretirement benefit plans and the eventual nuclear generating station decommissioning has decreased. Also, as a result of the Merger and corporate restructuring, there was a larger than average number of employees taking advantage of retirement benefits in 2001. These...

  • Page 41
    ... chief financial officer,general counsel, treasurer,vice president of corporate planning and officers from each of the business units. The RMC reports to the board of directors on the scope of Exelon's derivative activities. Commodity Price Risk Commodity price risk is associated with market price...

  • Page 42
    ...of the net energy trading and non-trading assets and sources of fair value as of December 31, 2001 are as follows: (in millions) 1 Year 2-3 Years Maturities Within 4-5 Years Total Fair Value Non-trading: Actively quoted prices Prices provided by other external sources Prices based on model or other...

  • Page 43
    ... customer base. For the year ended December 31, 2001, ComEd's ten largest customers represented approximately 3% of its retail electric revenues and PECO's ten largest customers represented approximately 10% of its retail electric revenues. Credit risk for Energy Delivery is managed by each company...

  • Page 44
    .... Equity Price Risk Exelon maintains trust funds, as required by the Nuclear Regulatory Commission (NRC), to fund certain costs of decommissioning its nuclear plants. As of December 31, 2001, these funds are reflected at fair value on Exelon's Consolidated Balance Sheets. The mix of securities is...

  • Page 45
    ...fair value of energy derivative contracts marked to market. The valuation model uses volatility assumptions relating to future energy prices based on specific energy markets and utilizes externally available forward market price curves. Interest Rate Derivatives Exelon utilizes derivatives to manage...

  • Page 46
    ... each month based on daily generation volumes, estimated customer usage by class, line losses and applicable customer rates based on regression analyses reflecting significant historical trends and experience. Customer accounts receivable as of December 31, 2001 include unbilled energy revenues of...

  • Page 47
    ... supply marketplace to customers who do not or cannot choose an alternate supplier. Retail competition for generation services has resulted in reduced revenues from regulated rates and the sale of increasing amounts of energy at market-based rates. Energy Delivery's revenues will be affected by rate...

  • Page 48
    ...functioning competitive wholesale market for generation services. The proposal offers large customers a default power and energy offering at spot market rates, thereby freeing the utility from maintaining a long-term portfolio and making that capacity available to alternative suppliers. The proposal...

  • Page 49
    ... operational benefits of owning and operating substantial generating capacity and to optimize the value of Exelon's low-cost generating capacity through energy marketing expertise. Generation competes nationally in the wholesale electric generation markets on the basis of price and service offerings...

  • Page 50
    ...cooling business of Exelon Thermal Technologies, Inc., communications joint ventures and other investments weighted towards the communications, energy services and retail services industries. InfraSource, formerly Exelon Infrastructure Services, Inc. (EIS), was renamed effective November 15, 2001 in...

  • Page 51
    ...will be recorded in the first quarter of 2002. See New Accounting Pronouncements. Other Factors Inflation affects Exelon through increased operating costs and increased capital costs for electric plant. As a result of the rate caps imposed under the legislation in Illinois and Pennsylvania and price...

  • Page 52
    ... nuclear generating plants on its highest alert status, requiring increased security measures, enhanced communication with authorities at all levels of government and enhanced physical barriers. These additional measures are estimated to cost between $600,000 and $900,000 annually for each of Exelon...

  • Page 53
    ...statute, written or oral contract or by legal construction under the doctrine of promissory estoppel. Adoption of SFAS No. 143 will change the accounting for the decommissioning of Exelon's nuclear generating plants. Currently, Exelon records the obligation for decommissioning ratably over the lives...

  • Page 54
    ... for nuclear outage costs in 2000. As discussed in Note 1 to the consolidated financial statements, Exelon changed its method of accounting for derivative instruments and hedging activities effective January 1, 2001. Chicago, Illinois January 29, 2002, except for Note 25 for which the date is...

  • Page 55
    ... Statements of Income Exelon Corporation and Subsidiary Companies in millions, except per share data 2001 For the Years Ended December 31, 2000 1999 Operating Revenues Operating Expenses Fuel and Purchased Power Operating and Maintenance Merger-Related Costs Depreciation and Amortization...

  • Page 56
    ... Changes in Working Capital: Accounts Receivable Repurchase of Accounts Receivable Inventories Accounts Payable, Accrued Expenses, & Other Current Liabilities Other Current Assets Net Cash Flows provided by Operating Activities Cash Flows from Investing Activities Investment in Plant Unicom Merger...

  • Page 57
    55 Consolidated Balance Sheets Exelon Corporation and Subsidiary Companies in millions at December 31, 2001 2000 Assets Current Assets Cash and Cash Equivalents Restricted Cash Accounts Receivable, net Customer Other Inventories, at average cost Fossil Fuel Materials and Supplies Deferred Income...

  • Page 58
    ... Employee Stock Purchase Plan Issuances Merger Consideration-Stock Options Amortization of Deferred Compensation Common Stock Dividends Reclassified Net Unrealized Losses on Marketable Securities, net of income taxes of $22 Other Comprehensive Income, net of income tax benefit of $197 Balance...

  • Page 59
    ... the energy delivery, wholesale generation and the energy-related enterprises businesses. See Note 21-Segment Information. The energy delivery business consists of the retail electricity distribution and transmission businesses of Commonwealth Edison Company (ComEd) in northern Illinois and PECO in...

  • Page 60
    ... stations through regulated rates. The amounts recovered from customers are deposited in trust accounts and invested for funding of future costs for operating and retired plants. Exelon accounts for the current period's cost of decommissioning related to generating plants previously owned by PECO...

  • Page 61
    ... retired units. When regulatory accounting practices are discontinued, unrealized gains and losses on marketable securities held in the nuclear decommissioning trust funds are reported in accumulated other comprehensive income. At December 31, 2001 and 2000, Exelon had no held-tomaturity or trading...

  • Page 62
    ... to limit the market price risk associated with forward energy commodity contracts. Additionally, Exelon enters into certain energy related derivatives for trading or speculative purposes. As part of Exelon's energy marketing business, Exelon enters into contracts to buy and sell energy to meet the...

  • Page 63
    ...statute, written or oral contract or by legal construction under the doctrine of promissory estoppel. Adoption of SFAS No. 143 will change the accounting for the decommissioning of Exelon's nuclear generating plants. Currently, Exelon records the obligation for decommissioning ratably over the lives...

  • Page 64
    ... the Share Exchange, Exelon became the owner of all of the common stock of PECO. As a result of the Merger, Unicom ceased to exist and its subsidiaries, including ComEd, became subsidiaries of Exelon. The Merger was accounted for using the purchase method of accounting. The total purchase price was...

  • Page 65
    ... were recorded as part of the application of purchase accounting and did not affect results of operations. Merger-related costs charged to expense in 2000 were $276 million, consisting of $124 million for PECO employee costs and $152 million of direct incremental costs. Direct incremental costs...

  • Page 66
    ... primarily related to PECO employees were charged to expense in 2001. Exelon anticipates that a total of $289 million of employee costs will be funded from pension and postretirement benefit plans and $191 million of Unicom employee severance costs will be funded from general corporate funds. The...

  • Page 67
    ... assets and liabilities of PECO, representing PECO's generation and enterprises business segments, were transferred to Generation and Enterprises, respectively. Additionally, certain operations and assets and liabilities of ComEd and PECO were transferred to Exelon Business Services Company (BSC).

  • Page 68
    ... purchase of electric energy from ComEd at market-based prices. ComEd's residential customers become eligible to choose a new electric supplier in May 2002. As of December 31, 2001, approximately 18,700 non-residential customers, representing approximately 22% of ComEd's annual retail kilowatt-hour...

  • Page 69
    ... generation from an alternative generation supplier. Customers who purchase energy from an EGS continue to pay a delivery charge. Rate Reductions and Caps Under the Final Restructuring Order, retail electric rates were capped at year-end 1996 levels (system-wide average of 9.96 cents/kilowatt hour...

  • Page 70
    ... amount capitalized) Income Taxes (net of refunds) Non-cash investing and financing: Regulatory Asset Fair Value Adjustment Purchase Accounting Estimate Adjustments Issuance of Exelon Shares for Unicom Issuance of InfraSource stock Depreciation and amortization: Property, plant and equipment Nuclear...

  • Page 71
    ... has been adjusted for Exelon's share of this joint venture's operating losses incurred in excess of its investment. The notes bear interest at the Applicable Federal Rate, compounded semi-annually. The average interest rate on the notes receivable was 4.18% and 6.22% at December 31, 2001 and 2000...

  • Page 72
    ...December 31, 2001, were as follows: Production Plant Transmission Quad Cities and Other Plant Generation Various Co. Peach Bottom Operator Generation Salem PSE&G Nuclear Keystone Reliant Conemaugh Reliant Participating Interest Exelon's Share: Plant Accumulated Depreciation Construction Work in...

  • Page 73
    ... and losses on decommissioning trust funds (based on the market value of the assets on the Merger date, in accordance with purchase accounting) had previously been recorded in accumulated depreciation or regulatory assets. As a result of the transfer of the ComEd nuclear plants to Generation and the...

  • Page 74
    .... (13) Notes Payable 2001 2000 1999 Average borrowings Average interest rates, computed on daily basis Maximum borrowings outstanding Average interest rates, at December 31 $ 193 4.01% $ 599 2.63% $ 186 6.62% $ 500 7.18% $ 242 5.62% $ 728 6.80% Exelon, ComEd, PECO and Generation entered into...

  • Page 75
    ... Rates Maturity Date 2001 2000 ComEd Transitional Trust Notes Series 1998-A: PETT Bonds Series 1999-A: Fixed rates Floating rates PETT Bonds Series 2000-A: PETT Bonds Series 2001: First and Refunding Mortgage Bonds(b)(c): Fixed rates Floating rates Notes payable Pollution control notes: Fixed rates...

  • Page 76
    ... starting interest rate swaps to manage interest rate exposure associated with the anticipated issuance of the Series 1999-A Transition Bonds. On March 18, 1999, these instruments were settled with net proceeds of $80 million to PECO which were deferred and are being amortized over the life of the...

  • Page 77
    ... 1999 2001 U.S. Federal statutory rate Increase (decrease) due to: Property basis differences State income taxes, net of Federal income tax benefit Amortization of investment tax credit Amortization of goodwill Prior period income taxes Dividends on PECO Preferred Stock Other, net Effective income...

  • Page 78
    ...employed by Exelon on January 1, 2002, will have the opportunity to continue to participate in the pension plan or to transfer to the cash balance plan. Benefits under Exelon's pension plans generally reflect each employee's compensation, years of service and age at retirement. Funding is based upon...

  • Page 79
    ...basis over the average remaining service period of employees expected to receive benefits under the plans. Special accounting costs of $48 million in 2001 represent accelerated separation and enhancement benefits provided to PECO employees expected to be terminated as a result of the Merger. Special...

  • Page 80
    ... or contributions are based upon the benefits paid during the year. Additionally, Exelon sponsors nonqualified supplemental retirement plans which cover any excess pension benefits that would be payable to management employees under the qualified plan but which are limited by the Internal Revenue...

  • Page 81
    ... through open-market, privately negotiated and/or other types of transactions in conformity with the rules of the SEC. Pursuant to these authorizations, PECO entered into forward purchase agreements to be settled from time to time, at PECO's election, on a physical, net share or net cash basis. PECO...

  • Page 82
    ...The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2001, 2000 and 1999, respectively: 2001 2000 1999 Dividend yield Expected volatility Risk-free interest rate Expected life...

  • Page 83
    ...In June 2001, the Board of Directors of Exelon approved the Employee Stock Purchase Plan (ESPP). The purpose of the ESPP is to provide employees of Exelon, and its subsidiary companies the right to purchase shares of Exelon's common stock at below-market prices. A total of 5,000,000 shares of Exelon...

  • Page 84
    ... accounts for decommissioning nuclear plants, long-term debt and preferred securities of subsidiaries are estimated based on quoted market prices for the same or similar issues. The fair value of Exelon's interest rate swaps and power purchase and sale contracts is determined using quoted exchange...

  • Page 85
    ... purchase or sale of the energy commodity occurs. The majority of Exelon's cash flow hedges are expected to settle within the next 3 years. Exelon classifies investments in the trust accounts for decommissioning nuclear plants as available-for-sale. The following tables show the fair values...

  • Page 86
    ...and Spent Fuel Storage for further information regarding the nuclear decommissioning trusts. (20) Commitments and Contingencies Capital Commitments In December 2001, Generation agreed to purchase two generation plants located in the Dallas-Fort Worth metropolitan area from TXU Corp. (TXU) to expand...

  • Page 87
    ... Exelon with physical power supply to enable it to deliver energy to meet customer needs. Exelon primarily uses financial contracts in its wholesale marketing activities for hedging purposes. Exelon also uses financial contracts to manage the risk surrounding trading for profit activities. Exelon...

  • Page 88
    ... with AmerGen, under which it will purchase all the energy from Unit No. 1 at Three Mile Island Nuclear Station (TMI) after December 31, 2001 through December 31, 2014. Under a 1999 PPA, Generation will purchase from AmerGen all of the residual energy from the Clinton Nuclear Power Station (Clinton...

  • Page 89
    ... an Energy Reliability and Capacity Account, into which ComEd deposited $25 million during each of the years 1999 through 2001 and has conditionally agreed to deposit $25 million at the end of 2002, to help ensure an adequate and reliable electric supply for Chicago. Cotter Corporation Litigation...

  • Page 90
    .... Pennsylvania Real Estate Tax Appeals. Exelon is involved in tax appeals regarding two of its nuclear facilities, Limerick Generating Station (Montgomery County) and Peach Bottom Atomic Power Station (York County), and one of its fossil facilities, Eddystone (Delaware County). Exelon is also...

  • Page 91
    ... customers served by Enron Energy Services (EES), either as a billing agent or a third party supplier. EES is the billing agent for 366 of ComEd's customer accounts. On January 7, 2002, EES was authorized by the bankruptcy court to reject its contracts for 129 of these accounts. EES advised Exelon...

  • Page 92
    ... PECO located in the Pennsylvania counties surrounding the City of Philadelphia. Generation consists of electric generating facilities, energy marketing operations and Exelon's interests in Sithe and AmerGen. Enterprises consists of competitive retail energy sales, energy and infrastructure services...

  • Page 93
    ... Exelon's agreement to maintain a positive net worth of Sithe. Exelon recorded $2 million of interest income on the note in 2001. Generation has entered into PPAs dated December 18, 2001 and November 22, 1999 with AmerGen. Under the 2001 PPA, Exelon has agreed to purchase from AmerGen all the energy...

  • Page 94
    ... January 2002, Exelon discovered that its September 30, 2001 financial statements required a restatement for additional net realized and unrealized losses on investments of Generation's nuclear decommissioning trust funds that were incurred prior to September 30, 2001 but not recorded. (c) Reflects...

  • Page 95
    ...the first half of 2002. Enterprises expects to record a pre-tax gain of approximately $200 million on the sale ($120 million after income taxes) resulting in an increase in diluted earnings per share in 2002 of $0.37. Proceeds from the transaction will be used for Exelon's general corporate purposes...

  • Page 96
    94 Securities Statistics Exelon Corporation and Subsidiary Companies Securities Ratings for Exelon and its Subsidiary Companies Securities Moody's Standard & Poors Corporation Fitch Investors Service, Inc. Exelon ComEd PECO Generation Senior unsecured debt Commercial paper Senior secured debt ...

  • Page 97
    ... to Exelon Corporation c/o EquiServe, Post Office Box 2500, Jersey City, New Jersey 07303-2500. If you prefer, EquiServe provides walk-in service to Exelon shareholders at One North State Street, Eleventh Floor, Chicago, Illinois. The 2001 Form 10-K Annual Report to the Securities and Exchange...

  • Page 98
    Exelon Corporation P.O. Box 805398 Chicago, IL 60680-5398 www.exeloncorp.com