Exelon 2003 Annual Report Download - page 127

125Notes to Consolidated Financial Statements
EXELON CORPORATION AND SUBSIDIARY COMPANIES
Clean Air Act. On June 1, 2001, the EPA issued to a subsidiary
of the Company a Notice of Violation (NOV) and Reporting
Requirement pursuant to Sections 113 and 114 of the Clean Air
Act. The NOV alleges numerous exceedances of opacity limits
and violations of opacity-related monitoring, recording and
reporting requirements at Mystic Station in Everett, Massa-
chusetts. On January 8, 2002, the EPA indicated that it had
decided to resolve the NOV through an administrative com-
pliance order and a judicial civil penalty action. In March
2002, the EPA issued and Mystic I, LLC, doing business as
Mystic Generating (formerly known as Exelon Mystic Gen-
erating, LLC) (Mystic), a wholly owned subsidiary of the
Company, voluntarily entered a Compliance Order and Re-
porting Requirement (Order) regarding Mystic Station. Un-
der the Order, Mystic Station installed new ignition
equipment on three of the four units at the plant. Mystic
Station also undertook an extensive opacity monitoring and
testing program for all four units at the plant to help de-
termine if additional compliance measures are needed. Pur-
suant to the requirements of the Order, the subsidiary
switched three of the four units to a lower sulfur fuel oil by
September 1, 2002. The Order did not address civil penalties.
By letter dated April 21, 2003, the United States Department
of Justice notified the subsidiary that, at the request of the
EPA, it intended to bring a civil penalty action, but also of-
fered the opportunity to resolve the matter through settle-
ment discussions. Mystic has entered into a consent decree
with the EPA and the Department of Justice, the net dis-
counted cost of which is approximately $4 million. The con-
sent decree is subject to the approval of the United States
District Court of the District of Massachusetts.
Real Estate Tax Appeals. PECO and Generation are each chal-
lenging real estate taxes assessed on nuclear plants since
1997. PECO is involved in litigation in which it is contesting
taxes assessed in 1997 under the Pennsylvania Public Utility
Realty Tax Act of March 4, 1971, as amended (PURTA) and has
appealed local real estate assessments for 1998 and 1999 on
the Limerick Generating Station (Montgomery County, PA)
(Limerick) and Peach Bottom Atomic Power Station (York
County, PA) (Peach Bottom) plants. Generation is involved in
real estate tax appeals for 2000 through 2003, also regard-
ing the valuation of its Limerick and Peach Bottom plants, its
Quad Cities Station (Rock Island County, IL) and, through its
wholly owned subsidiary AmerGen, Three Mile Island Nu-
clear Station (Dauphin County, PA).
During 2003, upon completion of updated nuclear plant
appraisal studies, Exelon recorded reductions of $74 million
to reserves recorded for exposures associated with the real
estate taxes. While Exelon believes the resulting reserve bal-
ances as of December 31, 2003 reflect the most likely prob-
able expected outcome of the litigation and appeals
proceedings in accordance with SFAS No. 5, “Accounting for
Contingencies,” the ultimate outcome of such matters could
result in additional unfavorable or favorable adjustments to
the consolidated financial statements of Exelon, and such
adjustments could be material.
General. Exelon is involved in various other litigation matters
that are being defended and handled in the ordinary course
of business, and Exelon maintains accruals for such costs
that are probable of being incurred and subject to reason-
able estimation. The ultimate outcome of such matters, as
well as the matters discussed above, while uncertain, is not
expected to have a material adverse effect on Exelon’s finan-
cial condition or results of operations.
Capital Commitments
Exelon has a 74% interest in Southeast Chicago, which owns a
peaking facility in Chicago. Southeast Chicago is obligated to
make equity distributions of $51 million over the next 20 years
to the party, which is not affiliated with Exelon, which owns
the remaining 26% interest. This amount reflects a return of
that party’s investment in Southeast Chicago. Exelon has the
right to purchase, generally at a premium, and the other party
has the right to require Exelon to purchase, generally at a dis-
count, the 26% interest in Southeast Chicago. Additionally,
Exelon may be required to purchase the remaining 26% inter-
est upon the occurrence of certain events, including Exelon’s
failure to maintain an investment grade rating. In con-
junction with the adoption of SFAS No. 150 on July 1, 2003,
Exelon reclassified the minority interest associated with
Southeast Chicago to a long-term liability. The total minority
interest related to Southeast Chicago was $51 million as of
December 31, 2003. Prior periods were not restated.
Exelon has committed to making an additional invest-
ment in the Aladdin thermal facility in 2004 of approx-
imately $19 million for the repayment of debt, which may
result in prepayment penalties and the need for additional
investment. See Note 2 – Acquisitions and Dispositions for
further information regarding agreement to sell the Aladdin
thermal facility.
Credit Contingencies
Dynegy. Generation is a counterparty to Dynegy in various
energy transactions. In early July 2002, the credit ratings of
Dynegy were downgraded by two credit rating agencies to
below investment grade. As of December 31, 2003, Exelon has
credit risk associated with Dynegy through Generation’s in-
vestment in Sithe. Sithe is a 60% owner of the Independence
generating station, a 1,028-MW gas-fired facility that has an
energy-only long-term tolling agreement with Dynegy, with
a related financial swap arrangement. Sithe has entered into
a contract to purchase the remaining 40% interest of the
Independence generating station. As of December 31, 2003,