Exelon 2003 Annual Report Download - page 96

94 Notes to Consolidated Financial Statements
EXELON CORPORATION AND SUBSIDIARY COMPANIES
these facilities. The notes payable recorded for the purchase
of the facilities was $238 million. Exelon’s right to acquire its
share of tax credits generated by the facilities was recorded
as an intangible asset and will be amortized as the tax cred-
its are earned. Synthetic fuel facilities chemically change
coal, including waste and marginal coal, into a fuel used at
power plants. Requests for two private letter rulings have
been filed with the Internal Revenue Service (IRS) to affirm
that the fuel production from these facilities qualifies for tax
credits under Section 29 of the Internal Revenue Code. Ex-
elon has retained a termination right that may be exercised
in the event that the letter rulings are not received within
one year.
NOTE 03 ‰SITHE
Generation is a 50% owner of Sithe and accounts for the in-
vestment as an unconsolidated equity investment. In 2003,
Generation recorded impairment charges of $255 million
(before income taxes) in other income and deductions
within the Consolidated Statements of Income associated
with a decline in the fair value of the Sithe investment,
which was considered to be other-than-temporary. Gen-
eration’s management considered various factors in the
decision to impair this investment, including management’s
negotiations to sell its interest in Sithe. The discussions sur-
rounding the sale indicated that the fair value of the Sithe
investment was below its book value and, as such, impair-
ment charges were required.
On November 25, 2003, Generation, Reservoir Capital
Group (Reservoir) and Sithe completed a series of trans-
actions 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 Generation, 35.2% by Apollo En-
ergy, 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 FASB Interpretation (FIN) No. 45, “Guarantor’s Ac-
counting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others”
(FIN No. 45). These guarantees were issued to protect Reser-
voir from credit exposure of certain counterparties through
2015 and other indemnities. In determining the value of
the FIN No. 45 guarantees, Exelon utilized probabilistic
models 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 Generation’s 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 fac-
tors, such as the acquirer, date of acquisition and assets
owned by Sithe at the time of exercise. Any closing under
either the put or call options is conditioned upon obtaining
state and Federal regulatory approvals.
At December 31, 2003, Sithe had total assets of $1.5 billion
(including the $90 million note from Generation) and total
liabilities of $1.6 billion. Of the total liabilities, Sithe had $1.0
billion of debt which included $588 million of subsidiary debt
incurred in prior years, primarily to finance the construction
of six generating facilities, $419 million of subordinated debt,
$43 million of current portion of long-term debt, but ex-
cludes $469 million of non-recourse debt associated with
Sithe’s equity investments. For the year ended December 31,
2003, Sithe had revenues of $690 million and incurred a net
loss of approximately $72 million. Exelon contractually does
not own any interest in Sithe International, a subsidiary of
Sithe.
The book value of Generation’s investment in Sithe was
$47 million at December 31, 2003. Generation recorded $2
million of equity method income for its investment in Sithe
during the twelve months ended December 31, 2003. See
Note 1—Significant Accounting Policies for a discussion of
Sithe in relation to FIN No. 46-R.