SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 1, 2002
_____________________
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Commission File Number Name of Registrant; State of Incorporation; Address of Principal IRS Employer
Executive Offices; and Telephone Number Identification Number
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1-16169 EXELON CORPORATION 23-2990190
(a Pennsylvania Corporation)
10 South Dearborn Street - 37 Floor
P.O. Box 805379
Chicago, Illinois 60680-5379
312-394-7398
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333-85496 EXELON GENERATION COMPANY, LLC 23-3064219
(a Pennsylvania limited liability company)
300 Exelon Way
Kennett Square, Pennsylvania 19348
(610) 765-6900
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N/A
(Former name or former address, if changed since last report.)
Forward-looking Statements
Except for the historical information contained herein, certain of the matters
discussed in this Report are forward-looking statements that are subject to
risks and uncertainties. The factors that could cause actual results to differ
materially from the forward-looking statements made by a registrant include
those discussed herein as well as those listed in Note 8 of Notes to
Consolidated Financial Statements, those discussed in "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Outlook" in
Exelon Corporation's 2001 Annual Report, those discussed in "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Exelon Generation Company, LLC's Registration Statement on Form
S-4, Reg. No. 333-85496, and other factors discussed in filings with the
Securities and Exchange Commission by the Exelon Corporation and Exelon
Generation Company, LLC. Readers are cautioned not to place undue reliance on
these forward-looking statements, which apply only as of the date of this
Report. Exelon Corporation and Exelon Generation Company, LLC do not undertake
any obligation to publicly release any revision to its forward-looking
statements to reflect events or circumstances after the date of this Report.
-2-
Item 2. Acquisition or Disposition of Assets.
As previously disclosed, on November 1, 2002, Exelon Generation Company, LLC
("Exelon Generation") completed its acquisition of Sithe AOG Holding #1, Inc.,
Sithe AOG Holding #2, Inc., Sithe Power Marketing, LP, and Sithe New England
Holdings, LLC (collectively, "Sithe New England"), which consists of three
generating facilities under construction and several operating generating
facilities, from Sithe Energies, Inc ("Sithe"). The purchase involves
approximately 4,446 megawatts (MWs) of generation capacity, consisting of 1,645
MWs in operation, 380 MWs of non-operating facilities, and 2,421 MWs under
construction. Sithe New England's generation facilities are located primarily in
Massachusetts.
Exelon Generation acquired Sithe New England in exchange for a $534 million
note, and the assumption of various Sithe guarantees related to an equity
contribution agreement between Sithe New England and Sithe Boston Generating LLC
("Boston Generating"), a project subsidiary of Sithe New England. The equity
contribution agreement requires, among other things, that Sithe New England,
upon the occurrence of certain events, contribute up to $38 million of equity
for the purpose of completing construction of three generating facilities. Also,
in order to finance the construction of these two generating facilities, Boston
Generating established a $1.25 billion credit facility (the "SBG Facility"). The
$1.0 billion outstanding under the facility at December 31, 2002 is reflected on
Exelon Generation's Consolidated Balance Sheet.
Item 5. Other Events
On February 13, 2001, Sithe New England Holdings, LLC, through its wholly owned
subsidiary, Sithe Boston, entered into the SBG Facility under which up to a
total of $1.25 billion will be available to finance the Construction Projects.
The SBG Facility is non-recourse to Exelon Generation. The SBG Facility provides
that if the Construction Projects are not completed by May 31, 2003, the SBG
Facility lenders will have the right, but will not be required, to, among other
things, declare all amounts then outstanding under the SBG Facility and the
interest rate swap agreements to be due. Exelon Generation believes that the
Construction Projects will be substantially complete by May 31, 2003, but that
all of the approvals required under the SBG Facility may not be issued by that
date. Exelon Generation is currently evaluating whether the requirements of the
SBG Facility relating to the Construction Projects can be satisfied by May 31,
2003. In the event that the requirements are not expected to be satisfied by May
31, 2003, Exelon Generation will contact the SBG Facility lenders concerning an
amendment or waiver of these provisions of the SBG Facility. Exelon Generation
currently expects that arrangements for such an amendment or waiver, if
necessary, can be successfully negotiated with the SBG Facility lenders.
Item 7. Financial Statements and Exhibits.
(a) Financial statements of business acquired
-3-
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of Sithe Energies, Inc.:
We have audited the accompanying combined balance sheet of Sithe AOG Holding #1,
Inc., Sithe AOG Holding #2, Inc., Sithe Power Marketing, LP, and Sithe New
England Holdings, LLC (the "Company") as of December 31, 2001, and the related
statements of operations, member's and partners' capital, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2001, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
New York, New York
December 12, 2002
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SITHE AOG HOLDING #1, INC.
SITHE AOG HOLDING #2, INC.
SITHE POWER MARKETING, LP
SITHE NEW ENGLAND HOLDINGS, LLC AND SUBSIDIARIES
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(In thousands)
Revenue $ 379,965
---------
Cost of sales
Fuel 242,876
Operations and maintenance 72,116
Depreciation 8,955
---------
323,947
---------
Gross profit 56,018
---------
Other operating expenses:
Amortization of goodwill 375
Unrealized loss on derivatives 6,071
Loss on disposal of assets 882
7,328
Operating income 48,690
Non-operating income (expense) :
Interest expense (245)
Other income, net 3,040
---------
Income before income taxes 51,485
Provision for income taxes 19,339
---------
Net income $ 32,146
=========
See notes to combined financial statements
-5-
SITHE AOG HOLDING # 1, INC.
SITHE AOG HOLDING # 2, INC.
SITHE POWER MARKETING, LP
SITHE NEW ENGLAND HOLDINGS, LLC AND SUBSIDIARIES
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
(In thousands)
Cash flows from operating activities:
Net income $ 32,146
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 9,330
Amortization of debt issuance costs 4,052
Unrealized loss on derivatives 6,071
Loss on disposal of assets 882
Deferred income taxes (9,274)
Changes in operating assets and liabilities:
Accounts receivable 30,400
Inventories (1,204)
Prepaid expenses and other current assets 1,697
Trade payables and other liabilities (12,376)
Other (470)
---------
Net cash provided by operating activities 61,254
---------
Cash flows from investing activities:
Capital expenditures, including capitalized interest (606,768)
Restricted cash and cash equivalents (7,000)
---------
Net cash used in investing activities (613,768)
---------
Cash flows from financing activities:
Capital contributions 281,933
Equity distributions (418,373)
Borrowings under construction loan 916,897
Repayments under line of credit (115,626)
Repayments of interim credit agreement (75,000)
Deferred financing costs (22,327)
Payments to affiliates (15,911)
---------
Net cash provided by financing activities 551,593
---------
Net decrease in cash and cash equivalents (921)
Cash and cash equivalents at beginning of year 967
---------
Cash and cash equivalents at end of year $ 46
=========
Supplemental cash flows information
There was no cash paid for taxes or interest (net of amounts capitalized)
See notes to combined financial statements
-6-
SITHE AOG HOLDING #1, INC.
SITHE AOG HOLDING #2, INC.
SITHE POWER MARKETING, LP
SITHE NEW ENGLAND HOLDINGS, LLC AND SUBSIDIARIES
COMBINED BALANCE SHEET
DECEMBER 31, 2001
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 46
Restricted cash and cash equivalents 7,000
Accounts receivable 38,171
Current portion of deferred tax asset 1,376
Inventories - oil 12,555
Prepaid expenses and other current assets 1,686
-----------
Total current assets 60,834
-----------
Property, plant and equipment :
Land 21,113
Electric generating facilities 227,656
Construction in progress 1,717,443
-----------
1,966,212
Accumulated depreciation (30,084)
-----------
1,936,128
-----------
Other assets:
Project development costs 100,263
Debt issuance costs and other assets 39,911
Goodwill (net of accumulated amortization of $1,357) 21,226
Non current portion of deferred tax asset 27,309
-----------
188,709
-----------
Total assets $ 2,185,671
===========
See notes to combined financial statements
-7-
SITHE AOG HOLDING #1, INC.
SITHE AOG HOLDING #2, INC.
SITHE POWER MARKETING, LP
SITHE NEW ENGLAND HOLDINGS, LLC AND SUBSIDIARIES
COMBINED BALANCE SHEET - Continued
DECEMBER 31, 2001
LIABILITIES AND MEMBER'S CAPITAL
Current liabilities:
Trade payables and accrued expenses $ 41,929
Current portion of derivative liability 9,893
Payable to affiliates 8,775
-----------
Total current liabilities 60,597
-----------
Long-term debt:
Construction loan 916,897
-----------
Other liabilities:
Derivative liability 34,255
Deferred income tax liability 6,656
-----------
40,911
-----------
Commitments and contingencies
Capital:
Member's and partners' capital 1,132,562
Accumulated retained earnings 63,015
Accumulated other comprehensive loss (28,311)
-----------
1,167,266
-----------
Total liabilities and capital $ 2,185,671
===========
See notes to combined financial statements
-8-
SITHE AOG HOLDING #1, INC.
SITHE AOG HOLDING #2, INC.
SITHE POWER MARKETING, LP
SITHE NEW ENGLAND HOLDINGS, LLC AND SUBSIDIAIRES
COMBINED STATEMENT OF MEMBER'S AND PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2001
(In thousands)
Member's and Accumulated
Partners' Accumulated Other
Contributed Retained Comprehensive Total
Capital Earnings Loss Capital
----------- ----------- ----------- -----------
Balance January 1, 2001 $ 1,269,002 $ 30,869 $ -- $ 1,299,871
----------- ----------- ----------- -----------
Capital contributions 281,933 -- -- 281,933
Capital distributions (418,373) -- -- (418,373)
----------- ----------- ----------- -----------
(136,440) -- -- (136,440)
----------- ----------- ----------- -----------
Comprehensive Income:
Net Income -- 32,146 -- 32,146
Unrealized loss on cash flow hedges -- -- (28,311) (28,311)
----------- ----------- ----------- -----------
Total comprehensive income -- 32,146 (28,311) 3,835
----------- ----------- ----------- -----------
Balance December 31, 2001 $ 1,132,562 $ 63,015 $ (28,311) $ 1,167,266
=========== =========== =========== ===========
See notes to combined financial statements
-9-
SITHE AOG HOLDING #1, INC.
SITHE AOG HOLDING #2, INC.
SITHE POWER MARKETING, LP
SITHE NEW ENGLAND HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Organization and Nature of Operations
Sithe New England Holdings, LLC ("Sithe New England"), a subsidiary of
Sithe Northeast Generating Company, Inc. ("Sithe Northeast"), which is in turn a
subsidiary of Sithe Energies, Inc. ("Sithe Energies"), is a Delaware limited
liability company. Sithe AOG Holding #1, Inc. and Sithe AOG Holding #2, Inc.,
also subsidiaries of Sithe Northeast, are the 1% general partner and 99% limited
partner, respectively, in Sithe Power Marketing, LP, a Delaware limited
partnership. Sithe New England and its subsidiaries, Sithe AOG Holding #1, Inc.,
Sithe AOG Holding #2, Inc. and Sithe Power Marketing, LP are collectively
referred to as the "Company". The Company owns, operates and markets the
electrical generation capacity and ancillary services of six electric power
plants in New England with an aggregate installed capacity of 2,000 MW that were
acquired from Boston Edison on May 15, 1998 and is constructing the 1,600 MW
Mystic 8 & 9 and 800 MW Fore River projects (the "Construction Projects"). The
Construction Projects will use combined-cycle technology, with the Mystic 8 & 9
project fueled by natural gas and the Fore River Project fueled by both natural
gas and low-sulfur distillate oil. The Construction Projects are expected to be
completed and enter service in 2003.
Sithe Power Marketing, LP also markets the electrical generation,
capacity and ancillary services and procures fuel for four other plants located
in New York with an aggregate installed capacity of 285 MW that are owned by
Sithe Energies. Effective November 1, 2002, Sithe Power Marketing, LP no longer
provides these services to these plants owned by Sithe Energies.
On November 1, 2002, Exelon Generation Company, LLC, a wholly-owned
subsidiary of Exelon Corporation, completed the acquisition of the Company from
Sithe Northeast and Sithe Energies.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying combined financial statements include the accounts of
the Company and all of the subsidiaries and partnerships in which it has a
controlling ownership interest. All significant intercompany transactions and
balances have been eliminated.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
-10-
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents, including restricted amounts, include bank
deposits, commercial paper and certificates of deposit that mature within three
months of their purchase.
Restricted Cash
All cash and cash equivalents generated by the operations of Sithe
Boston Generating, LLC ("Sithe Boston") have been pledged as collateral under
the Sithe Boston long-term financing facility (the "SBG facility").
Fuel Inventory
Fuel inventory is stated at cost using the average cost method.
Electric and Steam Generating Facilities
Owned electric and steam generating facilities are valued at cost.
Depreciation of electric and steam generating facilities is computed using the
straight-line method over the shorter of the estimated economic or service lives
of the respective assets (ranging from 5 to 30 years).
Goodwill, representing costs in excess of fair value of net assets
acquired, is being amortized over 40 years on a straight-line basis. The Company
evaluates the carrying amount of long-lived assets, including goodwill, on an
annual basis using the recoverability from operating income methodology.
Construction Costs and Capitalized Interest
The Company capitalizes qualifying costs directly related to
construction of power plants during the construction phase, including
capitalized interest. The total amount of interest costs incurred during 2001
was $54.2 million, of which $54.0 million was capitalized.
Project Development Costs
The Company capitalizes costs directly related to developing new
projects when management determines it is probable that the project will proceed
to the construction phase. Such determination is based on the facts and
circumstances for each project, and reflects the legal, political and regulatory
environment where the project is being developed.
-11-
Environmental Remediation Expenditures
The Company capitalizes certain environmental remediation expenditures
at sites on which it constructs new power plants. The Company accrues for
environmental remediation costs related to existing conditions resulting from
past operations when the costs are probable and can be reasonably estimated.
Project Impairments
The Company evaluates the operating and financial performance of its
long-lived assets for potential impairments in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," which prescribes the method for measuring impairment. If an
asset is determined to be impaired, the capitalized costs are written down to
fair value. No provision for project impairment was required in 2001.
In August 2001, the FASB issued SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets," (SFAS No. 144). Under SFAS No.
144, long-lived assets to be disposed of should be measured at the lower of the
carrying amount or fair value less cost to sell, whether reported in continued
operations or in discontinued operations. Discontinued operations will no longer
be measured at net realizable value or include amounts for operating losses that
have not yet occurred. SFAS No. 144 also broadens the reporting of discontinued
operations. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. Effective January 1, 2002, the Company adopted SFAS No. 144, which did
not have a material impact on its financial position or results of operations.
Effective January 1, 2002, the Company began accelerating depreciation
expense on its New Boston Station units 1 and 2, with a net book value of $52.7
million, over a five year remaining life as compared to the previous 30 year
useful life used from May 16, 1998 through December 31, 2001. The change in
useful life was made to reflect the Company's estimate of New Boston Station's
remaining useful life in a changing energy market. As of June 30, 2002, the
Company recognized an impairment charge of $22.3 million for one-half of the
remaining net book value of New Boston Station, and pursuant to an agreement
with ISO New England, Inc. ("ISONE"), one unit was taken out of service as of
July 1, 2002.
Debt Issuance Costs
Legal fees and other direct costs incurred in connection with obtaining
financing are deferred and amortized to interest cost using the interest method
over the term of the related debt.
Maintenance and Repairs
Routine maintenance and repairs and major overhaul costs for major
equipment are charged to expense as incurred.
-12-
Revenue Recognition
Revenue from sales of electricity generated, capacity and ancillary
services into the market administered by ISONE are recorded based on market
clearing prices. Revenues from the sale of electricity and capacity under
bilateral sales contracts are recorded based upon output delivered and capacity
provided at the payment rates as specified under contract terms.
Customers accounting for 10% or more of revenue during 2001 were as
follows:
ISONE 26.79%
Derivative Instruments
The Company has adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS No. 133). SFAS No. 133, as amended
and interpreted, establishes accounting and reporting standards requiring that
all derivatives, including certain derivative instruments embedded in other
contracts be recorded on the balance sheet as either an asset or liability
measured at their fair value. When specific hedge accounting criteria are not
met, SFAS No. 133 requires that changes in a derivative's fair value be
recognized currently in earnings. If a derivative is designated as and qualifies
as a fair-value hedge, the changes in the fair value of the derivative and the
hedged item will be recognized in earnings. If the derivative is designated as a
cash flow hedge, changes in the fair value of the derivative will be recorded in
other comprehensive income and will be recognized in the income statement when
the hedged item affects earnings. SFAS No. 133 requires that an entity formally
document, designate and perform ongoing assessments of the effectiveness of
transactions that receive hedge accounting. The impact of the Company's adoption
of SFAS No. 133 was not material. Ongoing discussions and interpretations of
SFAS No. 133 by the FASB could alter the definition of derivative instruments.
The Company has implemented SFAS No. 133 based upon current rules and guidance,
and any changes in these rules and guidance could impact the Company's
subsequent reported operating results.
The Company enters into various derivative transactions in order to
hedge its exposure to certain market risks. As further discussed in Note 5, the
Company has outstanding interest rate swap agreements to hedge against interest
rate exposure and outstanding commodity derivative instruments to manage its
risks related to electric, oil and gas sales and purchases. The company also has
outstanding emissions allowance options which are not designated as hedges of an
underlying risk.
The change in the fair value of commodity derivatives that qualify as
hedges of forecasted or index-based purchases of natural gas and fuel oil are
recorded in accumulated other comprehensive income (loss) on the Company's
consolidated balance sheets and subsequently recognized in cost of sales as fuel
expense in the Company's consolidated statements of income when the underlying
hedged transaction settles and the commodity is consumed. If the commodity
derivative instrument is no longer sufficiently correlated to the underlying
commodity, or if the underlying commodity transaction is terminated or settles
earlier than anticipated, the gains or losses previously recorded in accumulated
other comprehensive income (loss) are recognized in earnings.
-13-
Other New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations,"
(SFAS No. 141). SFAS No. 141 was effective July 1, 2001 and requires that all
business combinations on or after that date be accounted for under the purchase
method. The implementation of this standard had no impact on the Company's
financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," (SFAS No. 142), which is effective for fiscal years
beginning after December 15, 2001 as to all goodwill and other intangible assets
recognized in an entity's statement of financial position at that date,
regardless of when those assets were initially recognized. Under SFAS No. 142,
goodwill is considered a nonamortizable asset and will be subject to an annual
review for impairment and an interim review when required by events or
circumstances. At December 31, 2001, the Company had recorded goodwill of
approximately $21.2 million, net of accumulated amortization of $1.4 million,
which was being amortized over 40 years. Goodwill has been evaluated based on
the fair values of the Company's plants. These fair values have been evaluated
based on the net present values of the projected future cash flows for the
remaining useful lives of the facilities. Future cash flows have been based on
internal business plans and trend analyses and the net present values have been
computed using the weighted average cost of capital. The implementation of this
standard had no impact, other than the discontinuance of goodwill amortization,
on the Company's financial position or results of operations. Had the Company
adopted SFAS No. 142 in 2001, the Company's net income would have been $32,521
for the year ended December 31, 2001.
Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," (SFAS No. 143). Upon adoption of SFAS No. 143, the fair
value of a liability for an asset retirement obligation is required to be
recorded. Upon settlement of the liability, an entity either settles the
obligation for the recorded amount or incurs a gain or loss upon settlement.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The
Company is currently evaluating the effect of SFAS No. 143 and has not yet
determined the impact, if any, this new standard will have on its financial
position or results of operations.
3. Borrowings
On February 13, 2001, the Company, through its wholly-owned subsidiary,
Sithe Boston closed the SBG facility under which up to a total of $1.25 billion
will be available, including $1.148 billion to pay construction costs of the
Construction Projects, $62 million for debt service and other security letters
of credit and $40 million for a working capital facility. The existing 1,005 MW
Mystic Station and the Construction Projects have been pledged as collateral
under the SBG Facility. Upon closing of the SBG Facility, Sithe Boston made an
initial drawdown of $536.3 million, of which $102.4 million was used to pay
construction costs, $116.6 million was used to fully repay the remaining $115.6
million of recourse project debt outstanding under the Sithe New England
Holdings, LLC Senior Secured Credit Facility at December 31, 2000 plus accrued
interest through February 13, 2001, and $317.3 million was distributed to Sithe
Northeast as a return of capital previously invested by Sithe Energies to fund a
portion of the costs of the Construction Projects. The Company made additional
borrowings under the SBG Facility to fund construction costs of the Construction
Projects totaling $380.6 million. Under the SBG Facility there were $916.9
million of borrowings for construction costs, $39.6 million of letters of credit
and no amounts drawn under the working capital facility as of December 31, 2001.
-14-
Interest on the SBG Facility is at LIBOR or the Base Rate, plus an
applicable margin, at Sithe Boston's option. The Base Rate is the higher of the
prime rate announced by the administrative agent or the Federal Funds rate plus
0.5%. Applicable margins under the SBG Facility for LIBOR borrowings and Base
Rate borrowings are 1.375% and 0.625%, respectively, through February 13, 2003,
increasing to 1.45% and 0.70%, respectively, through February 13, 2005 and
increasing to 1.75% and 1.00%, respectively, thereafter. After February 13,
2003, if Sithe Boston does not receive an investment grade rating, the
applicable margin will be increased by 0.2% through February 13, 2005 and by
0.25% thereafter. A commitment fee of 0.375% is payable on the unused portion of
the SBG Facility. Sithe Boston is required to enter into interest rate swap
agreements to effectively fix the interest rate through May 30, 2002 on 70% of
the borrowings outstanding under the SBG Facility and thereafter on 50% of such
borrowings. As of December 31, 2001, Sithe Boston has entered into five interest
rate swap agreements which have effectively fixed the LIBOR component of the
interest rate at approximately 5.73% on $758.0 million notional principal or 83%
of the borrowings outstanding at December 31, 2001 and 75% of the borrowings
forecast to be outstanding under the SBG Facility through June 30, 2004.
Commencing July 1, 2004, scheduled reductions in the notional principal amount
underlying these interest rate swaps will begin to reduce the effectively fixed
LIBOR component portion of borrowings, until such portion reaches 50% at
December 31, 2004, where it will remain until the December 31, 2007 final
maturity of the SBG Facility.
The SBG Facility provides that if the Construction Projects are not
completed by May 31, 2003, the SBG Facility lenders will have the right, but
will not be required, to (i) terminate their commitments to make advances or
issue letters of credit under the SBG Facility, (ii) declare all amounts then
outstanding under the SBG Facility and the interest rate swap agreements to be
due, and (iii) require posting of collateral equal to the remaining amount that
can be drawn under previously issued letters of credit.
Quarterly principal repayments commence on September 30, 2004, and,
excluding the working capital facility, which had no outstanding borrowings at
December 31, 2001, aggregate $11.4 million in 2004, $13.0 million in 2005, $16.3
million in 2006 and $1.048 billion thereafter, including a final maturity
payment of $1.021 billion on December 31, 2007.
4. Income Taxes
The provision for income taxes included in these combined financial
statements was calculated as if the corporate members and each limited liability
company ("LLC") for which a written tax sharing agreement exists, within the
group of companies included in these combined financial statements, were
separate tax paying entities. The provision for income taxes was calculated in
accordance with SFAS No. 109, "Accounting for Income Taxes," which requires an
asset and liability approach for financial accounting and reporting of income
taxes. Under this method, deferred income tax assets and liabilities are
recognized for the estimated future income tax effects of temporary differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements. Deferred tax assets are also established for the
estimated future benefit of net operating loss and tax credit carryforwards when
it is more likely than not that such assets will be realized. Deferred taxes are
calculated based on provisions of the enacted tax law, and possible future
changes in tax laws or rates are not anticipated. For balance sheet purposes,
-15-
deferred tax assets and liabilities within certain jurisdictions have been
offset based on their classification as current or non-current.
Corporate members of the group of entities whose results are included
in these combined financial statements are members of Sithe Energies'
consolidated group for income tax purposes. The limited liability companies
whose results are also included in these combined financial statements are owned
directly or indirectly by Sithe Northeast, who is also a member of Sithe
Energies' consolidated group for income tax purposes. Deferred and current
portions of the provisions for income taxes are allocated to each corporate
member of the group of entities included in the combined financial statements as
if each were a separate taxpaying entity. The LLCs included in these combined
statements are treated as disregarded entities for federal and state tax
purposes, and therefore, their income is generally not taxed on a separate
entity basis. Deferred and current portions of the provisions for income taxes
are allocated to each LLC within the group of entities included in the combined
financial statements only to the extent that a written tax sharing agreement
exists which provides for such allocation. The only existing written LLC tax
sharing agreement is between Sithe Boston and Sithe Northeast.
Principal Components of Deferred Taxes
The significant components of the net deferred tax liability which
reflect the tax effects of the Company's temporary differences, tax credit
carryforwards and net operating loss carryforwards are as follows (in
thousands):
2001
----
Net deferred tax assets - current:
Mark to market adjustments $ 1,376
-------
1,376
-------
Net deferred tax assets - non-current:
Mark to market adjustments 10,563
Capitalized interest on construction in
progress 15,639
State, local & other 1,107
-------
27,309
-------
Net deferred tax liabilities - non-current:
Depreciation 6,656
-------
6,656
-------
Net deferred tax asset $22,029
=======
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Provision for Income Taxes
The provision for income taxes consists of the following (in
thousands):
2001
----
Current:
Federal $ 21,225
State 7,388
--------
$ 28,613
--------
Deferred:
Federal (7,144)
State (2,130)
--------
(9,274)
--------
$ 19,339
========
The liability for current tax expense of $28,613 is reflected in
Payable to affiliates, net on the Company's balance sheet.
The provision for income taxes differs from the amounts computed by
applying the Federal statutory rate to income before income taxes, as follows
(dollars in thousands):
2001
-----------------------
Amount %
-------- --------
Amounts computed by applying Federal
statutory rate $ 18,020 35.0%
Current year state income taxes, net of
Federal tax benefit 2,640 5.1
Income of LLC's for which no tax
sharing agreement exists (6,509) (12.6)
Deferred taxes resulting from change
due to tax sharing agreement 5,188 10.1
-------- ----
$ 19,339 37.6%
======== ====
5. Financial and Derivative Instruments
Financial Instruments and Fair Value
Financial instruments, which potentially subject the Company to
concentrations of risk, consist principally of temporary cash investments and
trade receivables. The Company invests its temporary cash balances in U.S.
government obligations and financial instruments of highly rated financial
-17-
institutions. A substantial portion of trade receivables are from major
regulated electric utilities and power marketers.
The carrying values reflected in the balance sheet at December 31, 2001
approximate fair values for cash and cash equivalents, trade receivables and
payables, construction payables and variable-rate long-term debt. In making such
assessment, the Company utilized credit reviews, quoted market prices and
discounted cash flow analyses as appropriate.
The Company enters into commodity derivatives to mitigate exposure to
market fluctuations in the commodity price and transportation cost of natural
gas and petroleum products. At December 31, 2001, these commodity derivatives
covered periods through December 31, 2002 and the Company had recorded in
accumulated other comprehensive loss a net loss on effective hedges of
index-based purchases and forecasted transactions of $3.4 million, net of
deferred taxes of $1.4 million. The Company estimates that approximately $3.4
million of the amounts recorded in accumulated other comprehensive loss at
December 31, 2001 will be amortized to earnings for the year ending December 31,
2002. During 2001, the Company reclassified $1.3 million of losses from
accumulated other comprehensive loss into earnings when it became probable that
the related original forecasted transactions would not occur. At December 31,
2001, the Company had recorded an unrealized loss on ineffective hedges of
index-based purchases and forecasted transactions of $4.3 million included in
unrealized loss on derivatives in its combined statement of operations.
The Company's purchased and sold emissions allowance options were not
designated by the Company as hedges of an underlying risk. As such, these
options were recorded at their fair market value resulting in an unrealized loss
of $1.8 million included in unrealized loss on derivatives in the Company's
combined statement of operations at December 31, 2001.
Sithe Boston is required to enter into interest rate swap agreements to
effectively fix the interest rate through May 30, 2002 on 70% of the borrowings
outstanding under the SBG Facility and thereafter on 50% of such borrowings. As
of December 31, 2001, Sithe Boston has entered into interest rate swap
agreements which have effectively fixed the LIBOR component of the interest rate
at approximately 5.73% on $758.0 million of notional principal, or 83% of the
borrowings outstanding at December 31, 2001 and 75% of the borrowings forecast
to be outstanding under the SBG Facility through June 30, 2004. Commencing July
1, 2004, scheduled reductions in the notional principal amount underlying these
interest rate swaps will begin to decrease the portion of the borrowings
forecast to be outstanding on which the LIBOR component of the interest rate is
effectively fixed at approximately 5.73%, until it reaches 50% at December 31,
2004, where it will remain until the December 31, 2007 final maturity of the SBG
Facility. In accordance SFAS No. 133, these interest rate swap agreements
qualify and have been designated as cash flow hedges. At December 31, 2001, the
fair market value of these cash flow hedges were reflected on the Company's
combined balance sheet as liabilities aggregating $25.7 million, with a charge
of $14.6 million to other comprehensive loss, net of deferred taxes of $11.1
million. The Company estimates that the amounts that will be reclassified to
earnings for the year ending December 31, 2002 from the amounts recorded in
accumulated other comprehensive loss at December 31, 2001 will not have a
material impact on the Company's financial position or results of operations.
-18-
6. Capital
During 2001, Sithe Northeast made capital contributions of $281.9
million to fund costs of the Construction Projects. During the year, the Company
made capital distributions to Sithe Northeast totaling $418.4 million of which
$317.3 million was distributed upon closing of the SBG facility (See note 3).
7. Commitments and Contingencies
Environmental Remediation
The Company reviews its obligations as it relates to compliance with
environmental laws, including site restoration and remediation. Because of the
uncertainties associated with environmental assessment and remediation
activities, future costs of compliance or remediation could be higher or lower
than the amount currently accrued. Based on currently available information, the
Company does not believe that any costs incurred in excess of those currently
accrued will have a material effect on the financial position or results of
operations of the Company.
Litigation and Claims
In March 2001, two subsidiaries of Sithe Boston, Sithe Fore River
Development, LLC ("Sithe Fore River") and Sithe Mystic Development LLC ("Sithe
Mystic" and, collectively with Sithe Fore River, the "Project Companies"),
brought an action in the New York Supreme Court, New York County, (the "New York
Action"), against Raytheon Company ("Raytheon") seeking injunctive relief to
enforce the terms of Guarantee Agreements (the "Guarantees") issued by Raytheon
to Sithe Fore River and Sithe Mystic, respectively, pursuant to which Raytheon
guaranteed the punctual and full performance and payment obligations of the
turnkey contractor for the Project Companies but which, on March 8, 2001,
abandoned the construction work at the Project Companies' respective sites. An
agreement was reached between the Project Companies and Raytheon on March 15,
2001, pursuant to which Raytheon agreed to step in pursuant to the Guarantees
and to complete construction of the Construction Projects.
The New York Action is still pending. On February 28, 2002, Sithe Fore
River by motion sought leave to serve as a Supplemental Complaint therein, which
complaint would not supplant the original complaint but sought a declaratory
judgment that a change order request submitted by Raytheon to Sithe Fore River
under date of January 9, 2002 for cost and schedule impacts allegedly resulting
from restrictions on Raytheon's second shift operations at the Fore River
project was properly rejected by Sithe Fore River. The change order request
sought a 109-day extension of Raytheon's time to complete the Fore River project
and claimed $20.1 million of cost relief. On May 3, 2002, Raytheon moved in the
New York Action for an order staying the New York Action and compelling Sithe
Fore River to arbitrate the dispute concerning the change order in an
arbitration before the International Chamber of Commerce Court of Arbitration
(the "ICC Court") that Raytheon had commenced on May 2, 2002. After briefing and
argument, Justice Charles E. Ramos entered an Order on July 12, 2002, granting
both Sithe Fore River's motion to serve its Supplemental Complaint and
Raytheon's motion to compel arbitration. On July 30, 2002, Sithe Fore River
-19-
determined not to appeal the referral of the change order dispute to arbitration
and formally submitted to the jurisdiction of the ICC Court for adjudication of
this dispute.
The New York Action was not dismissed but has informally been stayed
pending the outcome of the ICC Court arbitration. An Arbitral Tribunal
consisting of three arbitrators has been appointed and has set a procedural
schedule for hearings on the merits of the parties' respective claims and
defenses in the first four months of 2003.
The Company believes it properly rejected Raytheon's request for a
change order and will vigorously defend its position in the arbitration.
In a dispute before the FERC involving the interconnection of the
Mystic 8 and 9 project with the transmission system of Boston Edison, Boston
Edison sought to charge the Company for congestion costs that may be incurred by
it during temporary line outages to upgrade equipment as part of the
interconnection of the Mystic 8 and 9 projects. The Company's position is that
it is not responsible for such costs. On October 16, 2001, the parties reached a
settlement, which was approved by the FERC on February 27, 2002. Under the terms
of this settlement, any upgrade related to congestion costs incurred prior to
October 17, 2001 will be allocated to the New England Power Pool (the "NEPOOL")
network load consistent with existing NEPOOL rules. From and after October 17,
2001, the first $0.5 million of upgrade related congestion costs shall be
allocated to the Company, the next $1.5 million shall be allocated to NEPOOL
network load consistent with existing NEPOOL rules and thereafter any upgrade
related congestion costs shall be allocated equally between the Company and
NEPOOL network load. The Company is recording those congestion costs in
accordance with the settlement agreement, which has had no effect on the
financial statements as of December 31, 2001.
On December 28, 2001, Sithe New Boston filed a petition before the FERC
requesting that the facility be operated under proposed rates between Sithe New
Boston and ISONE effective January 1, 2002, subject to refund. The parties
reached a settlement which was approved by the FERC on December 20, 2002. All
revenues for Sithe New Boston have been recorded in accordance with this
settlement agreement.
In a dispute before the FERC regarding NSTAR Electric & Gas Corp.'s
("NSTAR") complaint contesting ISONE's policy for compensating out of merit
generators through mitigation agreements, NSTAR has made allegations related to
market power issues and has sought refunds for past power sales. The Company has
vigorously opposed these allegations. The case has been dismissed by the FERC.
NSTAR has petitioned the D.C. Circuit for review of the FERC's dismissal of its
complaint and is seeking refunds on past mitigation agreements. Sithe New
England has intervened in this proceeding, which is currently pending at the
D.C. Circuit.
The Company is a participant in a proceeding before the FERC related to
the Company's recovery of a portion of its operating costs for providing energy
to ISONE during capacity-constrained periods between July 1, 2001 and December
27, 2001. ISONE potentially may not pay the Company these costs because of its
implementation of rules relating to when suppliers will be disqualified from
receiving such payments for failing to follow ISONE's precise dispatch
instructions. The FERC approved modifications to these rules prospectively which
would mitigate or eliminate the problem going forward, but left nearly six
months (July 1, 2001 to December 27, 2001) when the Company potentially would be
-20-
subject to the prior provisions. The FERC rejected a motion to place the new
provisions in place retroactively, effective July 1, 2001, and subsequently, on
March 15, 2002, denied rehearing. Sithe New England sought review of the
Commission's orders in the D.C. Circuit Court of appeals on April 9, 2002. That
proceeding is being held in abeyance pending the Commission's consideration of a
Complaint that Sithe New England filed on September 23, 2002 seeking relief for
the locked in period from July 1, 2001 to December 27, 2001. The Company intends
to vigorously pursue these proceedings.
On June 1, 2001, the U.S. Environmental Protection Agency (the "EPA")
issued to the Company a Notice of Violation (the "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,
Massachusetts. On January 8, 2002, the EPA indicated that it had decided to
resolve the NOV through an administrative compliance order and a judicial civil
penalty action. In March 2002, the EPA issued and Sithe Mystic LLC, a
wholly-owned subsidiary of the Company, voluntarily entered a Compliance Order
and Reporting Requirement (the "Order") regarding Mystic Station. The Order's
effective date is March 14, 2002. Under the Order, Mystic Station will install
new ignition equipment on three of the four units at the plant. Mystic Station
will also undertake an extensive opacity monitoring and testing program for all
four units at the plant to help determine if additional compliance measures are
needed. The Order requires three of the four units to switch to a lower sulfur
fuel oil. The installation of the equipment and the use of a lower sulfur oil
was completed by September 1, 2002. The Order does not address civil penalties.
The EPA Region I Senior Enforcement Counsel (the "EPA Counsel") has indicated
that penalty discussions will likely begin in early 2003. The EPA Counsel also
has indicated that the EPA will seek civil penalties of an undisclosed amount to
recover the benefit of the alleged noncompliance. To date, the EPA has not
provided any other information regarding possible penalties. The Company will
determine its response after the EPA makes a formal demand for penalties.
Alternate Power Sources, Inc ("APS") has filed a complaint with the
FERC charging that the ISONE failed to properly investigate and mitigate
anomalous conduct in the ICAP market and that the ICAP closing prices should be
reset to zero for the period between April and July 2000. Sithe New England
Holdings has intervened and protested the complaint by APS. On October 11, 2002,
the FERC issued an order approving a settlement of this proceeding which
resulted in a net payment to Sithe New England Holdings of $5.5 million paid
during October 2002. This amount has been recognized into income during the year
ended December 31, 2001.
In addition to the legal matters discussed above the Company is a
defendant in legal actions arising from activities conducted in the normal
course of business. Management, after consultation with legal counsel, believes
that the outcome of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
Other
The Company has entered into a long-term gas supply agreement for the
Mystic 8 & 9 project and a long-term gas transportation agreement for the Fore
River project. Aggregate minimum commitments under these agreements are
estimated to be $33.1 million in 2002, $101.0 in 2003, $102.2 in 2004, $102.2 in
2005 and $102.2 million in 2006.
The Company has entered into long-term service agreements for
maintenance of the gas turbines and generators at the Construction Projects.
Upon completion of the Construction Projects, aggregate annual future minimum
payments under these agreements are estimated to be approximately $27.0 million
for each of the next five years.
On October 1, 2002, a fire at New Boston Station seriously damaged New
Boston Station's unit that was in service. The total estimated repairs of the
unit are expected to be between $10.0 million and $15.0 million of which $1.6
million has been spent as of December 23, 2002. Sithe New England has returned
to service the New Boston Station unit that was previously taken out of service.
-21-
The Company believes its insurance policies will be sufficient to provide for
recovery of loss due to damages and all incremental costs incurred as a result
of the fire.
Leases
The Company leases storage capacity for up to 500,000 barrels of fuel
oil under a lease that is cancelable upon 18 months' notice, and office space
under a lease that expires in June 2003. Total lease expense was $2.2 million in
2001. Future minimum lease payments under these leases are $2.1 million in 2002
and $1.1 million in 2003.
Employee Benefit Plans
The Company's non-union employees and eligible union employees, as
discussed below, participate in a defined contribution 401(k) savings plan
sponsored by Sithe Energies. The Company matches employees' contributions up to
specified limitations. Company contributions to the plan amounted to
approximately $0.2 million in 2001.
In 1998, the Company adopted a defined benefit pension plan for the
union employees it hired in connection with the Boston Edison asset acquisition
(the "Union Plan"). The Company's funding policy is to fund at least the minimum
annual contribution required by the Employee Retirement Income Security Act of
1974.
On October 1, 2000, the Company and the Local 369 of Utility Workers
Union of America entered into a new union employee contract through September
30, 2005. This contract grants other retirement benefits to union employees who
elect not to or are no longer eligible to receive traditional pension benefit
from the Union Plan. These benefits, which became effective January 1, 2001,
include participation in the Sithe Energies' 401(k) savings plan with matching
employer contributions and participation in the cash balance stable pension
account program under the Union Plan. All union employees under the age of 45 or
selected for permanent assignments at the Construction Projects plus any other
union employees, who voluntarily elect to do so, will receive these benefits.
The following tables present the benefit obligation and the funded
status of the Union Plan (in thousands):
Change in Benefit Obligation
Benefit obligation at beginning of year $ 1,616
Employer service cost 313
Interest cost 113
Actuarial gain (364)
Benefits paid (12)
-------
Benefits obligation at the end of the year $ 1,666
=======
-22-
Change in Plan Assets
Fair value of plan assets at beginning of year $ 1,033
Actual return on assets 23
Employer contributions 4
Benefits paid (12)
-------
Fair value of assets at end of year $ 1,048
=======
Funded status $ (618)
Unrecognized transition (asset)/obligation --
Unrecognized prior service cost 224
Unrecognized net gain (90)
-------
Accrued benefit cost $ (484)
=======
Net periodic pension expense amounted to approximately $0.3 million in
2001 and consisted of the following components (in thousands):
Benefit cost for service during the year $ 313
Interest cost on projected benefit obligation 113
Expected return on plan assets (85)
Amortization of prior service cost 17
Amortization of unrecognized gain (4)
-------
Net pension expense $ 354
=======
The major assumptions used in accounting for the pension plan at
December 31, 2001 are as follows:
Discount rate (weighted average) 7.25%
Expected long-term rate of return on plan assets 8.50%
Rate of compensation increase 3.25%
In addition, effective January 1, 2001, all union employees are
eligible to participate in the Company's post employment medical saving account
program, under which the Company will provide matching contributions based on
the employee's contributions and age. During 2001, the Company recognized an
expense of $0.1 million for this program.
Effective January 1, 2000, Sithe Energies adopted the Stable Account
Plan for its full-time non-union employees. The Stable Account Plan is a cash
balance defined benefit plan under which Sithe Energies credits to each
participating employee's account a pre-determined percentage of their base
salary up to specified limitations. The Company recognized expense during 2001
related to the Stable Account Plan in the amount of $0.6 million.
-23-
8. Related Party Transactions
In the ordinary course of business, the Company borrows from or makes
advances to affiliates. Any borrowings or advances bear interest at the monthly
weighted average interest rates that Sithe New England incurs on its credit
facilities and that the Company incurs on the SBG Facility. Outstanding
borrowings from Sithe Northeast Generating amounted to approximately $12.3
million at December 31, 2001. Net interest expense to Sithe Northeast Generating
amounted to approximately $0.2 million for the year ended December 31, 2001.
During 2001, Sithe Power Marketing, LP acted as agent and sold
electrical generation, capacity and ancillary services and procured fuels on
behalf of four New York power plants owed by Sithe Energies with an aggregate
installed capacity of 285 MW. Sithe Power Marketing, LP received no fee for
these services, and the accompanying financial statements do not include any
revenues or expenses associated with these transactions. Effective November 1,
2002, Sithe Power Marketing, LP no longer provides these services to these
plants owned by Sithe Energies.
*****
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-25-
SITHE AOG HOLDING #1, INC.
SITHE AOG HOLDING #2, INC.
SITHE POWER MARKETING, LP
SITHE NEW ENGLAND HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
---------------------------
2002 2001
Revenue $ 362,401 $ 290,632
--------- ---------
Cost of sales:
Fuel 254,232 183,582
Operations and maintenance 50,221 56,210
Depreciation 11,478 6,806
--------- ---------
315,931 246,598
--------- ---------
Gross profit 46,470 44,034
--------- ---------
Other operating (income) expenses:
Amortization of goodwill -- 281
Unrealized (gain) loss on derivatives (6,351) 955
Provision for impairment of New Boston 22,279 --
--------- ---------
15,928 1,236
--------- ---------
Operating income 30,542 42,798
--------- ---------
Non-operating income (expense) :
Interest income (expense) 56 (48)
Other income, net 2,674 1,895
--------- ---------
Income before income taxes 33,272 44,645
Provision for income taxes 15,393 14,856
--------- ---------
Net income $ 17,879 $ 29,789
========= =========
See notes to condensed combined financial statements
-26-
SITHE AOG HOLDING # 1, INC.
SITHE AOG HOLDING # 2, INC.
SITHE POWER MARKETING, LP
SITHE NEW ENGLAND HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) (Unaudited)
Nine Months Ended September 30,
-------------------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net income $ 17,879 $ 29,789
Adjustments to reconcile net income to cash provided
by (used in) operating activities:
Depreciation and amortization 11,478 7,087
Amortization of debt issuance costs 5,006 3,060
Unrealized (gain)loss on derivatives (6,351) 955
Provision for impairment of New Boston 22,279 --
Deferred income taxes (4,855) 4,636
Changes in operating assets and liabilities:
Accounts receivable (2,728) 39,448
Inventories 4,553 (4,312)
Prepaid expenses and other current assets (501) (1,457)
Trade payables and other liabilities 7,509 (80,651)
Other 2,269 403
--------- ---------
Net cash provided by (used in) operating activities 56,538 (1,042)
--------- ---------
Cash flows from investing activities:
Capital expenditures, including capitalized interest (125,663) (456,753)
Restricted cash and cash equivalents 101 (4,858)
--------- ---------
Net cash used in investing activities (125,562) (461,611)
--------- ---------
Cash flows from financing activities:
Capital contributions 3,795 281,675
Distributions (70,569) (418,373)
Borrowings under construction loan 115,903 845,986
Repayments under line of credit -- (115,626)
Repayments of interim credit agrrement -- (75,000)
Deferred financing costs (742) (22,260)
Advances from (payments to) affiliates 37,404 (21,665)
--------- ---------
Net cash provided by financing activities 85,791 474,737
--------- ---------
Net increase in cash and cash equivalents 16,767 12,084
Cash and cash equivalents at beginning of period 46 967
--------- ---------
Cash and cash equivalents at end of period $ 16,813 $ 13,051
========= =========
Supplemental cash flow information
There was no cash paid for taxes or interest (net of amounts capitalized)
See notes to condensed combined financial statements
-27-
SITHE AOG HOLDING #1, INC.
SITHE AOG HOLDING #2, INC.
SITHE POWER MARKETING, LP
SITHE NEW ENGLAND HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED COMBINED BALANCE SHEETS
(In thousands)
September 30,
2002 December 31,
(unaudited) 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 16,813 $ 46
Restricted cash and cash equivalents 6,899 7,000
Accounts receivable 48,643 38,171
Current portion of deferred tax asset -- 1,376
Inventories 8,002 12,555
Prepaid expenses and other current assets 2,187 1,686
----------- -----------
Total current assets 82,544 60,834
----------- -----------
Property, plant and equipment:
Land 21,113 21,113
Electric generating facilities 203,372 227,656
Construction in progress 1,811,511 1,717,443
----------- -----------
2,035,996 1,966,212
Accumulated depreciation (35,464) (30,084)
----------- -----------
2,000,532 1,936,128
----------- -----------
Other assets:
Project development costs 103,758 100,263
Debt issuance costs and other assets 33,873 39,911
Goodwill (net of accumulated amortization of $1,357 and $1,357) 21,226 21,226
Non current portion of deferred tax asset 61,482 27,309
----------- -----------
220,339 188,709
----------- -----------
Total assets $ 2,303,415 $ 2,185,671
=========== ===========
See notes to condensed combined financial statements
-28-
SITHE AOG HOLDING #1, INC.
SITHE AOG HOLDING #2, INC.
SITHE POWER MARKETING, LP
SITHE NEW ENGLAND HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED COMBINED BALANCE SHEETS
(In thousands)
September 30,
2002 December 31,
(unaudited) 2001
----------- -----------
LIABILITIES AND CAPITAL
Current liabilities:
Trade payables and accrued expenses $ 49,438 $ 41,929
Current portion of derivative liabilities 10,737 9,893
Current portion of deferred tax liability 31 --
Payable to affiliates 46,179 8,775
----------- -----------
Total current liabilities 106,385 60,597
----------- -----------
Long-term debt:
Construction loan 1,032,800 916,897
----------- -----------
Other liabilities
Derivative liability 99,959 34,255
Deferred income tax liability 7,978 6,656
----------- -----------
107,937 40,911
----------- -----------
Commitments and contingencies
Capital:
Member's and partners' capital 1,065,788 1,132,562
Accumulated retained earnings 80,894 63,015
Accumulated other comprehensive loss (90,389) (28,311)
----------- -----------
1,056,293 1,167,266
----------- -----------
Total liabilities and capital $ 2,303,415 $ 2,185,671
=========== ===========
See notes to condensed combined financial statements
-29-
SITHE AOG HOLDING #1, INC.
SITHE AOG HOLDING #2, INC.
SITHE POWER MARKETING, LP
SITHE NEW ENGLAND HOLDINGS, LLC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Unaudited)
1. Organization and Nature of Operations
Sithe New England Holdings, LLC ("Sithe New England"), a subsidiary of
Sithe Northeast Generating Company, Inc. ("Sithe Northeast"), which is in turn a
subsidiary of Sithe Energies, Inc. ("Sithe Energies"), is a Delaware limited
liability company. Sithe AOG Holding #1, Inc. and Sithe AOG Holding #2, Inc.,
also subsidiaries of Sithe Northeast, are the 1% general partner and 99% limited
partner, respectively, in Sithe Power Marketing, LP, a Delaware limited
partnership. Sithe New England and its subsidiaries, Sithe AOG Holding #1, Inc.,
Sithe AOG Holding #2, Inc. and Sithe Power Marketing, LP are collectively
referred to as the "Company". The Company owns, operates and markets the
electrical generation capacity and ancillary services of six electric power
plants in New England with an aggregate installed capacity of 2,000 MW that were
acquired from Boston Edison on May 15, 1998 and is constructing the 1,600 MW
Mystic 8 & 9 and 800 MW Fore River projects (the "Construction Projects"). The
Construction Projects will use combined-cycle technology, with the Mystic 8 & 9
project fueled by natural gas and the Fore River Project fueled by both natural
gas and low-sulfur distillate oil. The Construction Projects are expected to be
completed and enter service in 2003.
Sithe Power Marketing, LP also markets the electrical generation,
capacity and ancillary services and procures fuel for four other plants located
in New York with an aggregate installed capacity of 285 MW that are owned by
Sithe Energies. Effective November 1, 2002, Sithe Power Marketing, LP no longer
provides these services to these plants owned by Sithe Energies.
On November 1, 2002, Exelon Generation Company, LLC, a wholly-owned
subsidiary of Exelon Corporation, completed the acquisition of the Company from
Sithe Northeast and Sithe Energies.
2. Basis of Presentation
The accompanying condensed combined balance sheets at September 30,
2002 and December 31, 2001 and the condensed combined statements of operations
and condensed combined statements of cash flows for the nine months ended
September 30, 2002 and 2001 should be read in conjunction with the audited
combined financial statements included elsewhere in this Report on Form 8-K.
The results of operations for the nine months ended September 30, 2002
and 2001 are not necessarily indicative of the results to be expected for the
full year. The unaudited financial information at September 30, 2002 and for the
nine months ended September 30, 2002 and 2001 contains all adjustments,
consisting only of normal recurring adjustments, which management considers
-30-
necessary for a fair presentation of the financial position and operating
results for such periods. The December 31, 2001 condensed combined balance sheet
was derived from audited financial statements but does not include all
disclosures required under accounting principles generally accepted in the
United States of America.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
3. Project Impairments
In August 2001, the FASB issued SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets," (SFAS No. 144). Under SFAS No.
144, long-lived assets to be disposed of should be measured at the lower of the
carrying amount or fair value less cost to sell, whether reported in continued
operations or in discontinued operations. Discontinued operations will no longer
be measured at net realizable value or include amounts for operating losses that
have not yet occurred. SFAS No. 144 also broadens the reporting of discontinued
operations. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. Effective January 1, 2002, the Company adopted SFAS No. 144, which did
not have a material impact on its financial position or results of operations.
Effective January 1, 2002, the Company began accelerating depreciation
expense on its New Boston Station units 1 and 2, with a net book value of $52.7
million, over a five year remaining life as compared to the previous 30 year
useful life used from May 16, 1998 through December 31, 2001. The change in
useful life was made to reflect the Company's estimate of New Boston Station's
remaining useful life in a changing energy market. As of June 30, 2002, the
Company recognized an impairment charge of $22.3 million for one-half of the
remaining net book value of New Boston Station, and pursuant to an agreement
with ISO New England, Inc. ("ISONE"), one unit was taken out of service as of
July 1, 2002.
4. New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," (SFAS No. 142), which is effective for fiscal years
beginning after December 15, 2001 as to all goodwill and other intangible assets
recognized in an entity's statement of financial position at that date,
regardless of when those assets were initially recognized. Under SFAS No. 142,
goodwill is considered a nonamortizable asset and will be subject to an annual
review for impairment and an interim review when required by events or
circumstances. At December 31, 2001, the Company had recorded goodwill of
approximately $21.2 million, net of accumulated amortization of $1.4 million,
which was being amortized over 40 years. Goodwill has been evaluated based on
the fair values of the Company's plants. These fair values have been evaluated
based on the net present values of the projected future cash flows for the
remaining useful lives of the facilities. Future cash flows have been based on
internal business plans and trend analyses and the net present values have been
computed using the weighted average cost of capital. The implementation of this
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standard had no impact, other than the discontinuance of goodwill amortization,
on the Company's financial position or results of operations.
The Company adopted SFAS No. 142 as of January 1, 2002. Had the Company
adopted SFAS No. 142 in 2001, the Company's net income would have been $30,070
for the nine months ended September 30, 2001.
Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," (SFAS No. 143). Upon adoption of SFAS No. 143, the fair
value of a liability for an asset retirement obligation is required to be
recorded. Upon settlement of the liability, an entity either settles the
obligation for the recorded amount or incurs a gain or loss upon settlement.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The
Company is currently evaluating the effect of SFAS No. 143 and has not yet
determined the impact, if any, this new standard will have on its financial
position or results of operations.
5. Borrowings
On February 13, 2001, the Company, through its wholly-owned subsidiary,
Sithe Boston Generating, LLC ("Sithe Boston") closed long-term financing (the
"SBG Facility") under which up to a total of $1.25 billion will be available,
including $1.148 billion to pay construction costs of the Construction Projects,
$62 million for debt service and other security letters of credit and $40
million for a working capital facility. The existing 1,005 MW Mystic Station and
the Construction Projects have been pledged as collateral under the SBG
facility. For the nine months ended September 30, 2002, the Company borrowed an
additional $115.9 million to pay construction costs of the Construction
Projects, and incurred $54.1 million of interest costs, all of which was
capitalized.
The SBG Facility provides that if the Construction Projects are not
completed by May 31, 2003, the SBG Facility lenders will have the right, but
will not be required, to (i) terminate their commitments to make advances or
issue letters of credit under the SBG Facility, (ii) declare all amounts then
outstanding under the SBG Facility and the interest rate swap agreements to be
due, and (iii) require posting of collateral equal to the remaining amount that
can be drawn under previously issued letters of credit.
6. Commitments and Contingencies
Environmental Remediation
The Company reviews its obligations as it relates to compliance with
environmental laws, including site restoration and remediation. Because of the
uncertainties associated with environmental assessment and remediation
activities, future costs of compliance or remediation could be higher or lower
than the amount currently accrued. Based on currently available information, the
Company does not believe that any costs incurred in excess of those currently
accrued will have a material effect on the financial position or results of
operations of the Company.
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Litigation and Claims
In March 2001, two subsidiaries of Sithe Boston, Sithe Fore River
Development, LLC ("Sithe Fore River") and Sithe Mystic Development LLC ("Sithe
Mystic" and, collectively with Sithe Fore River, the "Project Companies"),
brought an action in the New York Supreme Court, New York County, (the "New York
Action"), against Raytheon Company ("Raytheon") seeking injunctive relief to
enforce the terms of Guarantee Agreements (the "Guarantees") issued by Raytheon
to Sithe Fore River and Sithe Mystic, respectively, pursuant to which Raytheon
guaranteed the punctual and full performance and payment obligations of the
turnkey contractor for the Project Companies but which, on March 8, 2001,
abandoned the construction work at the Project Companies' respective sites. An
agreement was reached between the Project Companies and Raytheon on March 15,
2001, pursuant to which Raytheon agreed to step in pursuant to the Guarantees
and to complete construction of the Construction Projects.
The New York Action is still pending. On February 28, 2002, Sithe Fore
River by motion sought leave to serve as a Supplemental Complaint therein, which
complaint would not supplant the original complaint but sought a declaratory
judgment that a change order request submitted by Raytheon to Sithe Fore River
under date of January 9, 2002 for cost and schedule impacts allegedly resulting
from restrictions on Raytheon's second shift operations at the Fore River
project was properly rejected by Sithe Fore River. The change order request
sought a 109-day extension of Raytheon's time to complete the Fore River project
and claimed $20.1 million of cost relief. On May 3, 2002, Raytheon moved in the
New York Action for an order staying the New York Action and compelling Sithe
Fore River to arbitrate the dispute concerning the change order in an
arbitration before the International Chamber of Commerce Court of Arbitration
(the "ICC Court") that Raytheon had commenced on May 2, 2002. After briefing and
argument, Justice Charles E. Ramos entered an Order on July 12, 2002, granting
both Sithe Fore River's motion to serve its Supplemental Complaint and
Raytheon's motion to compel arbitration. On July 30, 2002, Sithe Fore River
determined not to appeal the referral of the change order dispute to arbitration
and formally submitted to the jurisdiction of the ICC Court for adjudication of
this dispute.
The New York Action was not dismissed but has informally been stayed
pending the outcome of the ICC Court arbitration. The arbitration has proceeded
to the extent that an Arbitral Tribunal consisting of three arbitrators has been
appointed and has set a procedural schedule for hearings on the merits of the
parties' respective claims and defenses in the first four months of 2003.
The Company believes it properly rejected Raytheon's request for a
change order and will vigorously defend its position in the arbitration.
In a dispute before the FERC involving the interconnection of the
Mystic 8 and 9 project with the transmission system of Boston Edison, Boston
Edison sought to charge the Company for congestion costs that may be incurred by
it during temporary line outages to upgrade equipment as part of the
interconnection of the Mystic 8 and 9 projects. The Company's position is that
it is not responsible for such costs. On October 16, 2001, the parties reached a
settlement, which was approved by the FERC on February 27, 2002. Under the terms
of this settlement, any upgrade related to congestion costs incurred prior to
October 17, 2001 will be allocated to the New England Power Pool (the "NEPOOL")
network load consistent with existing NEPOOL rules. From and after October 17,
2001, the first $0.5 million of upgrade related congestion costs shall be
allocated to the Company, the next $1.5 million shall be allocated to NEPOOL
network load consistent with existing NEPOOL rules and thereafter any upgrade
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related congestion costs shall be allocated equally between the Company and
NEPOOL network load. The company is recording those congestion costs in
accordance with the settlement agreement.
On December 28, 2001, Sithe New Boston filed a petition before the FERC
requesting that the facility be operated under proposed rates between Sithe New
Boston and ISONE effective January 1, 2002, subject to refund. The parties
reached a settlement which was approved by the FERC on December 20, 2002. All
revenues for Sithe New Boston have been recorded in accordance with this
settlement agreement.
In a dispute before the FERC regarding NSTAR Electric & Gas Corp.'s
("NSTAR") complaint contesting ISONE's policy for compensating out of merit
generators through mitigation agreements, NSTAR has made allegations related to
market power issues and has sought refunds for past power sales. The Company has
vigorously opposed these allegations. The case has been dismissed by the FERC.
NSTAR has petitioned the D.C. Circuit for review of the FERC's dismissal of its
complaint and is seeking refunds on past mitigation agreements. Sithe New
England has intervened in this proceeding, which is currently pending at the
D.C. Circuit.
The Company is a participant in a proceeding before the FERC related to
the Company's recovery of a portion of its operating costs for providing energy
to ISONE during capacity-constrained periods between July 1, 2001 and December
27, 2001. ISONE potentially may not pay the Company these costs because of its
implementation of rules relating to when suppliers will be disqualified from
receiving such payments for failing to follow ISONE's precise dispatch
instructions. The FERC approved modifications to these rules prospectively which
would mitigate or eliminate the problem going forward, but left nearly six
months (July 1, 2001 to December 27, 2001) when the Company potentially would be
subject to the prior provisions. The FERC rejected a motion to place the new
provisions in place retroactively, effective July 1, 2001, and subsequently, on
March 15, 2002, denied rehearing. Sithe New England sought review of the
Commission's orders in the D.C. Circuit Court of appeals on April 9, 2002. That
proceeding is being held in abeyance pending the Commission's consideration of a
Complaint that Sithe New England filed on September 23, 2002 seeking relief for
the locked in period from July 1, 2001 to December 27, 2001. The Company intends
to vigorously pursue these proceedings.
On June 1, 2001, the U.S. Environmental Protection Agency (the "EPA")
issued to the Company a Notice of Violation (the "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,
Massachusetts. On January 8, 2002, the EPA indicated that it had decided to
resolve the NOV through an administrative compliance order and a judicial civil
penalty action. In March 2002, the EPA issued and Sithe Mystic LLC, a
wholly-owned subsidiary of the Company, voluntarily entered a Compliance Order
and Reporting Requirement (the "Order") regarding Mystic Station. The Order's
effective date is March 14, 2002. Under the Order, Mystic Station will install
new ignition equipment on three of the four units at the plant. Mystic Station
will also undertake an extensive opacity monitoring and testing program for all
four units at the plant to help determine if additional compliance measures are
needed. The Order requires three of the four units to switch to a lower sulfur
fuel oil. The installation of the equipment and the use of a lower sulfur oil
was completed by September 1, 2002. The Order does not address civil penalties.
The EPA Region I Senior Enforcement Counsel (the "EPA Counsel") has indicated
that penalty discussions will likely begin in early 2003. The EPA Counsel also
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has indicated that the EPA will seek civil penalties of an undisclosed amount to
recover the benefit of the alleged noncompliance. To date, the EPA has not
provided any other information regarding possible penalties. The Company will
determine its response after the EPA makes a formal demand for penalties.
Alternate Power Sources, Inc. ("APS") has filed a complaint with the
FERC charging that the ISONE failed to properly investigate and mitigate
anomalous conduct in the ICAP market and that the ICAP closing prices should be
reset to zero for the period between April and July 2000. Sithe New England
Holdings has intervened and protested the complaint by APS. On October 11, 2002,
the FERC issued an order approving a settlement of this proceeding which
resulted in a net payment to Sithe New England Holdings of $5.5 million paid
during October 2002. This amount was recognized into income during the year
ended December 31, 2001.
In addition to the legal matters discussed above the Company is a
defendant in legal actions arising from activities conducted in the normal
course of business. Management, after consultation with legal counsel, believes
that the outcome of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
Other
On October 1, 2002, a fire at New Boston Station seriously damaged New
Boston Station's unit that was in service. The total estimated repairs of the
unit are expected to be between $10.0 million and $15.0 million of which $1.6
million has been spent as of December 23, 2002. Sithe New England has returned
to service the New Boston Station unit that was previously taken out of service.
The Company believes its insurance policies will be sufficient to provide for
recovery of loss due to damages and all incremental costs incurred as a result
of the fire.
*****
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(b) Pro forma financial information
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Pursuant to SEC regulations, the pro forma financial statements for Exelon
Generation are included below. Under SEC regulations, pro forma financial
statements are not required for Exelon Corporation.
The following unaudited pro forma combined condensed financial statements have
been prepared to reflect the acquisition of the assets of Sithe New England by
Exelon Generation under the purchase method of accounting. Under the purchase
method of accounting, tangible and identifiable intangible assets acquired and
liabilities assumed are recorded at their fair values. The unaudited pro forma
combined condensed financial statements reflect the estimated fair values of the
assets acquired and liabilities assumed. Such estimates are subject to final
valuation adjustments.
The following unaudited pro forma financial statements do not give effect to the
estimated cost savings and revenue enhancements. The pro forma adjustments are
reflected in the unaudited combined condensed pro forma balance sheet as if the
acquisition occurred on September 30, 2002. The unaudited pro forma combined
condensed statements of income for the nine months ended September 30, 2002 and
the year ended December 31, 2001 assume the acquisition was completed on January
1, 2001.
The following unaudited pro forma combined condensed financial statements are
for illustrative purposes only. They are not necessarily indicative of the
financial position or operating results that would have occurred had these
transactions been completed on January 1, 2001 or September 30, 2002, as assumed
above; nor is the information necessarily indicative of future financial
position or operating results.
-36-
Unaudited Pro Forma Combined Condensed Statement of Income
For the year ended December 31, 2001
Exelon Sithe Exelon
Generation New England Pro Forma Generation
as filed Historical Adjustments Pro Forma
-------- ---------- ----------- ---------
(in millions)
OPERATING REVENUES $ 7,048 $ 380 $ (3) (l) $ 7,425
------- ------- ------- -------
OPERATING EXPENSES
Fuel and Purchased Power 4,218 243 (3) (l) 4,458
Operating and Maintenance 1,527 72 1,599
Depreciation and Amortization 282 9 (4) (o) 287
Taxes Other Than Income 149 149
------- ------- ------- -------
Total Operating Expense 6,176 324 (7) 6,493
------- ------- ------- -------
OPERATING INCOME 872 56 4 932
------- ------- ------- -------
OTHER INCOME AND DEDUCTIONS
Interest Expense (115) 3 (14) (a) (126)
Equity in Earnings of Unconsolidated Affiliates 90 (16) (k) 74
Other, net (8) (8) (16)
------- ------- ------- -------
Total Other Income and Deductions (33) (5) (30) (68)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 839 51 (26) 864
INCOME TAXES 327 19 (11) (p) 335
------- ------- ------- -------
INCOME FROM CONTINUING OPERATIONS $ 512 $ 32 $ (15) $ 529
======= ======= ======= =======
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Unaudited Pro Forma Combined Condensed Statement of Income
For the nine month period ended September 30, 2002
Exelon Sithe Exelon
Generation New England Pro Forma Generation
as filed Historical Adjustments Pro Forma
-------- ---------- ----------- ---------
(in millions)
OPERATING REVENUES $ 5,233 $ 362 $ (10) (l) $ 5,585
------- ------- ------- -------
OPERATING EXPENSES
Fuel and Purchased Power 3,287 248 (10) (l) 3,525
Operating and Maintenance 1,234 50 1,284
Depreciation and Amortization 197 11 (8) (o) 200
Taxes Other Than Income 126 126
------- ------- ------- -------
Total Operating Expense 4,844 309 (18) 5,135
------- ------- ------- -------
OPERATING INCOME 389 53 8 450
------- ------- ------- -------
OTHER INCOME AND DEDUCTIONS
Interest Expense (51) (10) (a) (61)
Equity in Earnings of Unconsolidated Affiliates 119 (9) (k) 110
Other, net 54 (20) 34
------- ------- ------- -------
Total Other Income and Deductions 122 (20) (19) 83
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 511 33 (11) 533
INCOME TAXES 198 15 (5) (p) 208
------- ------- ------- -------
INCOME FROM CONTINUING OPERATIONS $ 313 $ 18 $ (6) $ 325
======= ======= ======= =======
-38-
Unaudited Pro Forma Combined Condensed Balance Sheet
As of September 30, 2002
Exelon
Exelon Sithe Generation
Generation New England Pro Forma Pro Forma
(in millions) as filed Historical Adjustments Balance
------------- -------- ---------- ----------- -------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 39 $ 17 $ 56
Restricted cash 7 7
Accounts Receivable, net 506 49 555
Receivables from Affiliates 783 783
Inventories, at average cost 329 8 337
Deferred Income Taxes 7 7
Other 113 2 $ 20 (c,f) 135
------- ------- ------- -------
Total Current Assets 1,777 83 20 1,880
------- ------- ------- -------
PROPERTY, PLANT AND EQUIPMENT, NET 2,796 2,000 (54)(i) 4,742
------- ------- ------- -------
DEFERRED DEBITS AND OTHER ASSETS
Nuclear Decommissioning Trust Funds 2,997 2,997
Investments 922 (284)(j) 638
Note Receivable from Affiliate 246 246
Deferred Income Taxes 340 61 38 (m) 439
Other 202 159 (86)(e,g,h) 275
------- ------- ------- -------
Total Deferred Debits and Other Assets 4,707 220 (332) 4,595
------- ------- ------- -------
TOTAL ASSETS $ 9,280 $ 2,303 $ (366) $11,217
======= ======= ======= =======
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Unaudited Pro Forma Combined Condensed Balance Sheet
As of September 30, 2002
Exelon
Exelon Sithe Generation
Generation New England Pro Forma Pro Forma
as filed Historical Adjustments Balance
-------- ---------- ----------- -------
(in millions)
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES
Long-Term Debt Due within One Year $ 6 $ 6
Accounts Payable and accrued expenses 1,149 49 1,198
Payables to Affiliates 33 46 79
Note Payable to Affiliate 348 $ 534 (a) 882
Other 194 11 29 (c) 234
-------- -------- -------- --------
Total Current Liabilities 1,730 106 563 2,399
-------- -------- -------- --------
LONG-TERM DEBT 1,096 1,033 2,129
-------- -------- -------- --------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 247 8 108 (m) 363
Unamortized Investment Tax Credits 228 228
Nuclear Decommissioning Liability for Retired Plants 1,389 1,389
Pension Obligation 100 100
Non-Pension Postretirement Benefits Obligation 404 404
Spent Nuclear Fuel Obligation 854 854
Other 324 100 5 (d) 429
-------- -------- -------- --------
Total Deferred Credits and Other Liabilities 3,546 108 113 3,767
-------- -------- -------- --------
MINORITY INTEREST OF CONSOLIDATED SUBSIDIARY 55 55
-------- -------- -------- --------
COMMITMENTS AND CONTINGENCIES
MEMBER'S EQUITY
Membership Interest 2,286 1,065 (1,051)(b,n) 2,300
Undistributed Earnings 850 81 (81)(n) 850
Accumulated Other Comprehensive Income (Loss) (283) (90) 90 (n) (283)
-------- -------- -------- --------
Total Member's Equity 2,853 1,056 (1,042) 2,867
-------- -------- -------- --------
TOTAL LIABILITIES AND MEMBER'S EQUITY $ 9,280 $ 2,303 $ (366) $ 11,217
======== ======== ======== ========
-40-
Notes to unaudited Pro Forma Combined Condensed Financial Statements
The fair value of the assets and liabilities acquired and the purchase price is
comprised of the following components:
(in millions)
-------------
Fair value of assets and liabilities acquired
---------------------------------------------
Property, plant, and equipment $ 1,946
Net current liabilities (32)
Net non-current liabilities (48)
-------
$ 1,866
=======
Purchase price
--------------
Note payable $ 534
Transaction costs 14
Liabilities associated with the transaction 1,133
Excess basis 185 (j)
-------
$ 1,866
=======
(a) To reflect the acquisition financing for the issuance of a $534 million
note payable due June 18, 2003 to Sithe Northeast Generating Company, Inc.,
a wholly-owned subsidiary of Sithe. The interest on the note payable is
based on a variable rate, which approximates 2.6% at acquisition date. Pro
forma interest expense of $14 million and $10 million has been included in
the pro forma income statements for the year ended December 31, 2001 and
for the nine months ended September 30, 2002, respectively.
(b) To record direct costs of the asset acquisition, including fees of
financial advisors, legal counsel and independent auditors estimated to be
$14 million.
(c) To reflect adjustments in assets of approximately $8 million and
liabilities of $29 million associated with certain contractual liquidated
damages receivable and payable in connection with construction delays at
two sites. The construction at these sites is expected to be completed
during the second quarter of 2003.
(d) To reflect estimated liabilities of $5 million associated with certain
environmental remediation activities based on a different remediation
program utilized by Exelon.
(e) To eliminate other long term assets of $47 million associated with Sithe
New England's previously deferred debt issuance costs and acquired
goodwill.
(f) To reflect $12 million of fair value associated with energy derivative
contracts that will be utilized for hedging purposes that were previously
treated as normal purchases and sales by Sithe New England.
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(g) To reflect an increase in the carrying value of emission allowances of $23
million based on current market valuations.
(h) To reflect an adjustment of $62 million to the carrying value of certain
equipment based on the fair value of this equipment as of the acquisition
date.
(i) To reflect an adjustment to recognize the fair value of existing electric
facilities and construction in progress at the acquisition date.
(j) To reclassify from the investment in Sithe Energies, Inc. balance to the
Sithe New England asset balance the difference between the original basis
in the underlying Sithe New England assets and the price paid for the
remaining Sithe New England assets.
(k) To reflect the reduction in equity earnings from affiliates for
Generation's Sithe equity interest to exclude Generation's share of
earnings from Sithe New England.
(l) To eliminate the effect of intercompany energy market transactions between
Generation and Sithe New England. During 2001, Generation recorded power
sales of $1 million to Sithe New England and purchased power totaling $2
million from Sithe New England. For the nine months ended September 30,
2002, Generation recorded sales of $2 million to Sithe New England and
purchased power totaling $8 million from Sithe New England.
(m) To record $70 million of net deferred taxes associated with the excess of
tax basis over the book basis of Generation's original investment in Sithe
related to the underlying Sithe New England assets and the elimination of
Sithe New England's historical deferred taxes.
(n) To reflect the elimination of Sithe New England's historical equity
balances.
(o) To reflect the change in depreciation expense related to the fair value
adjustment to plant acquired in the transaction and Exelon Generation's
change to the accounting useful life of generating plants.
(p) To reflect the estimated tax effect of the pro forma adjustments made in
the Unaudited Pro Forma Combined Condensed Statement of Income at the
combined statutory federal and state tax rate.
-42-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXELON CORPORATION
EXELON GENERATION COMPANY L.L.C.
By /s/ Robert S. Shapard
---------------------
Robert S. Shapard
Executive Vice President and Chief Financial Officer
Exelon Corporation
January 15, 2003
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