Exelon Corporation & Exelon Generation Company, LLC - 8-K Summary
Business Context and Reporting Period
Date of Report: November 1, 2002
Registrants: Exelon Corporation and Exelon Generation Company, LLC
Event: Completion of the acquisition of Sithe New England Holdings, LLC ("Sithe New England") and related subsidiaries from Sithe Energies, Inc.
The acquisition includes approximately 4,446 megawatts (MW) of generation capacity located primarily in Massachusetts. The portfolio consists of 1,645 MW in operation, 380 MW of non-operating facilities, and 2,421 MW under construction (Mystic 8 & 9 and Fore River projects).
Key Financial Metrics
Acquisition Consideration:
- Note Payable: $534 million issued to Sithe Northeast Generating Company, Inc.
- Assumed Liabilities: Assumption of various Sithe guarantees related to an equity contribution agreement (up to $38 million potential equity contribution).
Acquired Entity Financials (Sithe New England - Historical):
- Revenue (Year Ended Dec 31, 2001): $379.97 million
- Net Income (Year Ended Dec 31, 2001): $32.15 million
- Operating Cash Flow (Year Ended Dec 31, 2001): $61.25 million
- Total Assets (Dec 31, 2001): $2.19 billion (primarily Construction in Progress of $1.72 billion)
- Long-Term Debt (Dec 31, 2001): $916.9 million (Construction loan)
Pro Forma Impact (Exelon Generation):
- Pro Forma Total Assets (Sept 30, 2002): $11.22 billion
- Pro Forma Income from Continuing Operations (9 months ended Sept 30, 2002): $325 million
Material Changes and Unusual Items
Asset Impairment: Sithe New England recognized an impairment charge of $22.3 million as of June 30, 2002, related to one-half of the remaining net book value of New Boston Station. One unit was taken out of service on July 1, 2002.
Asset Damage: On October 1, 2002, a fire at New Boston Station seriously damaged an operating unit. Estimated repairs range from $10.0 million to $15.0 million. The company expects insurance to cover the loss.
Derivative Losses: For the year ended December 31, 2001, Sithe New England reported an unrealized loss on derivatives of $6.07 million. For the nine months ended September 30, 2002, this resulted in an unrealized gain of $6.35 million.
Outlook, Risks, and Contingencies
Construction Financing Risk (SBG Facility):
The acquired assets are subject to a $1.25 billion credit facility (SBG Facility) with $1.0 billion outstanding as of December 31, 2002. The facility is non-recourse to Exelon Generation.
- Completion Deadline: Construction projects must be completed by May 31, 2003.
- Default Risk: If projects are not completed by the deadline, lenders have the right to declare all amounts outstanding due.
- Management Outlook: Exelon Generation believes projects will be substantially complete by May 31, 2003, but anticipates that all required approvals may not be issued by that date. The company is evaluating the need for an amendment or waiver from lenders.
Legal and Regulatory Contingencies:
- Raytheon Dispute: Pending arbitration regarding a $20.1 million change order request for cost and schedule impacts at the Fore River project. Exelon intends to vigorously defend its position.
- EPA Violation: A Notice of Violation regarding opacity limits at Mystic Station resulted in a Compliance Order. Civil penalties are expected to be discussed in early 2003; the amount is currently undisclosed.
- FERC Proceedings: Ongoing disputes regarding congestion costs, market power allegations (NSTAR), and recovery of operating costs during capacity-constrained periods.
Investor Verification Checklist
- Construction Timeline: Verify the status of the Mystic 8 & 9 and Fore River projects against the May 31, 2003, SBG Facility deadline.
- Financing Terms: Confirm whether an amendment or waiver for the SBG Facility has been secured from lenders regarding the May 31, 2003, completion date.
- Insurance Recovery: Monitor the final settlement amount for the New Boston Station fire damage ($10M-$15M estimate).
- Legal Outcomes: Track the resolution of the Raytheon arbitration and the EPA civil penalty determination.
- Pro Forma Adjustments: Review the final valuation adjustments to the $1.866 billion fair value of assets acquired, specifically regarding the $185 million excess basis and deferred tax impacts.