e10vq
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
         
  þ     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
        For the Quarterly Period Ended June 30, 2006
or
  o     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
         
    Name of Registrant; State of Incorporation;
 		  IRS Employer
Commission
 		  Address of Principal Executive Offices; and
 		  Identification
File Number
  Telephone Number   Number
 
1-16169
  EXELON CORPORATION
(a Pennsylvania corporation)
10 South Dearborn Street — 37th Floor
P.O. Box 805379
Chicago, Illinois 60680-5379
(312) 394-7398 		  23-2990190
1-1839
  COMMONWEALTH EDISON COMPANY
(an Illinois corporation)
440 South LaSalle Street
Chicago, Illinois 60605-1028
(312) 394-4321 		  36-0938600
000-16844
  PECO ENERGY COMPANY
(a Pennsylvania corporation)
P.O. Box 8699
2301 Market Street
Philadelphia, Pennsylvania 19101-8699
(215) 841-4000 		  23-0970240
333-85496
  EXELON GENERATION COMPANY, LLC
(a Pennsylvania limited liability company)
300 Exelon Way
Kennett Square, Pennsylvania 19348
(610) 765-6900 		  23-3064219
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o.
 
The number of shares outstanding of each registrant’s common stock as of June 30, 2006 was:
 
     
Exelon Corporation Common Stock, without par value
  669,489,140
Commonwealth Edison Company Common Stock, $12.50 par value
  127,016,519
PECO Energy Company Common Stock, without par value
  170,478,507
Exelon Generation Company, LLC
  not applicable
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
                         
    Large Accelerated Filer   Accelerated Filer   Non-accelerated Filer
 
Exelon Corporation
    ü                  
Commonwealth Edison Company
                    ü  
PECO Energy Company
                    ü  
Exelon Generation Company, LLC
                    ü  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Exelon Corporation, Commonwealth Edison Company, PECO Energy Company and Exelon Generation Company, LLC  Yes o     No þ.
 

Table of Contents

 
TABLE OF CONTENTS
 
             
        Page No.
 
    3  
    3  
    3  
         
  FINANCIAL INFORMATION     4  
  FINANCIAL STATEMENTS     4  
    Exelon Corporation        
      Consolidated Statements of Income and Comprehensive Income     5  
      Consolidated Statements of Cash Flows     6  
      Consolidated Balance Sheets     7  
      Consolidated Statement of Changes in Shareholders’ Equity     9  
    Commonwealth Edison Company        
      Consolidated Statements of Income and Comprehensive Income     10  
      Consolidated Statements of Cash Flows     11  
      Consolidated Balance Sheets     12  
      Consolidated Statement of Changes in Shareholders’ Equity     14  
    PECO Energy Company        
      Consolidated Statements of Income and Comprehensive Income     15  
      Consolidated Statements of Cash Flows     16  
      Consolidated Balance Sheets     17  
      Consolidated Statement of Changes in Shareholders’ Equity     19  
    Exelon Generation Company, LLC        
      Consolidated Statements of Income and Comprehensive Income     20  
      Consolidated Statements of Cash Flows     21  
      Consolidated Balance Sheets     22  
      Consolidated Statement of Changes in Member’s Equity     24  
    Combined Notes to Consolidated Financial Statements     25  
  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     77  
    Exelon Corporation     77  
    Commonwealth Edison Company     127  
    PECO Energy Company     128  
    Exelon Generation Company, LLC     130  
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     132  
  CONTROLS AND PROCEDURES     138  
         
  OTHER INFORMATION     138  
  LEGAL PROCEEDINGS     138  
  RISK FACTORS     138  
  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS     139  
  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS     140  
  OTHER INFORMATION     140  


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        Page No.
 
  EXHIBITS     141  
    142  
    Exelon Corporation     142  
    Commonwealth Edison Company     142  
    PECO Energy Company     143  
    Exelon Generation Company, LLC     143  
    144  
    Exelon Corporation     144,152  
    Commonwealth Edison Company     146,154  
    PECO Energy Company     148,156  
    Exelon Generation Company, LLC     150,158  
 Certification
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FILING FORMAT
 
This combined Form 10-Q is being filed separately by Exelon Corporation (Exelon), Commonwealth Edison Company (ComEd), PECO Energy Company (PECO) and Exelon Generation Company, LLC (Generation) (collectively, the Registrants). Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. No registrant makes any representation as to information relating to any other registrant.
 
FORWARD-LOOKING STATEMENTS
 
Certain of the matters discussed in this Report are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, 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 (a) those factors discussed in the following sections of the Registrants’ 2005 Annual Report on Form 10-K: ITEM 1A. Risk Factors, ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and ITEM 8. Financial Statements and Supplementary Data: Exelon — Note 20, ComEd — Note 17, PECO — Note 15 and Generation — Note 17; and (b) other factors discussed herein and in other filings with the United States Securities and Exchange Commission (SEC) by the Registrants. Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this Report. None of the Registrants undertakes any obligation to publicly release any revision to its forward-looking statements to reflect events or circumstances after the date of this Report.
 
WHERE TO FIND MORE INFORMATION
 
The public may read and copy any reports or other information that the Registrants file with the SEC at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These documents are also available to the public from commercial document retrieval services, the web site maintained by the SEC at www.sec.gov and Exelon’s website and the other Registrant’s web sites at www.exeloncorp.com. Information contained on Exelon’s web site shall not be deemed incorporated into, or to be a part of, this Report.


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PART I. FINANCIAL INFORMATION
 
Item 1.  Financial Statements
 


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EXELON CORPORATION
 
 
EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
 
                                 
    Three Months
 		    Six Months
 		 
    Ended June 30,     Ended June 30,  
(In millions, except per share data)   2006     2005     2006     2005  
 
Operating revenues
  $ 3,697     $ 3,484     $ 7,559     $ 7,045  
Operating expenses
                               
Purchased power
    571       663       1,096       1,232  
Fuel
    502       493       1,438       1,115  
Operating and maintenance
    881       929       1,906       1,877  
Depreciation and amortization
    371       325       735       644  
Taxes other than income
    170       177       364       349  
                                 
Total operating expenses
    2,495       2,587       5,539       5,217  
                                 
Operating income
    1,202       897       2,020       1,828  
                                 
Other income and deductions
                               
Interest expense
    (154 )     (129 )     (306 )     (235 )
Interest expense to affiliates
    (68 )     (81 )     (139 )     (164 )
Distributions on preferred securities of subsidiaries
    (1 )     (1 )     (2 )     (2 )
Equity in losses of unconsolidated affiliates
    (22 )     (32 )     (61 )     (68 )
Other, net
    47       69       93       99  
                                 
Total other income and deductions
    (198 )     (174 )     (415 )     (370 )
                                 
Income from continuing operations before income taxes
    1,004       723       1,605       1,458  
Income taxes
    363       207       564       435  
                                 
Income from continuing operations
    641       516       1,041       1,023  
                                 
Discontinued operations
                               
Loss from discontinued operations (net of taxes of $0 and $(3) for the three and six months ended June 30, 2005, respectively)
    —       (1 )     —       (3 )
Gain (loss) on disposal of discontinued operations (net of taxes of $2, $(1), $2 and $4 for the three and six months ended June 30, 2006 and 2005, respectively)
    3       (1 )     3       15  
                                 
Income (loss) from discontinued operations
    3       (2 )     3       12  
                                 
Net income
    644       514       1,044       1,035  
                                 
Other comprehensive income (loss), net of income taxes
                               
Minimum pension liability
    —       —       —       2  
Change in unrealized gain (loss) on cash-flow hedges
    140       (31 )     232       (133 )
Unrealized gain (loss) on marketable securities
    (13 )     (9 )     15       (24 )
                                 
Other comprehensive income (loss)
    127       (40 )     247       (155 )
                                 
Comprehensive income
  $ 771     $ 474     $ 1,291     $ 880  
                                 
Average shares of common stock outstanding:
                               
Basic
    670       670       669       669  
Diluted
    676       677       675       676  
                                 
Earnings per average common share — basic:
                               
Income from continuing operations
  $ 0.96     $ 0.77     $ 1.56     $ 1.53  
Income from discontinued operations
    —       —       —       0.02  
                                 
Net income
  $ 0.96     $ 0.77     $ 1.56     $ 1.55  
                                 
Earnings per average common share — diluted:
                               
Income from continuing operations
  $ 0.95     $ 0.76     $ 1.55     $ 1.51  
Income from discontinued operations
    —       —       —       0.02  
                                 
Net income
  $ 0.95     $ 0.76     $ 1.55     $ 1.53  
                                 
Dividends per common share
  $ 0.40     $ 0.40     $ 0.80     $ 0.80  
                                 
 
See the Combined Notes to Consolidated Financial Statements


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
                 
    For the Six Months Ended June 30,  
(In millions)   2006     2005  
 
Cash flows from operating activities
               
Net income
  $ 1,044     $ 1,035  
Adjustments to reconcile net income to net cash flows provided by operating activities:
               
Depreciation, amortization and accretion, including nuclear fuel
    1,060       961  
Deferred income taxes and amortization of investment tax credits
    (81 )     528  
Provision for uncollectible accounts
    42       22  
Equity in losses of unconsolidated affiliates
    61       68  
Gain on sales of investments and wholly owned subsidiaries
    (2 )     (17 )
Net realized (gains) losses on nuclear decommissioning trust funds
    11       (55 )
Other decommissioning-related activities
    (149 )     13  
Impairment charges
    117       —  
Other non-cash operating activities
    32       27  
Changes in assets and liabilities
               
Accounts receivable
    230       53  
Inventories
    11       26  
Other current assets
    (136 )     (136 )
Accounts payable, accrued expenses and other current liabilities
    (406 )     (211 )
Counterparty collateral asset
    178       (20 )
Counterparty collateral liability
    5       7  
Income taxes
    300       24  
Net realized and unrealized mark-to-market and hedging transactions
    (69 )     (74 )
Pension and non-pension postretirement benefits
    99       (1,927 )
Other noncurrent assets and liabilities
    (159 )     (38 )
                 
Net cash flows provided by operating activities
    2,188       286  
                 
Cash flows from investing activities
               
Capital expenditures
    (1,156 )     (1,007 )
Proceeds from nuclear decommissioning trust fund sales
    2,554       2,149  
Investment in nuclear decommissioning trust funds
    (2,706 )     (2,256 )
Acquisitions of businesses, net of cash acquired
    —       (97 )
Proceeds from sales of investments and wholly owned subsidiaries, net of $32 of cash sold during the six months ended June 30, 2005
    1       103  
Investments in synthetic fuel-producing facilities
    (53 )     (56 )
Change in restricted cash
    1       23  
Other investing activities
    (1 )     (2 )
                 
Net cash flows used in investing activities
    (1,360 )     (1,143 )
                 
Cash flows from financing activities
               
Issuance of long-term debt
    326       1,788  
Retirement of long-term debt
    (34 )     (185 )
Retirement of long-term debt to financing affiliates
    (422 )     (397 )
Issuance of short-term debt
    —       2,500  
Retirement of short-term debt
    —       (2,200 )
Change in other short-term debt
    (106 )     (161 )
Dividends paid on common stock
    (535 )     (535 )
Proceeds from employee stock plans
    107       156  
Purchase of treasury stock
    (53 )     (8 )
Other financing activities
    31       (55 )
                 
Net cash flows provided by (used in) financing activities
    (686 )     903  
                 
Increase in cash and cash equivalents
    142       46  
Cash and cash equivalents at beginning of period
    140       499  
                 
Cash and cash equivalents at end of period
  $ 282     $ 545  
                 
 
See the Combined Notes to Consolidated Financial Statements


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
                 
    June 30,
 		    December 31,
 		 
(In millions)   2006     2005  
 
ASSETS
Current assets
               
Cash and cash equivalents
  $ 282     $ 140  
Restricted cash and investments
    48       49  
Accounts receivable, net
               
Customer
    1,609       1,858  
Other
    265       337  
Mark-to-market derivative assets
    737       916  
Inventories, at average cost
               
Fossil fuel
    282       311  
Materials and supplies
    381       351  
Deferred income taxes
    114       80  
Other
    540       595  
                 
Total current assets
    4,258       4,637  
                 
Property, plant and equipment, net
    22,122       21,981  
Deferred debits and other assets
               
Regulatory assets
    4,093       4,386  
Nuclear decommissioning trust funds
    5,809       5,585  
Investments
    819       813  
Goodwill
    3,476       3,475  
Mark-to-market derivative assets
    586       371  
Prepaid pension asset
    374       377  
Other
    753       824  
                 
Total deferred debits and other assets
    15,910       15,831  
                 
Total assets
  $ 42,290     $ 42,449  
                 
 
See the Combined Notes to Consolidated Financial Statements


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
                 
    June 30,
 		    December 31,
 		 
(In millions)   2006     2005  
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
               
Commercial paper and notes payable
  $ 1,184     $ 1,290  
Long-term debt due within one year
    554       407  
Long-term debt to ComEd Transitional Funding Trust and PECO Energy
               
Transition Trust due within one year
    577       507  
Accounts payable
    1,195       1,467  
Mark-to-market derivative liabilities
    885       1,282  
Accrued expenses
    1,070       1,005  
Other
    838       605  
                 
Total current liabilities
    6,303       6,563  
                 
Long-term debt
    7,904       7,759  
Long-term debt to ComEd Transitional Funding Trust and PECO
               
Energy Transition Trust
    2,963       3,456  
Long-term debt to other financing trusts
    545       545  
Deferred credits and other liabilities
               
Deferred income taxes
    4,957       4,816  
Unamortized investment tax credits
    256       262  
Asset retirement obligations
    3,676       4,157  
Pension obligations
    292       268  
Non-pension postretirement benefit obligations
    1,086       1,014  
Spent nuclear fuel obligation
    926       906  
Regulatory liabilities
    2,293       2,170  
Mark-to-market derivative liabilities
    504       522  
Other
    763       798  
                 
Total deferred credits and other liabilities
    14,753       14,913  
                 
Total liabilities
    32,468       33,236  
                 
Commitments and contingencies
               
Minority interest of consolidated subsidiaries
    —       1  
Preferred securities of subsidiaries
    87       87  
Shareholders’ equity
               
Common stock (No par value, 2,000 shares authorized, 669.5 and 666.4 shares outstanding at June 30, 2006 and December 31, 2005, respectively)
    8,166       7,987  
Treasury stock, at cost (10.4 and 9.4 shares held at June 30, 2006 and December 31, 2005, respectively)
    (497 )     (444 )
Retained earnings
    3,443       3,206  
Accumulated other comprehensive loss
    (1,377 )     (1,624 )
                 
Total shareholders’ equity
    9,735       9,125  
                 
Total liabilities and shareholders’ equity
  $ 42,290     $ 42,449  
                 
 
See the Combined Notes to Consolidated Financial Statements


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
 
                                                 
                            Accumulated
 		       
                            Other
 		    Total
 		 
(Dollars in millions,
 		  Issued
 		    Common
 		    Treasury
 		    Retained
 		    Comprehensive
    Shareholders’
 		 
shares in thousands)   Shares     Stock     Stock     Earnings     Loss     Equity  
 
Balance, December 31, 2005
    675.8     $ 7,987     $ (444 )   $ 3,206     $ (1,624 )   $ 9,125  
Net income
    —       —       —       1,044       —       1,044  
Long-term incentive plan activity
    4.1       179       —       —       —       179  
Common stock purchases
    —       —       (53 )     —       —       (53 )
Common stock dividends declared
    —       —       —       (807 )     —       (807 )
Other comprehensive income, net of income taxes of $175
    —       —       —       —       247       247  
                                                 
Balance, June 30, 2006
    679.9     $ 8,166     $ (497 )   $ 3,443     $ (1,377 )   $ 9,735  
                                                 
 
See the Combined Notes to Consolidated Financial Statements


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COMMONWEALTH EDISON COMPANY
 
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
 
                                 
    Three Months
 		    Six Months
 		 
    Ended June 30,     Ended June 30,  
(In millions)   2006     2005     2006     2005  
 
Operating revenues
                               
Operating revenues
  $ 1,450     $ 1,485     $ 2,874     $ 2,869  
Operating revenues from affiliates
    3       3       6       6  
                                 
Total operating revenues
    1,453       1,488       2,880       2,875  
                                 
Operating expenses
                               
Purchased power
    81       88       172       156  
Purchased power from affiliate
    685       770       1,456       1,523  
Operating and maintenance
    165       158       329       316  
Operating and maintenance from affiliates
    53       44       105       88  
Depreciation and amortization
    106       101       205       198  
Taxes other than income
    71       73       152       151  
                                 
Total operating expenses
    1,161       1,234       2,419       2,432  
                                 
Operating income
    292       254       461       443  
                                 
Other income and deductions
                               
Interest expense
    (58 )     (53 )     (114 )     (102 )
Interest expense to affiliates
    (19 )     (24 )     (39 )     (49 )
Equity in losses of unconsolidated affiliates
    (3 )     (4 )     (5 )     (8 )
Interest income from affiliates
    —       1       —       3  
Other, net
    1       6       1       10  
                                 
Total other income and deductions
    (79 )     (74 )     (157 )     (146 )
                                 
Income before income taxes
    213       180       304       297  
Income taxes
    86       71       123       118  
                                 
Net income
    127       109       181       179  
                                 
Other comprehensive loss, net of income taxes
                               
Change in unrealized loss on cash-flow hedges
    —       (19 )     —       (21 )
                                 
Other comprehensive loss
    —       (19 )     —       (21 )
                                 
Comprehensive income
  $ 127     $ 90     $ 181     $ 158  
                                 
 
See the Combined Notes to Consolidated Financial Statements


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Table of Contents

COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
                 
    For the Six Months Ended June 30,  
(In millions)   2006     2005  
 
Cash flows from operating activities
               
Net income
  $ 181     $ 179  
Adjustments to reconcile net income to net cash flows provided by (used in) operating activities:
               
Depreciation, amortization and accretion
    205       198  
Deferred income taxes and amortization of investment tax credits
    (25 )     230  
Provision for uncollectible accounts
    11       12  
Equity in losses of unconsolidated affiliates
    5       8  
Other non-cash operating activities
    18       23  
Changes in assets and liabilities
               
Accounts receivable
    24       (100 )
Inventories
    (8 )     1  
Other current assets
    (10 )     (14 )
Accounts payable, accrued expenses and other current liabilities
    (3 )     (27 )
Changes in receivables and payables to affiliates
    33       137  
Income taxes
    100       3  
Net realized and unrealized mark-to-market and hedging transactions
    7       —  
Pension and non-pension postretirement benefits
    34       (767 )
Other noncurrent assets and liabilities
    3       (11 )
                 
Net cash flows provided by (used in) operating activities
    575       (128 )
                 
Cash flows from investing activities
               
Capital expenditures
    (465 )     (391 )
Changes in Exelon intercompany money pool contributions
    —       287  
Change in restricted cash
    (1 )     (1 )
Other investing activities
    5       1  
                 
Net cash flows used in investing activities
    (461 )     (104 )
                 
Cash flows from financing activities
               
Changes in short-term debt
    (120 )     —  
Issuance of long-term debt
    320       91  
Retirement of long-term debt
    (1 )     (146 )
Retirement of Exelon intercompany money pool borrowings
    (140 )     —  
Retirement of long-term debt to ComEd Transitional Funding Trust
    (174 )     (190 )
Dividends paid on common stock
    —       (245 )
Contributions from parent
    —       834  
Other financing activities
    (3 )     (5 )
                 
Net cash flows provided by (used in) financing activities
    (118 )     339  
                 
Increase (decrease) in cash and cash equivalents
    (4 )     107  
Cash and cash equivalents at beginning of period
    38       30  
                 
Cash and cash equivalents at end of period
  $ 34     $ 137  
                 
 
See the Combined Notes to Consolidated Financial Statements


11

Table of Contents

COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
                 
    June 30,
 		    December 31,
 		 
(In millions)   2006     2005  
 
ASSETS
Current assets
               
Cash and cash equivalents
  $ 34     $ 38  
Restricted cash
    1       —  
Accounts receivable, net
               
Customer
    747       806  
Other
    39       46  
Inventories, at average cost
    58       50  
Deferred income taxes
    20       13  
Receivables from affiliates
    16       37  
Other
    44       34  
                 
Total current assets
    959       1,024  
                 
Property, plant and equipment, net
    10,194       9,906  
Deferred debits and other assets
               
Investments
    41       41  
Investments in affiliates
    27       34  
Goodwill
    3,476       3,475  
Receivables from affiliates
    1,529       1,447  
Prepaid pension asset
    926       938  
Other
    347       346  
                 
Total deferred debits and other assets
    6,346       6,281  
                 
Total assets
  $ 17,499     $ 17,211  
                 
 
See the Combined Notes to Consolidated Financial Statements


12

Table of Contents

COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
                 
    June 30,
 		    December 31,
 		 
(In millions)
  2006     2005  
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
               
Long-term debt due within one year
  $ 473     $ 328  
Long-term debt to ComEd Transitional Funding Trust due within one year
    303       307  
Accounts payable
    192       223  
Accrued expenses
    512       417  
Payables to affiliates
    291       278  
Commercial paper
    339       459  
Borrowing from Exelon intercompany money pool
    —       140  
Customer deposits
    115       110  
Other
    56       46  
                 
Total current liabilities
    2,281       2,308  
                 
Long-term debt
    2,674       2,500  
Long-term debt to ComEd Transitional Funding Trust
    510       680  
Long-term debt to other financing trusts
    361       361  
Deferred credits and other liabilities
               
Deferred income taxes
    2,131       2,147  
Unamortized investment tax credits
    42       43  
Asset retirement obligations
    155       151  
Non-pension postretirement benefit obligations
    197       175  
Regulatory liabilities
    2,293       2,170  
Other
    278       280  
                 
Total deferred credits and other liabilities
    5,096       4,966  
                 
Total liabilities
    10,922       10,815  
                 
Commitments and contingencies
               
Shareholders’ equity
               
Common stock
    1,588       1,588  
Other paid-in capital
    4,890       4,890  
Retained earnings (deficit)
    100       (81 )
Accumulated other comprehensive loss
    (1 )     (1 )
                 
Total shareholders’ equity
    6,577       6,396  
                 
Total liabilities and shareholders’ equity
  $ 17,499     $ 17,211  
                 
 
See the Combined Notes to Consolidated Financial Statements


13

Table of Contents

COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
 
                                                 
                            Accumulated
 		       
          Other
 		    Retained
 		    Retained
 		    Other
 		    Total
 		 
    Common
 		    Paid-In
 		    Earnings
 		    Earnings
 		    Comprehensive
 		    Shareholders’
 		 
(In millions)   Stock     Capital     Unappropriated     Appropriated     Loss     Equity  
 
Balance, December 31, 2005
  $ 1,588     $ 4,890     $ (1,180 )   $ 1,099     $ (1 )   $ 6,396  
Net income
    —       —       181       —       —       181  
Appropriation of Retained Earnings for future dividends
    —       —       (181 )     181       —       —  
                                                 
Balance, June 30, 2006
  $ 1,588     $ 4,890     $ (1,180 )   $ 1,280     $ (1 )   $ 6,577  
                                                 
 
See the Combined Notes to Consolidated Financial Statements


14

Table of Contents

 
PECO ENERGY COMPANY
 
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
 
                                 
    Three Months
 		    Six Months
 		 
    Ended June 30,     Ended June 30,  
(In millions)   2006     2005     2006     2005  
 
Operating revenues
                               
Operating revenues
  $ 1,144     $ 1,040     $ 2,546     $ 2,331  
Operating revenues from affiliates
    4       4       8       8  
                                 
Total operating revenues
    1,148       1,044       2,554       2,339  
                                 
Operating expenses
                               
Purchased power
    72       58       142       109  
Purchased power from affiliate
    429       379       845       760  
Fuel
    76       66       402       331  
Operating and maintenance
    109       91       225       200  
Operating and maintenance from affiliates
    32       28       64       53  
Depreciation and amortization
    172       137       343       273  
Taxes other than income
    53       60       117       115  
                                 
Total operating expenses
    943       819       2,138       1,841  
                                 
Operating income
    205       225       416       498  
                                 
Other income and deductions
                               
Interest expense
    (18 )     (13 )     (35 )     (26 )
Interest expense to affiliates
    (49 )     (57 )     (101 )     (116 )
Equity in losses of unconsolidated affiliates
    (2 )     (4 )     (6 )     (8 )
Other, net
    2       6       5       9  
                                 
Total other income and deductions
    (67 )     (68 )     (137 )     (141 )
                                 
Income before income taxes
    138       157       279       357  
Income taxes
    45       47       93       118  
                                 
Net income
    93       110       186       239  
Preferred stock dividends
    1       1       2       2  
                                 
Net income on common stock
  $ 92     $ 109     $ 184     $ 237  
                                 
Comprehensive income, net of income taxes
                               
Net income
  $ 93     $ 110     $ 186     $ 239  
                                 
Other comprehensive loss, net of income taxes
                               
Change in net unrealized loss on cash-flow hedges
    (1 )     (2 )     (1 )     (2 )
                                 
Other comprehensive loss
    (1 )     (2 )     (1 )     (2 )
                                 
Comprehensive income
  $ 92     $ 108     $ 185     $ 237  
                                 
 
See the Combined Notes to Consolidated Financial Statements


15

Table of Contents

PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
                 
    For the Six Months Ended June 30,  
(In millions)   2006     2005  
 
Cash flows from operating activities
               
Net income
  $ 186     $ 239  
Adjustments to reconcile net income to net cash flows provided by operating activities:
               
Depreciation, amortization and accretion
    343       273  
Deferred income taxes and amortization of investment tax credits
    (138 )     (60 )
Provision for uncollectible accounts
    31       11  
Equity in losses of unconsolidated affiliates
    6       8  
Other non-cash operating activities
    9       (4 )
Changes in assets and liabilities
               
Accounts receivable
    73       43  
Inventories
    9       23  
Deferred/over-recovered energy costs
    61       18  
Prepaid utility taxes
    (81 )     (99 )
Other current assets
    (3 )     —  
Accounts payable, accrued expenses and other current liabilities
    (123 )     (79 )
Change in receivables and payables to affiliates, net
    39       36  
Income taxes
    142       27  
Pension and non-pension postretirement benefits
    5       (144 )
Other noncurrent assets and liabilities
    3       9  
                 
Net cash flows provided by operating activities
    562       301  
                 
Cash flows from investing activities
               
Capital expenditures
    (164 )     (126 )
Changes in Exelon intercompany money pool contributions
    8       34  
Change in restricted cash
    (1 )     28  
Other investing activities
    —       6  
                 
Net cash flows used in investing activities
    (157 )     (58 )
                 
Cash flows from financing activities
               
Issuance of long-term debt
    6       —  
Retirement of long-term debt
    —       (8 )
Retirement of long-term debt to PECO Energy Transition Trust
    (248 )     (207 )
Change in short-term debt
    7       —  
Dividends paid on common and preferred stock
    (253 )     (233 )
Contributions from parent
    71       180  
                 
Net cash flows used in financing activities
    (417 )     (268 )
                 
Decrease in cash and cash equivalents
    (12 )     (25 )
Cash and cash equivalents at beginning of period
    37       74  
                 
Cash and cash equivalents at end of period
  $ 25     $ 49  
                 
 
See the Combined Notes to Consolidated Financial Statements


16

Table of Contents

PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
                 
    June 30,
 		    December 31,
 		 
(In millions)   2006     2005  
 
ASSETS
Current assets
               
Cash and cash equivalents
  $ 25     $ 37  
Restricted cash
    3       2  
Accounts receivable, net
               
Customer
    350       454  
Other
    21       57  
Affiliate
    —       13  
Inventories, at average cost
               
Gas
    142       151  
Materials and supplies
    11       11  
Contributions to Exelon intercompany money pool
    —       8  
Deferred income taxes
    34       7  
Deferred energy costs
    —       39  
Prepaid utility taxes
    81       —  
Other
    19       16  
                 
Total current assets
    686       795  
                 
Property, plant and equipment, net
    4,552       4,471  
Deferred debits and other assets
               
Regulatory assets
    4,093       4,386  
Investments
    22       22  
Investment in affiliates
    68       73  
Receivable from affiliate
    100       68  
Prepaid pension asset
    198       195  
Other
    4       8  
                 
Total deferred debits and other assets
    4,485       4,752  
                 
Total assets
  $ 9,723     $ 10,018  
                 
 
See the Combined Notes to Consolidated Financial Statements


17

Table of Contents

PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
                 
    June 30,
 		    December 31,
 		 
(In millions)   2006     2005  
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
               
Commercial paper
  $ 227     $ 220  
Long-term debt to PECO Energy Transition Trust due within one year
    274       199  
Accounts payable
    94       182  
Accrued expenses
    169       92  
Payables to affiliates
    204       178  
Customer deposits
    57       54  
Over-recovered energy costs
    22       —  
Other
    5       11  
                 
Total current liabilities
    1,052       936  
                 
Long-term debt
    1,189       1,183  
Long-term debt to PECO Energy Transition Trust
    2,453       2,776  
Long-term debt to other financing trusts
    184       184  
Deferred credits and other liabilities
               
Deferred income taxes
    2,674       2,781  
Unamortized investment tax credits
    16       17  
Asset retirement obligations
    21       20  
Non-pension postretirement benefit obligations
    286       278  
Other
    141       139  
                 
Total deferred credits and other liabilities
    3,138       3,235  
                 
Total liabilities
    8,016       8,314  
                 
Commitments and contingencies
               
Shareholders’ equity
               
Common stock
    2,193       2,193  
Preferred stock
    87       87  
Receivable from parent
    (1,161 )     (1,232 )
Retained earnings
    582       649  
Accumulated other comprehensive income
    6       7  
                 
Total shareholders’ equity
    1,707       1,704  
                 
Total liabilities and shareholders’ equity
  $ 9,723     $ 10,018  
                 
 
See the Combined Notes to Consolidated Financial Statements


18

Table of Contents

PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
 
                                                 
                            Accumulated
 		       
                Receivable
 		          Other
 		    Total
 		 
    Common
 		    Preferred
 		    from
 		    Retained
 		    Comprehensive
 		    Shareholders’
 		 
(In millions)   Stock     Stock     Parent     Earnings     Income     Equity  
 
Balance, December 31, 2005
  $ 2,193     $ 87     $ (1,232 )   $ 649     $ 7     $ 1,704  
Net income
    —       —       —       186       —       186  
Common stock dividends
    —       —       —       (251 )     —       (251 )
Preferred stock dividends
    —       —       —       (2 )     —       (2 )
Repayment of receivable from parent
    —       —       71       —       —       71  
Other comprehensive loss, net of income taxes of $(1)
    —       —       —       —       (1 )     (1 )
                                                 
Balance, June 30, 2006
  $ 2,193     $ 87     $ (1,161 )   $ 582     $ 6     $ 1,707  
                                                 
 
See the Combined Notes to Consolidated Financial Statements


19

Table of Contents

 
EXELON GENERATION COMPANY, LLC
 
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
 
                                 
    Three Months
 		    Six Months
 		 
    Ended June 30,     Ended June 30,  
(In millions)
  2006     2005     2006     2005  
 
Operating revenues
                               
Operating revenues
  $ 1,100     $ 955     $ 2,132     $ 1,840  
Operating revenues from affiliates
    1,114       1,150       2,302       2,285  
                                 
Total operating revenues
    2,214       2,105       4,434       4,125  
                                 
Operating expenses
                               
Purchased power
    418       517       781       967  
Fuel
    425       428       1,036       786  
Operating and maintenance
    362       536       955       1,077  
Operating and maintenance from affiliates
    78       66       153       134  
Depreciation and amortization
    72       63       139       125  
Taxes other than income
    41       39       84       74  
                                 
Total operating expenses
    1,396       1,649       3,148       3,163  
                                 
Operating income
    818       456       1,286       962  
                                 
Other income and deductions
                               
Interest expense
    (40 )     (29 )     (81 )     (56 )
Interest expense to affiliates
    —       —       (1 )     (2 )
Equity in earnings (losses) of unconsolidated affiliates
    (1 )     4       (5 )     4  
Other, net
    14       51       20       69  
                                 
Total other income and deductions
    (27 )     26       (67 )     15  
                                 
Income from continuing operations before income taxes
    791       482       1,219       977  
Income taxes
    294       185       454       376  
                                 
Income from continuing operations
    497       297       765       601  
                                 
Discontinued operations
                               
Loss from discontinued operations (net of taxes of $0 and $(1) for the three and six months ended June 30, 2005, respectively)
    —       —       —       —  
Gain (loss) on disposal of discontinued operations (net of taxes of $2, $(1), $2 and $4 for the three and six months ended June 30, 2006 and 2005, respectively)
    3       (1 )     3       15  
                                 
Income (loss) from discontinued operations
    3       (1 )     3       15  
                                 
Net income
    500       296       768       616  
                                 
Other comprehensive income (loss), net of income taxes
                               
Change in unrealized gain (loss) on cash-flow hedges
    141       39       232       (85 )
Unrealized gain (loss) on marketable securities
    (13 )     (9 )     15       (24 )
Foreign currency translation adjustment
    —       (1 )     —       (1 )
                                 
Other comprehensive income (loss)
    128       29       247       (110 )
                                 
Comprehensive income
  $ 628     $ 325     $ 1,015     $ 506  
                                 
 
See the Combined Notes to Consolidated Financial Statements


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Table of Contents

EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
                 
    For the Six
 		 
    Months Ended
 		 
    June 30,  
(In millions)   2006     2005  
 
Cash flows from operating activities
               
Net income
  $ 768     $ 616  
Adjustments to reconcile net income to net cash flows provided by operating activities:
               
Depreciation, amortization and accretion, including nuclear fuel
    464       440  
Deferred income taxes and amortization of investment tax credits
    81       337  
Equity in losses (earnings) of unconsolidated affiliates
    5       (4 )
Gain on sale of investments
    (2 )     (19 )
Net realized (gains) losses on nuclear decommissioning trust funds
    11       (55 )
Other decommissioning-related activities
    (149 )     13  
Other non-cash operating activities
    20       17  
Changes in assets and liabilities
               
Accounts receivable
    79       61  
Receivables and payables to affiliates, net
    11       (181 )
Inventories
    10       3  
Other current assets
    (70 )     (25 )
Accounts payable, accrued expenses and other current liabilities
    (237 )     (52 )
Counterparty collateral asset
    178       (20 )
Counterparty collateral liability
    5       7  
Income taxes
    38       174  
Net realized and unrealized mark-to-market and hedging transactions
    (37 )     (57 )
Pension and non-pension postretirement benefits
    45       (839 )
Other noncurrent assets and liabilities
    (148 )     (36 )
                 
Net cash flows provided by operating activities
    1,072       380  
                 
Cash flows from investing activities
               
Capital expenditures
    (512 )     (484 )
Proceeds from nuclear decommissioning trust fund sales
    2,554       2,149  
Investment in nuclear decommissioning trust funds
    (2,706 )     (2,256 )
Acquisitions of businesses, net of cash acquired
    —       (97 )
Proceeds from sales of wholly owned subsidiaries, net of $32 of cash sold during the six months ended June 30, 2005
    —       103  
Change in restricted cash
    1       (2 )
Other investing activities
    (3 )     (5 )
                 
Net cash flows used in investing activities
    (666 )     (592 )
                 
Cash flows from financing activities
               
Retirement of long-term debt
    —       (1 )
Changes in Exelon intercompany money pool borrowings
    (92 )     (283 )
Distribution to member
    (322 )     (319 )
Contribution from member
    —       843  
Other financing activities
    (2 )     1  
                 
Net cash flows provided by (used in) financing activities
    (416 )     241  
                 
Increase (decrease) in cash and cash equivalents
    (10 )     29  
Cash and cash equivalents at beginning of period
    34       263  
                 
Cash and cash equivalents at end of period
  $ 24     $ 292  
                 
 
See the Combined Notes to Consolidated Financial Statements


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EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
                 
    June 30,
 		    December 31,
 		 
(In millions)   2006     2005  
 
ASSETS
Current assets
               
Cash and cash equivalents
  $ 24     $ 34  
Restricted cash and investments
    2       3  
Accounts receivable, net
               
Customer
    506       585  
Other
    128       109  
Mark-to-market derivative assets
    699       916  
Receivable from affiliates
    428       411  
Inventories, at average cost
               
Fossil fuel
    140       160  
Materials and supplies
    312       290  
Deferred income taxes
    41       35  
Prepayments and other current assets
    380       497  
                 
Total current assets
    2,660       3,040  
                 
Property, plant and equipment, net
    7,241       7,464  
Deferred debits and other assets
               
Nuclear decommissioning trust funds
    5,809       5,585  
Investments
    128       120  
Mark-to-market derivative assets
    473       286  
Prepaid pension asset
    1,005       1,013  
Other
    286       216  
                 
Total deferred debits and other assets
    7,701       7,220  
                 
Total assets
  $ 17,602     $ 17,724  
                 
 
See the Combined Notes to Consolidated Financial Statements


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EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
                 
    June 30,
 		    December 31,
 		 
(In millions)   2006     2005  
 
LIABILITIES AND MEMBER’S EQUITY
Current liabilities
               
Long-term debt due within one year
  $ 12     $ 12  
Accounts payable
    813       954  
Mark-to-market derivative liabilities
    874       1,282  
Payables to affiliates
    36       4  
Borrowings from Exelon intercompany money pool
    —       92  
Commercial paper
    309       311  
Accrued expenses
    387       415  
Other
    283       330  
                 
Total current liabilities
    2,714       3,400  
                 
Long-term debt
    1,788       1,788  
Deferred credits and other liabilities
               
Asset retirement obligations
    3,500       3,986  
Pension obligation
    17       13  
Non-pension postretirement benefit obligations
    574       541  
Spent nuclear fuel obligation
    926       906  
Deferred income taxes
    931       663  
Unamortized investment tax credits
    198       202  
Payables to affiliates
    1,616       1,503  
Mark-to-market derivative liabilities
    420       460  
Other
    244       280  
                 
Total deferred credits and other liabilities
    8,426       8,554  
                 
Total liabilities
    12,928       13,742  
                 
Commitments and contingencies
               
Minority interest of consolidated subsidiary
    1       2  
Member’s equity
               
Membership interest
    3,220       3,220  
Undistributed earnings
    1,448       1,002  
Accumulated other comprehensive income (loss)
    5       (242 )
                 
Total member’s equity
    4,673       3,980  
                 
Total liabilities and member’s equity
  $ 17,602     $ 17,724  
                 
 
See the Combined Notes to Consolidated Financial Statements


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EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBER’S EQUITY
(Unaudited)
 
                                 
                Accumulated
 		       
                Other
 		    Total
 		 
    Membership
 		    Undistributed
 		    Comprehensive
 		    Member’s
 		 
(In millions)   Interest     Earnings     Income (Loss)     Equity  
 
Balance, December 31, 2005
  $ 3,220     $ 1,002     $ (242 )   $ 3,980  
Net income
    —       768       —       768  
Distribution to member
    —       (322 )     —       (322 )
Other comprehensive income, net of income taxes of $(106)
    —       —       247       247  
                                 
Balance, June 30, 2006
  $ 3,220     $ 1,448     $ 5     $ 4,673  
                                 
 
See the Combined Notes to Consolidated Financial Statements


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Table of Contents

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data, unless otherwise noted)
 
1.   Basis of Presentation (Exelon, ComEd, PECO and Generation)
 
Exelon Corporation (Exelon) is a utility services holding company engaged, through its subsidiaries, in the energy delivery and generation businesses. The energy delivery businesses include the purchase and regulated retail and wholesale sale of electricity and distribution and transmission services by Commonwealth Edison Company (ComEd) in northern Illinois, including the City of Chicago, and by PECO Energy Company (PECO) in southeastern Pennsylvania, including the City of Philadelphia, and the purchase and regulated retail sale of natural gas and related distribution services by PECO in the Pennsylvania counties surrounding the City of Philadelphia. The generation business consists principally of the electric generating facilities and wholesale energy marketing operations of Exelon Generation Company, LLC (Generation), the competitive retail sales business of Exelon Energy Company (Exelon Energy) and certain other generation projects.
 
Exelon’s consolidated financial statements include the accounts of entities in which it has a controlling financial interest, other than certain financing trusts of ComEd and PECO, and its proportionate interests in jointly owned electric utility plants, after the elimination of intercompany transactions. A controlling financial interest is evidenced by either a voting interest greater than 50% or a risk and rewards model that identifies Exelon or one of its subsidiaries as the primary beneficiary of the variable interest entity. Investments and joint ventures in which Exelon does not have a controlling financial interest and certain financing trusts of ComEd and PECO are accounted for under the equity or cost method of accounting.
 
Exelon owns 100% of all significant consolidated subsidiaries, either directly or indirectly, except for less than 1% of ComEd’s common stock and all of PECO’s preferred stock. Exelon has reflected the third-party interests in ComEd and PECO as minority interest in its consolidated financial statements.
 
The accompanying consolidated financial statements as of June 30, 2006 and 2005 and for the three and six months then ended are unaudited but, in the opinion of the management of each of Exelon, ComEd, PECO and Generation (collectively, the Registrants), include all adjustments that are considered necessary for a fair presentation of its respective financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). All adjustments are of a normal, recurring nature, except as otherwise disclosed. The December 31, 2005 Consolidated Balance Sheets were taken from audited financial statements. These Combined Notes to Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Certain prior-year amounts have been reclassified for comparative purposes. These reclassifications had no effect on net income or shareholders’ or Member’s equity. These notes should be read in conjunction with the Notes to Consolidated Financial Statements of Exelon, ComEd, PECO and Generation included in ITEM 8 of their 2005 Annual Report on Form 10-K.
 
2.   Discontinued Operations (Exelon and Generation)
 
As discussed in Note 4 — Acquisitions and Dispositions, on January 31, 2005, subsidiaries of Generation completed a series of transactions that resulted in Generation’s sale of its investment in Sithe Energies, Inc. (Sithe). In addition, during 2003 and 2004, Exelon sold or wound down substantially all components of Exelon Enterprises Company, LLC (Enterprises). As a result, the results of operations and any gain or loss on the sale of these entities are presented as discontinued operations for the three and six months ended June 30, 2006 and 2005 within Exelon’s


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(for Sithe and Enterprises) and Generation’s (for Sithe) Consolidated Statements of Income and Comprehensive Income. Results for the three and six months ended June 30, 2005 related to these entities were as follows:
 
                         
Three Months Ended June 30, 2005
  Sithe(a)     Enterprises(b)     Total  
 
Total operating revenues
  $ —     $ 4     $ 4  
Operating loss
    —       (2 )     (2 )
Loss before income taxes
    (2 )(c)     (1 )     (3 )
 
 
(a) Sithe was sold on January 31, 2005. Accordingly, there are no operating results for the three months ended June 30, 2005. See Note 4 — Acquisitions and Dispositions for further information regarding the sale of Sithe.
 
(b) Excludes certain investments.
 
(c) Represents an adjustment to the gain on sale of Sithe as a result of interest accrued on certain tax indemnifications.
 
                         
Six Months Ended June 30, 2005
  Sithe(a)     Enterprises(b)     Total  
 
Total operating revenues
  $ 30     $ 8     $ 38  
Operating income (loss)
    5       (4 )     1  
Income (loss) before income taxes
    18 (c)     (5 )     13  
 
 
(a) Includes Sithe’s results of operations from January 1, 2005 through January 31, 2005, which was the date of the sale. See Note 4 — Acquisitions and Dispositions for further information regarding the sale of Sithe.
 
(b) Excludes certain investments.
 
(c) Sithe includes a pre-tax gain on sale of $19 million.
 
For the three and six months ended June 30, 2006, Exelon’s and Generation’s Consolidated Statements of Income and Comprehensive Income included $3 million of income (after tax) from discontinued operations related to Sithe, which represented an adjustment to the gain on sale as a result of the expiration of certain tax indemnifications and the collection of a receivable arising from the sale of Sithe that had been fully reserved.
 
Exelon has sold various investments and long-lived assets which do not qualify to be presented as discontinued operations.
 
3.   New Accounting Pronouncements (Exelon, ComEd, PECO and Generation)
 
Exelon has identified the following new accounting pronouncements that either have been recently adopted or issued that may impact the Registrants upon adoption.
 
SFAS No. 123-R
 
Exelon grants stock-based awards through its Long-Term Incentive Plans (LTIPs), which primarily include stock options and performance share awards. Prior to January 1, 2006, Exelon accounted for these stock-based awards under the intrinsic value method of Accounting Principles Board (APB) No. 25, “Accounting for Stock Issued to Employees” (APB No. 25). This method under APB No. 25 resulted in no expense being recorded for stock option grants in 2005. On January 1, 2006, Exelon adopted Financial Accounting Standards Board (FASB) Statement No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123-R), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123) and supersedes APB No. 25. SFAS No. 123-R requires that compensation cost relating to stock-based payment transactions be recognized in the financial statements. That cost is measured on the fair value of the equity or liability instruments issued. SFAS No. 123-R applies to all of Exelon’s outstanding unvested stock-based payment awards as of January 1, 2006 and all


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

prospective awards using the modified prospective transition method without restatement of prior periods. At June 30, 2006, there were approximately 28.2 million shares remaining for issuance under the LTIPs.
 
The following table presents the stock-based compensation expense included in Exelon’s Consolidated Statements of Income and Comprehensive Income during the three and six months ended June 30, 2006 and 2005:
 
                                 
    Three Months
 		    Six Months
 		 
    Ended
 		    Ended
 		 
    June 30,     June 30,  
Components of Stock-Based Compensation Expense
  2006     2005     2006     2005  
 
Stock options
  $ 8     $ —     $ 25     $ —  
Performance shares
    20       11       41       22  
Other stock-based awards
    2       3       3       5  
                                 
Total stock-based compensation included in operating and maintenance expense
    30       14       69       27  
                                 
Income tax benefit
    11       5       26       10  
                                 
Total after-tax stock-based compensation expense
  $ 19     $ 9     $ 43     $ 17  
                                 
 
The following table presents ComEd’s, PECO’s and Generation’s stock-based compensation expense (pre tax) during the three and six months ended June 30, 2006 and 2005:
 
                                 
    Three Months
 		    Six Months
 		 
    Ended
 		    Ended
 		 
    June 30,     June 30,  
Registrant
  2006     2005     2006     2005  
 
ComEd
  $ 9     $ 3     $ 19     $ 5  
PECO
    4       2       10       3  
Generation
    17       9       39       17  
 
Stock Options
 
Non-qualified stock options to purchase shares of Exelon’s common stock are granted under the LTIPs. As a result of adopting SFAS No. 123-R, Exelon expensed $8 million and $25 million of stock options during the three and six months ended June 30, 2006, respectively.
 
The exercise price of the stock options is equal to the fair market value of the underlying stock on the date of option grant. Stock options granted under the LTIPs generally become exercisable upon a specified vesting date. Shares subject to stock options are typically issued from authorized but unissued common stock shares. All stock options expire 10 years from the date of grant. The vesting period of stock options outstanding as of June 30, 2006 generally ranged from 3 years to 4 years. The value of stock options at the date of grant is either amortized through expense over the requisite service period using the straight-line method or capitalized. For stock options granted to retirement eligible employees, the value of the stock option is recognized immediately on the date of grant. There were no significant stock-based compensation costs capitalized during the three and six months ended June 30, 2006 and 2005.
 
Exelon grants most of its stock options in the first quarter of each year. Stock options granted in the second quarter of 2006 and 2005 were not material.


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
The fair value of each option is estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions used for grants for the six months ended June 30, 2006 and 2005:
 
                 
    Six Months
 		 
    Ended
 		 
    June 30,  
    2006     2005  
 
Dividend yield
    3.2 %     3.6 %
Expected volatility
    25.5 %     18.1 %
Risk-free interest rate
    4.27 %     3.83 %
Expected life (years)
    6.25       6.25  
 
The dividend yield is based on several factors, including Exelon’s most recent dividend payment at the grant date and the average stock price over the previous twelve months. Expected volatility is based on implied volatilities of traded stock options in Exelon’s common stock and historical volatility over the estimated expected life of the stock options. The risk-free interest rate for a security with a term equal to the expected life is based on a yield curve constructed from U.S. Treasury strips at the time of grant. The expected life represents the period of time the stock options are expected to be outstanding and is based on the simplified model. Additionally, Exelon uses historical data to estimate employee forfeitures. Exelon reviews the actual and estimated forfeitures and records an adjustment if necessary.
 
Utilizing the Black-Scholes-Merton option-pricing model and the assumptions discussed above, the weighted average grant-date fair value of stock options granted during the six months ended June 30, 2006 and 2005 was $13.22 and $6.33, respectively.
 
Information with respect to stock options at June 30, 2006 is as follows:
 
                                 
          Weighted
 		    Weighted
 		       
          Average
 		    Average
 		       
          Exercise
 		    Remaining
 		    Aggregate
 		 
          Price
 		    Contractual
 		    Intrinsic
 		 
    Shares     (per share)     Life     Value  
 
Balance at December 31, 2005
    21,674,270     $ 31.23                  
Options granted/assumed
    4,075,145       58.55                  
Options exercised
    (3,433,230 )     29.17                  
Options forfeited/cancelled
    (214,391 )     40.82                  
                                 
Balance at June 30, 2006
    22,101,794       36.48       7.05     $ 449,801,532  
                                 
Exercisable at June 30, 2006(a)
    11,087,045       30.30       5.74       294,184,725  
                                 
 
 
(a) Includes stock options issued to retirement-eligible employees.
 
Intrinsic value for stock-based instruments is defined as the difference between the current market value and the exercise price. The total intrinsic value of stock options exercised during the three and six months ended June 30, 2006 was $23 million and $93 million, respectively, and $46 million and $124 million for the three and six months ended June 30, 2005.
 
During the three and six months ended June 30, 2006, cash received from stock options exercised was $23 million and $100 million, respectively, and the actual tax benefit realized for tax deductions from stock options exercised was $9 million and $37 million, respectively. During the three and six months ended June 30, 2005, cash


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

received from stock options exercised was $49 million and $150 million, respectively, and the actual tax benefit realized for tax deductions from stock options exercised was $18 million and $50 million, respectively. SFAS No. 123-R requires the benefits of tax deductions in excess of the compensation cost recognized for stock options exercised (excess tax benefits) to be classified as financing cash flows. There was $29 million of excess tax benefits included as a cash inflow in other financing activities in Exelon’s Consolidated Statement of Cash Flow for the six months ended June 30, 2006. Prior to the adoption of SFAS No. 123-R, Exelon presented these benefits as operating cash flows in the Consolidated Statement of Cash Flows.
 
The following table summarizes Exelon’s nonvested stock option activity for the six months ended June 30, 2006:
 
                 
          Weighted
 		 
          Average
 		 
          Exercise
 		 
          Price
 		 
    Shares     (per share)  
 
Nonvested at December 31, 2005
    12,000,284     $ 35.42  
Granted
    4,075,145       58.55  
Vested
    (4,839,877 )     37.91  
Forfeited
    (220,803 )     41.92  
                 
Nonvested at June 30, 2006
    11,014,749       42.70  
                 
 
As of June 30, 2006, $61 million of total unrecognized compensation costs related to nonvested stock options are expected to be recognized over the weighted-average period of 3 years. The total grant date fair value of stock options vested, including the capitalized amount, during the three and six months ended June 30, 2006 was $8 million and $26 million, respectively. The total grant date fair value of stock options vested during the three and six months ended June 30, 2005 was $6 million and $12 million, respectively.
 
Performance Share Awards
 
In addition to the stock options discussed above, Exelon grants performance share awards under the LTIPs. These performance share awards will generally vest and settle over a three-year period. The holders of the performance share awards will receive shares of common stock and/or cash annually during the vesting period. The combination of common stock and/or cash is based on certain stock ownership requirements.
 
In January 2006, the Compensation Committee of the Board of Directors of Exelon granted 1,106,918 performance share awards, of which Exelon estimates that 601,306 will be settled in common stock and 505,613 will be settled in cash.
 
Performance share awards to be settled in stock are fair valued at the date of grant. Performance share awards to be settled in cash are remeasured each reporting period throughout the vesting period. As a result, the compensation costs for cash settled awards is subject to variability. The fair value of each performance share award granted during the six months ended June 30, 2006 was estimated using historical data for the previous two plan years and a Monte Carlo simulation model for the current plan year. This model requires assumptions regarding Exelon’s total shareholder return relative to certain stock market indices and the stock beta and volatility of Exelon’s common stock and all stocks represented in these indices. Expected volatility is based on historical information. Additionally, Exelon uses historical data to estimate employee forfeitures, which are compared to actual forfeitures on a quarterly basis and adjusted if necessary.
 
For non retirement-eligible employees, compensation costs are accrued and expensed over the vesting period of three years using the graded vesting method. As a result of adopting SFAS No. 123-R, Exelon recognizes ratably throughout the year of grant the entire compensation cost of new common stock awards in which retirement-eligible


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

employees are fully vested in the year of grant (non-substantive vesting approach). Prior to the adoption of SFAS No. 123-R on January 1, 2006, such compensation cost was recognized over the nominal vesting period of performance with any remaining compensation cost recognized at the date of retirement. The impact of using this approach related to performance share awards was $3 million and $5 million during the three and six months ended June 30, 2006, respectively. Exelon recognized compensation expense related to performance share awards (before income taxes) of $20 million and $41 million during the three and six months ended June 30, 2006, respectively, and $11 million and $22 million during the three and six months ended June 30, 2005, respectively. This compensation expense includes awards granted prior to 2006.
 
During the three and six months ended June 30, 2006, Exelon settled 404,786 and 401,767 performance share awards in common stock and cash, respectively, related to awards granted prior to 2006.
 
At June 30, 2006, Exelon had an obligation related to outstanding awards not yet settled of $52 million, of which $23 million and $29 million is included in common stock and deferred credits and other liabilities, respectively, in Exelon’s Consolidated Balance Sheet. At December 31, 2005, Exelon had an obligation related to outstanding awards not yet settled of $51 million, of which $27 million and $24 million is included in common stock and deferred credits and other liabilities, respectively, in Exelon’s Consolidated Balance Sheet.
 
Other Stock-Based Awards
 
Exelon also issues common stock through an employee stock purchase plan and through restricted stock units and accounts for these awards in accordance with SFAS No. 123-R. The compensation cost of these types of issuances was immaterial during the three and six months ended June 30, 2006 and 2005. However, at June 30, 2006 and December 31, 2005, Exelon had an obligation related to outstanding restricted stock not yet settled of $10 million and $19 million, respectively, which are included in common stock in Exelon’s Consolidated Balance Sheets.
 
Directors and executives are able to defer stock awards granted to them through Exelon’s stock-based compensation programs into the Exelon Corporation Stock Deferral Plan. At June 30, 2006 and December 31, 2005, Exelon had an obligation related to this plan of $36 million and $30 million, respectively, which are included in common stock in Exelon’s Consolidated Balance Sheets.


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
2005 Pro Forma Information
 
The table below shows the effect on Exelon’s net income and earnings per share had Exelon elected to account for all of its stock-based compensation plans using the fair-value method under SFAS No. 123 for the three and six months ended June 30, 2005:
 
                 
    Three Months
 		    Six Months
 		 
    Ended
 		    Ended
 		 
    June 30, 2005     June 30, 2005  
 
Net income — as reported
  $ 514     $ 1,035  
Add: Stock-based compensation expense included in reported net income, net of income taxes
    9       17  
Deduct: Total stock-based compensation expense determined under fair-value method for all awards, net of income taxes(a)
    (12 )     (24 )
                 
Pro forma net income
  $ 511     $ 1,028  
                 
Earnings per share:
               
Basic — as reported
  $ 0.77     $ 1.55  
Basic — pro forma
    0.76       1.54  
Diluted — as reported
    0.76       1.53  
Diluted — pro forma
    0.75       1.52  
 
 
(a) The fair value of stock options granted was estimated using a Black-Scholes-Merton option-pricing model.
 
Had Exelon recognized the entire compensation cost of its stock-based awards in which retirement-eligible employees were fully vested upon issuance for stock options, and in the first year for performance share awards (non-substantive vesting approach), as now required under SFAS No. 123-R, stock-based compensation expense would have been $1 million lower and $3 million higher after taxes than reflected in the table above for the three and six months ended June 30, 2005, respectively. These pro forma amounts of $1 million and $3 million were calculated as if SFAS No. 123-R had always been implemented. However, at the time of adoption on January 1, 2006, the compensation cost of stock-based awards issued to retirement eligible employees was recognized using the non-substantive vesting approach prospectively.
 
EITF 04-13
 
In September 2005, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty” (EITF 04-13). EITF 04-13 provides guidance on whether two or more inventory purchase and sales transactions with the same counterparty should be viewed as a single exchange transaction within the scope of APB No. 29, “Accounting for Nonmonetary Transactions.” In addition, EITF 04-13 indicates whether nonmonetary exchanges of inventory within the same line of business should be recognized at cost or fair value. EITF 04-13 was effective as of April 1, 2006 and the adoption of this standard did not have a material impact on the Registrants for the three months ended June 30, 2006.
 
FSP No. FIN 46(R)-6
 
In April 2006, the FASB issued FASB Staff Position No. FASB Interpretation No. (FIN) 46(R)-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)” (FSP No. 46(R)-6). This pronouncement provides guidance on how a reporting enterprise should determine the variability to be considered in applying FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” which could impact the assessment of whether certain variable interest entities are consolidated. FSP No. 46(R)-6 was effective for the Registrants on July 1, 2006. The provisions of FSP No. 46(R)-6 are applied prospectively. The


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

impact on the Registrants in periods subsequent to the effective date is dependent on transactions that could occur in future periods and, therefore, cannot be determined until the transactions occur.
 
SFAS No. 155
 
In February 2006, the FASB issued FASB Statement No. 155, “Accounting for Certain Hybrid Financial Instruments, amendment of FASB Statements No. 133 and 140” (SFAS No. 155). SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133) and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (SFAS No. 140). SFAS No. 155 gives entities the option of applying fair value accounting to certain hybrid financial instruments in their entirety if they contain embedded derivatives that would otherwise require bifurcation under SFAS No. 133. SFAS No. 155 will be effective for the Registrants as of January 1, 2007 and the Registrants are currently assessing the impact that SFAS No. 155 may have on their financial statements.
 
SFAS No. 156
 
In March 2006, the FASB issued FASB Statement No. 156, “Accounting for Servicing of Financial Assets, amendment of FASB Statement No. 140” (SFAS No. 156). SFAS No. 156 amends SFAS No. 140 with respect to the accounting for separately recognized servicing assets and liabilities. SFAS No. 156 primarily requires companies to initially record separately recognized servicing rights at fair value, allows companies to choose between two measurement methods and provides additional disclosure requirements. SFAS No. 156 will be effective for the Registrants as of January 1, 2007 and the Registrants are currently assessing the impact that SFAS No. 156 may have on their financial statements.
 
FIN 48
 
In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a benefit recognition model with a two-step approach, a more-likely-than-not recognition criterion and a measurement attribute that measures the position as the largest amount of tax benefit that is greater than 50% likely of being ultimately realized upon ultimate settlement. If it is not more likely than not that the benefit will be sustained on its technical merits, no benefit will be recorded. FIN 48 also requires that the amount of interest expense to be recognized related to uncertain tax positions be computed by applying the applicable statutory rate of interest to the difference between the tax position recognized in accordance with FIN 48 and the amount previously taken or expected to be taken in a tax return. The change in net assets as a result of applying this pronouncement will be considered a change in accounting principle with the cumulative effect of the change treated as an offsetting adjustment to the opening balance of retained earnings or goodwill, if allowed under existing accounting standards, in the period of transition. FIN 48 is effective for the Registrants as of January 1, 2007 and the Registrants are currently assessing the impact that FIN 48 will have on their financial statements, which may be significant. Two of Exelon’s and ComEd’s most significant uncertain tax positions related to the 1999 sale of ComEd’s fossil generating assets are further described in Note 10 — Income Taxes.
 
EITF 06-3
 
In June 2006, the FASB ratified EITF Issue No. 06-3, “How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation)” (EITF 06-3). EITF 06-3 provides guidance on disclosing the accounting policy for the income statement presentation of any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross (included in revenues and costs) or a net (excluded from revenues) basis. In addition, EITF 06-3 requires disclosure of any such taxes that are reported on a gross basis as well as the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented. EITF 06-3 will be effective for the Registrants as of January 1, 2007. The


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Registrants disclose taxes that are imposed on and concurrent with a specific revenue-producing transaction in accordance with EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.” ComEd’s and PECO’s utility taxes are presented on a gross basis (see Note 15 — Segment Information). As EITF 06-3 provides only disclosure requirements, the adoption of this standard is not expected to have a material impact on the Registrants.
 
4.   Acquisitions and Dispositions (Exelon and Generation)
 
Proposed Merger with PSEG (Exelon)
 
On December 20, 2004, Exelon entered into an Agreement and Plan of Merger (Merger Agreement) with Public Service Enterprise Group Incorporated (PSEG), a public utility holding company primarily located and serving customers in New Jersey, whereby PSEG will be merged with and into Exelon (Merger). PSEG shareholders approved the Merger on July 19, 2005. Exelon shareholders approved the issuance of Exelon shares pursuant to the Merger on July 22, 2005. Under the Merger Agreement, each share of PSEG common stock will be converted into 1.225 shares of Exelon common stock.
 
On May 30, 2006, the Nuclear Regulatory Commission (NRC) approved the transfer of the operating licenses for the Salem and Hope Creek nuclear power plants, and the non-operating ownership interest in Peach Bottom units 2 and 3, from PSEG to Exelon. On June 22, 2006, Exelon and PSEG reached a comprehensive agreement with the Antitrust Division of the United States Department of Justice (DOJ), which resolves all competition issues reviewed by the DOJ in connection with the Merger. Under the terms of the DOJ agreement, Exelon and PSEG will divest six fossil-fuel fired electric generating plants, two in Pennsylvania and four in New Jersey, with a total capacity of approximately 5,600 megawatts. The owners of the six plants are required to enter into contracts for sale of the plants within 150 days after the Merger closes and will give DOJ approval rights over the buyers to assure a competitive market after the divestiture. The two plants Exelon is required to sell are the Eddystone Generating Station and Cromby Generating Station in Pennsylvania. No divestitures will be required unless the Merger is completed.
 
As of July 30, 2006, all regulatory approvals or reviews necessary to consummate the Merger have been completed with the exception of the approval from the New Jersey Board of Public Utilities (NJBPU). Hearings before the administrative law judge in the NJBPU proceedings were completed on March 31, 2006, and settlement discussions with the NJBPU staff and other parties resumed in May 2006 and are continuing. Exelon and PSEG recently made an enhanced settlement proposal in New Jersey that includes concessions that are significantly greater than the concessions originally offered. Exelon and PSEG have also indicated that it is essential to reach settlement promptly. If Exelon and PSEG are able to reach a settlement in New Jersey, the settlement would need to be reviewed by the administrative law judge presiding over the case and would need to be approved by the NJBPU after public comment. Although it is possible that this process could be completed in time to allow the Merger to close in the third quarter of 2006, there is currently no established timetable for NJBPU action on the Merger. The final decision on whether to proceed with the Merger will rest with the boards of both Exelon and PSEG after terms and conditions of regulatory requirements are known.
 
Immediately after consummation of the Merger, the generation business of PSEG known as PSEG Power will be merged with and into Generation, which will succeed to all the assets and liabilities of PSEG Power, and PSEG Power will cease to exist.
 
Exelon has capitalized certain external costs associated with the Merger since the execution of the Merger Agreement on December 20, 2004. Total capitalized costs of $52 million and $46 million are included in deferred debits and other assets on Exelon’s Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005, respectively.
 
See Note 3 of Exelon’s Notes to Consolidated Financial Statements within Exelon’s 2005 Annual Report on Form 10-K for additional information regarding the Merger.


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Sithe (Exelon and Generation)
 
On January 31, 2005, subsidiaries of Generation completed a series of transactions that resulted in Generation’s sale of its investment in Sithe. Specifically, subsidiaries of Generation closed on the acquisition of Reservoir Capital Group’s (Reservoir) 50% interest in Sithe and the sale of 100% of Sithe to Dynegy, Inc. (Dynegy).
 
In connection with the sale, Exelon recorded $55 million of liabilities related to certain indemnifications provided to Dynegy and other guarantees directly resulting from the transaction. Generation issued certain guarantees associated with income tax indemnifications to Dynegy in connection with the sale that were valued at approximately $8 million (included in the $55 million accrual discussed above), of which $7 million has expired as of June 30, 2006. These guarantees are being accounted for under the provisions of FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others” (FIN 45). The exposures covered by these indemnities are anticipated to expire in 2006 and beyond. These liabilities were taken into account in the determination of the net gain on the sale of $21 million (before income taxes), which was adjusted to $24 million (before income taxes) in the third quarter of 2005. As of June 30, 2006, Exelon’s accrued liabilities related to these indemnifications and guarantees were $40 million, including $1 million related to income tax indemnifications. The net decrease for the accrual initially established was due to the expiration of certain guarantees, tax indemnifications and collections on certain assets that were associated with the sales transaction. The estimated maximum possible exposure to Exelon related to the guarantees provided as part of the sales transaction to Dynegy was approximately $175 million at June 30, 2006.
 
Exelon’s and Generation’s Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2005 included the following financial results related to Sithe, which were presented as discontinued operations:
 
                 
    Three Months
 		    Six Months
 		 
    Ended
 		    Ended
 		 
    June 30, 2005(a)     June 30, 2005(b)  
 
Operating revenues
  $ —     $ 30  
Operating income
    —       5  
Net income (loss)
    (1 )     15(c )
 
 
(a) Sithe was sold on January 31, 2005. Accordingly, there are no operating results for the three months ended June 30, 2005.
 
(b) Sithe was sold on January 31, 2005. Accordingly, results include only one month of operations.
 
(c) Includes a pre-tax gain on sale of Sithe of $19 million.
 
Exelon’s and Generation’s Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2006 included a $3 million (after-tax) gain as a result of the expiration of certain tax indemnifications and the collection of a receivable arising from the sale of Sithe that had been fully reserved.
 
See Note 3 of Exelon’s Notes to Consolidated Financial Statements within Exelon’s 2005 Annual Report on Form 10-K for further discussion of Generation’s investment in Sithe.
 
5.   Regulatory Issues (Exelon, ComEd, PECO and Generation)
 
ComEd
 
The legislatively mandated transition and rate freeze period in Illinois will conclude on January 1, 2007. Associated with the end of this rate freeze, ComEd is engaged in various regulatory proceedings to establish rates for the post-2006 period, which are more fully described below.
 
Illinois Procurement Filing.  On February 25, 2005, ComEd made a filing with the Illinois Commerce Commission (ICC) to seek regulatory approval of tariffs that would authorize ComEd to bill its customers for power costs incurred under a reverse-auction competitive bidding process (the Procurement Case). On January 24, 2006,


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the ICC, by a unanimous vote, approved the tariffs for the period commencing January 2, 2007. The reverse-auction competitive bidding process will be administered by an independent auction manager, with oversight by the ICC staff. The first auction is scheduled to take place during September 2006, at which time ComEd’s entire retail load will be up for bid. In order to mitigate the effects of the changes in future prices, the load for residential and commercial customers less than 400 kW will be served utilizing staggered three-year contracts. The ICC determined that it will review the prudence of ComEd’s purchase of power but that compliance with the ICC-approved process will establish a presumption of prudence. Various parties, including governmental and consumer representatives and ComEd, have filed petitions for review of portions of the order with the Illinois Appellate Court. While ComEd is generally supportive of the order in the Procurement Case, ComEd has objected to the requirement for a prudence review. On June 2, 2006, the Illinois Attorney General filed a petition with the Illinois Supreme Court asking the Supreme Court to hear the matter on direct appeal and to grant expedited review of the pending appeals and stay implementation of the auction pending appeal. The petition is fully briefed and awaiting action by the Supreme Court. In the meantime, the Illinois Appellate Court has stayed all proceedings before it pending action by the Illinois Supreme Court.
 
The ICC, in its January 24, 2006 order, also ordered its staff to initiate three separate rulemakings regarding demand response programs, energy efficiency programs and renewable energy resources. These rulemakings are now proceeding with ComEd’s active participation.
 
Illinois Rate Case.  On August 31, 2005, ComEd filed a rate case with the ICC to comprehensively review its tariff and to adjust ComEd’s rates for delivering electricity effective January 2, 2007 (Rate Case). ComEd proposed a revenue increase of $317 million. The ICC staff and several intervenors in the Rate Case, including the Illinois Attorney General, suggested and provided testimony that ComEd’s rates for delivery services should be reduced. The commodity component of ComEd’s rates will be established by the reverse-auction process in accordance with the ICC order in the Procurement Case. On June 8, 2006, the administrative law judges issued a proposed order, which included a revenue increase of $164 million plus ComEd’s request for recovery of several items which previously were recorded as expense. On July 26, 2006, the ICC issued its order in the Rate Case which approved a delivery services revenue increase of $8 million. The ICC order did approve ComEd’s requested recovery of several items which previously were recorded as expense. However, the ICC disallowed rate base treatment (return) for ComEd’s prepaid pension asset, net of deferred taxes, of $639 million. This disallowance will not result in an immediate write-off since the pension asset will be recovered as pension cost is recognized and recovered from customers in the future but will reduce ComEd’s future return on equity until the asset is recovered. See Note 13 — Commitments and Contingencies for further information. The final order in the Rate Case is subject to rehearing and appeal. ComEd believes that the disallowances contained in the order are inappropriate and intends to vigorously pursue these issues on rehearing and appeal.
 
Original Cost Audit.  In the Rate Case, the ICC, with ComEd’s concurrence, ordered an “original cost” audit of ComEd’s distribution assets. There was no suggestion in the case that any specific asset should be disallowed because it was unreasonable in amount, imprudently incurred or not used and useful. The ICC’s order does not provide for a new review of these issues but instead provides that the auditors will determine whether the costs were properly recorded on ComEd’s financial statements as distribution assets. This will be completed through a separately docketed proceeding. The original cost audit is not expected to be finalized in 2006. ComEd is unable to predict the results of this audit.
 
Residential Rate Stabilization Program.  On May 23, 2006, ComEd filed a proposal with the ICC to mitigate the impact of the transition to the post rate-freeze period on its residential customers. Under ComEd’s proposal, residential rate increases would be capped at 8% in 2007, an additional 7% in 2008, and an additional 6% in 2009. Costs that exceed the caps would be deferred and recovered with ComEd’s carrying charges over three years from 2010 to 2012. If ComEd’s rate increases are less than the caps in 2008 and 2009, ComEd would begin to recover deferred amounts up to the caps. The plan would terminate under a force majeure event or if ComEd’s senior unsecured credit rating from at least one of the three major credit rating agencies falls below investment grade. The


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ICC staff, the Illinois Attorney General and collectively the City of Chicago, Citizens Utility Board and Cook County States Attorney’s Office filed testimony objecting to all or parts off the proposal. ComEd is reviewing this initiative in light of the ICC order in the Rate Case.
 
Renewable Energy Filing.  On April 4, 2006, ComEd filed with the ICC a proposal to purchase and receive recovery of costs associated with purchasing the output of a portfolio of wind resources of approximately 300 MW. The filing supports the ICC’s resolution of July 19, 2005 which endorsed the Illinois Governor’s proposal for a voluntary initiative in which electric suppliers would obtain resources equal to 2% of electricity sold to Illinois retail customers from renewable energy resources by the end of 2007 and gradually increasing to a target of 8% by 2013 (the Plan). This filing covers the first year’s wind-only procurement associated with the Plan. Additionally, the filing expresses ComEd’s support of the renewable, efficiency and demand response rulemaking proceedings ordered by the ICC in the Procurement Case. Actual purchase of wind resources is contingent upon an ICC order approving the prudence of this activity and authorizing cost recovery. ComEd will file additional renewable energy, demand response and energy efficiency components sometime in the future, pending outcomes in those rulemakings. ComEd is reviewing this initiative in light of the ICC order in the Rate Case.
 
Rate Freeze Extension Proposal.  On February 24, 2006, House Bill 5766 was introduced in the Illinois General Assembly and was referred to the Rules Committee. House Bill 5766, if enacted, would extend the current rate freeze in Illinois until at least 2010. The Illinois General Assembly took no action on the bill and is now adjourned. It is scheduled to resume session in November 2006. ComEd believes the proposed legislation, if enacted into law, would have serious detrimental effects on Illinois, ComEd and consumers of electricity. ComEd believes the proposed rate freeze extension, if enacted into law, will violate Federal law and the U.S. Constitution, and ComEd is prepared to challenge the rate freeze legislation in court. If enacted, this legislation would have adverse liquidity consequences for ComEd.
 
Customers’ Affordable Reliable Energy.  In July 2006, ComEd implemented Customers’ Affordable Reliable Energy (CARE), an initiative to help residential customers prepare for electricity rate increases coming in 2007 after the expiration of the rate freeze in Illinois. In addition to the residential rate stabilization proposal, CARE includes a variety of energy efficiency and low-income and senior citizen programs to help keep residential customers’ bills affordable. ComEd has earmarked approximately $10 million for CARE in 2006.
 
Post 2006 Summary.  ComEd cannot predict the results of any rehearings or appeals in the Rate Case or the Procurement Case or whether the Illinois General Assembly might take action that could have a material impact on the outcome of the regulatory process. However, if the price which ComEd is ultimately allowed to bill to customers for energy beginning in 2007 is below ComEd’s cost to procure and deliver electricity, ComEd expects that it will suffer adverse consequences, which could be material. Exelon and ComEd believe that these potential material adverse consequences could include, but may not be limited to, reduced earnings for Exelon and ComEd, loss of ComEd’s investment grade credit ratings, limited or lost access for ComEd to credit markets to finance operations and capital investment, and loss of ComEd’s capacity to enter into bilateral long-term energy procurement contracts, which may force ComEd to procure electricity at more volatile spot market prices. Moreover, to the extent ComEd is not permitted to recover its costs, ComEd’s ability to maintain and improve service may be diminished and its ability to maintain reliability may be impaired. In the nearer term, these prospects could have adverse effects on ComEd’s liquidity if vendors reduce credit or shorten payment terms or if ComEd’s financing alternatives become more limited and significantly less flexible. Finally, if ComEd’s ability to recover its costs from customers through rates is significantly impacted, all or a portion of ComEd’s business could be required to cease applying SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation,” (SFAS No. 71) which covers the accounting for the effects of rate regulation and which would require Exelon and ComEd to eliminate the financial statement effects of regulation for the portion of ComEd’s business that ceases to meet the criteria. This would result in the elimination of all associated regulatory assets and liabilities that Exelon and ComEd had recorded on their Consolidated Balance Sheets through the recording of a one-time extraordinary item on their Consolidated Statements of Income and Comprehensive Income, which could be material.


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
  PECO
 
Partial Settlement before the Pennsylvania Public Utility Commission (PAPUC).  On January 27, 2006, the PAPUC approved the Merger and a partial settlement regarding PECO’s electric distribution and transmission rates through 2010 and other financial commitments of PECO related to the Merger. The provisions of the PAPUC order and partial settlement are contingent upon the completion of the Merger. The PAPUC order and partial settlement require PECO to implement electric rate reductions aggregating $120 million during a four-year period and to cap its electric rates through the end of 2010. The partial settlement also provides substantial funding for alternative energy and environmental projects, economic development, and expanded outreach and assistance for low-income customers. PECO also made commitments for enhanced customer service and reliability, commitments for charitable giving and employment, and a pledge to maintain its Philadelphia headquarters for a period of time. The total of these funding commitments is approximately $44 million, of which $30 million will be expensed at the time the Merger is completed. See Note 4 of Exelon’s Notes to Consolidated Financial Statements within Exelon’s 2005 Annual Report on Form 10-K for further discussion.
 
  ComEd and PECO
 
Through and Out Rates/SECA.  In November 2004, the Federal Energy Regulatory Commission (FERC) issued two orders authorizing ComEd and PECO to recover amounts for a limited time during a specified transitional period as a result of the elimination of through and out (T&O) rates for transmission service scheduled out of, or across, their respective transmission systems and ending within pre-expansion territories of PJM Interconnection, LLC (PJM) or Midwest Independent System Operators (MISO). T&O rates were terminated pursuant to FERC orders, effective December 1, 2004. The new rates, known as Seams Elimination Charge/Cost Adjustment/Assignment (SECA), were collected from load-serving entities within PJM and MISO over a transitional period from December 1, 2004 through March 31, 2006, subject to refund, surcharge and hearing. As load-serving entities, ComEd and PECO were also required to pay SECA rates during the transitional period based on the benefits they receive from the elimination of T&O rates of other transmission owners within PJM and MISO. Since the inception of the SECA rates in December 2004, ComEd has recorded approximately $49 million of SECA collections net of SECA charges, including $5 million during the six months ended June 30, 2006, while PECO has recorded $10 million of SECA charges net of SECA collections, including $3 million during the six months ended June 30, 2006. As a result of recent events related to disputes over the methodology of computing SECA amounts, during the first quarter of 2006, ComEd and PECO increased their previously-recorded reserves for amounts to be refunded. Management of each of ComEd and PECO believes that appropriate reserves have been established in the event that SECA collections are required to be refunded. Hearings and briefing of the matter have been concluded and an initial decision of the presiding administrative law judge is expected on or before August 11, 2006. Meanwhile, partial settlements have been reached with various parties. FERC has approved several of the partial settlements while others are still awaiting final execution and/or FERC approval. The ultimate outcome of the proceeding establishing SECA rates is uncertain.
 
PJM Transmission Design.  On May 31, 2005, the FERC issued an order creating an evidentiary hearing process to examine the existing PJM transmission rate design. A number of parties submitted testimony proposing the replacement of that rate design for existing facilities with several variants which could have an adverse impact on Exelon’s pre-tax operating income. FERC staff submitted testimony opposing adoption of all of those variants, and in the alternative recommended that the FERC supplant the existing design in which customers in a zone pay a transmission rate based on the cost of transmission in that zone, with a postage stamp rate design across PJM in which a single, uniform charge would be applied for all existing transmission facilities. This proposal if adopted would also be expected to produce an adverse impact on Exelon’s pre-tax operating income. ComEd and PECO, as members of the Responsible Pricing Alliance (comprised of most of the PJM transmission owners), submitted testimony opposing all changes and urging retention of the existing rate design at least through January 2008.


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
On July 13, 2006, the administrative law judge in the case issued an initial decision that recommends that the FERC implement the postage stamp rate suggested by FERC staff, effective as of April 1, 2006, but also allows for the potential to phase in rate changes. On review of the matter, the FERC will determine whether changes in rate design should be made, what those changes should be and their effective date. There is no set timeline for the FERC to act on this matter. ComEd and PECO will continue to contest this issue and currently cannot predict how the FERC will ultimately rule on this matter or estimate the final impact on either company’s results of operations and cash flows. However, ComEd anticipates that, with the completion of the rate freeze at the end of this year, beginning in 2007, all impacts of any rate design changes should be recoverable through retail rates.
 
  Generation
 
Market-Based Rates Filing.  On April 3, 2006, FERC accepted Exelon’s compliance filings regarding its triennial update of market-based rates and terminated proceedings under Section 206 of the Federal Power Act. FERC had initiated Section 206 proceedings based upon its initial understanding that Exelon had not addressed the affiliate abuse and reciprocal dealing component of FERC’s market-power analysis. In the order, FERC accepted Exelon’s statements that, under the regulatory structures in Illinois and Pennsylvania, most of the load is served under fixed prices, a scenario that has not changed since the previous market-based rates filing in 2000. FERC agreed that these pricing structures alleviated any concerns of affiliate abuse or reciprocal dealing. For a further discussion of this matter, see Note 4 of Exelon’s Notes to Consolidated Financial Statements within Exelon’s 2005 Annual Report on Form 10-K.
 
6.   Intangible Assets (Exelon and ComEd)
 
Goodwill (Exelon and ComEd).  As of June 30, 2006 and December 31, 2005, Exelon and ComEd had goodwill of approximately $3.5 billion. Under the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142), goodwill is tested for impairment at least annually or more frequently if events or circumstances indicate that it is “more likely than not” that goodwill might be impaired, such as a significant negative regulatory outcome. Exelon and ComEd perform their annual goodwill impairment assessment in the fourth quarter of each year. However, due to the significant negative impact of the ICC’s order in ComEd’s Rate Case to the cash flows and value of ComEd, it will complete an interim impairment assessment during the third quarter of 2006. This interim impairment test may lead to an impairment of goodwill at both Exelon and ComEd. The size of any potential impairment will not be known until ComEd completes its test in the third quarter but any impairment could be material. See Note 5 — Regulatory Issues for further information regarding the Rate Case.
 
Other Intangible Assets (Exelon).  Exelon’s other intangible assets, included in deferred debits and other assets, consisted of the following:
 
                                                 
    June 30, 2006     December 31, 2005  
          Amortization
 		                Accumulated
 		       
Exelon
  Gross     Accumulated     Net     Gross     Amortization     Net  
 
Synthetic fuel investments(a)
  $ —     $ —     $ —     $ 264     $ (121 )   $ 143  
Intangible pension asset
    34       —       34       34       —       34  
                                                 
Total intangible assets
  $ 34     $ —     $ 34     $ 298     $ (121 )   $ 177  
                                                 
 
 
(a) See Note 3 of Exelon’s Notes to Consolidated Financial Statements within Exelon’s 2005 Annual Report on Form 10-K for a description of Exelon’s right to acquire tax credits through investments in synthetic fuel-producing facilities. In the second quarter of 2006, Exelon recorded an impairment charge of $115 million (before income taxes) associated with the full write-off of the intangible asset related to its investment in synthetic fuel-producing facilities. See Note 10 — Income Taxes for further discussion.


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
For the three and six months ended June 30, 2006, Exelon’s amortization expense related to intangible assets was $12 million and $28 million, respectively. For the three and six months ended June 30, 2005, Exelon’s amortization expense related to intangible assets was $15 million and $35 million, respectively.
 
7.   Debt and Credit Agreements (Exelon, ComEd, PECO and Generation)
 
  Commercial Paper
 
Exelon, ComEd, PECO and Generation meet their short-term liquidity requirements primarily through the issuance of commercial paper. Exelon, ComEd, PECO and Generation had the following amounts of commercial paper outstanding at June 30, 2006 and December 31, 2005:
 
                 
    June 30,
 		    December 31,
 		 
Borrower
  2006     2005  
 
Exelon
  $ 10     $ —  
ComEd
    339       459  
PECO
    227       220  
Generation
    309       311  
 
  Credit Facilities
 
As of June 30, 2006, Exelon, PECO and Generation participated with a group of banks in a $1 billion unsecured revolving credit facility maturing on July 16, 2009 and a $500 million unsecured revolving credit facility maturing on October 31, 2006. These agreements were amended on February 22, 2006 to remove ComEd as a borrower and to remove provisions that would treat ComEd as a significant subsidiary of Exelon for purposes of its covenants and defaults under the credit agreements. See Note 10 of Exelon’s 2005 Annual Report on Form 10-K for further information regarding these credit facilities. In addition to these credit facilities, during the first quarter of 2006, Generation and ComEd each executed new credit facility agreements which are described below. The Registrants may use the credit facilities for general corporate purposes, including meeting short-term funding requirements and the issuance of letters of credit.
 
Generation
 
On February 10 through 16, 2006, Generation entered into separate additional credit facilities with aggregate bank commitments of $950 million. The additional credit facilities are each for a term of 364 days and contain the same terms as the revolving credit facilities described in Note 10 of Exelon’s Notes to Consolidated Financial Statements within Exelon’s 2005 Annual Report on Form 10-K.
 
ComEd
 
On February 22, 2006, ComEd entered into a $1 billion senior secured three-year revolving credit agreement. The credit agreement is secured by First Mortgage Bonds of ComEd in the principal amount of approximately $1 billion. First Mortgage Bonds are a first mortgage lien on ComEd’s utility assets (other than expressly excepted property).
 
Issuance of Long-Term Debt
 
During the six months ended June 30, 2006, the following long-term debt was issued:
 
                             
        Interest
 		       
Company
 
Type
  Rate  
Maturity
  Amount
 
ComEd
  First Mortgage Bonds     5.90 %     March 15, 2036     $ 325 (a)
PECO
  Notes payable, accounts receivable agreement     5.22 %     November 12, 2010       6  
 
 
(a) Excludes unamortized bond discounts.


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Retirement of Long-Term Debt
 
During the six months ended June 30, 2006, the following long-term debt was retired:
 
                         
        Interest
 		           
Company
 
Type
  Rate    
Maturity
  Amount  
 
Exelon
  Notes payable for investments in synthetic
fuel-producing facilities 		    6.00-8.00 %   Various   $ 33  
ComEd
  Sinking Fund Debentures     4.75 %   December 1, 2011     1  
ComEd
  ComEd Transitional Funding Trust     5.63 %   June 25, 2007     174  
PECO
  PECO Energy Transition Trust (PETT)     6.05 %   March 1, 2007     248  
 
SCEP
 
Generation and Peoples Calumet, LLC (Peoples Calumet), a subsidiary of Peoples Energy Corporation, were joint owners of Southeast Chicago Energy Project, LLC (SCEP), a 350-megawatt natural gas-fired, peaking electric power plant located in Chicago, Illinois, which began operation in 2002. In 2002, Generation and Peoples Calumet owned 70% and 30%, respectively, of SCEP. Generation had reflected the third-party interest in this majority-owned investment as a long-term liability in its consolidated financial statements. Pursuant to the joint owners agreement, Generation was obligated to purchase Peoples Calumet’s 30% interest ratably over a 20-year period.
 
On March 31, 2006, Generation entered into an agreement to accelerate the acquisition of Peoples Calumet’s interest in SCEP. This transaction closed on May 31, 2006. Under the agreement, Generation paid Peoples Calumet approximately $47 million for its remaining interest in SCEP. Generation financed this transaction using short-term debt and available cash.
 
8.   Severance Benefits (Exelon, ComEd, PECO and Generation)
 
The following tables present total salary continuance severance costs (benefits), recorded as operating and maintenance expense, for the three and six months ended June 30, 2006 and 2005:
 
                                         
Salary Continuance Severance
  ComEd   PECO   Generation   Other(a)   Exelon
 
Expense recorded for the three months ended June 30, 2006
  $ —     $ —     $ —     $ —     $ —  
Expense (income) recorded for the six months ended June 30, 2006
    (2 )     —       1 (c)     2 (b)     1 (b),(c)
 
 
(a) Other includes corporate operations, shared service entities, including Exelon Business Services Company (BSC) and Enterprises.
 
(b) Includes $1 million of severance related to stock-based compensation, which is not included in the salary continuance severance obligations table below.
 
(c) Excludes reduction of previously recorded severance charges of approximately $1 million related to Salem, of which Generation owns 42.59% and which is operated by PSEG.
                                         
Salary Continuance Severance
  ComEd   PECO   Generation   Other(a)   Exelon
 
Expense (income) recorded for the three months ended June 30, 2005
  $ (3 )   $ —     $ (1 )   $ 2     $ (2 )
Expense (income) recorded for the six months ended June 30, 2005
    (4 )     1       (2 )     1       (4 )
 
 
(a) Other includes corporate operations, shared service entities, including BSC and Enterprises.


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Table of Contents

 
EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
The following table presents the activity of the salary continuance severance obligations from January 1, 2006 through June 30, 2006:
 
                                         
Salary Continuance Obligations
  ComEd     PECO     Generation     Other(a)     Exelon  
 
Balance at January 1, 2006
  $ 8     $ 1     $ 7     $ 6     $ 22  
Severance (benefits) charges recorded
    (2 )     —       1       1       —  
Cash payments
    (1 )     —       (2 )     (3 )     (6 )
                                         
Balance at June 30, 2006
  $ 5     $ 1     $ 6     $ 4     $ 16  
                                         
 
 
(a) Other includes corporate operations, shared service entities, including BSC and Enterprises.
 
9.   Retirement Benefits (Exelon, ComEd, PECO and Generation)
 
The following tables present the components of Exelon’s net periodic benefit costs for the three and six months ended June 30, 2006 and 2005. The 2006 pension benefit cost is calculated using an expected long-term rate of return on plan assets of 9.00%. The 2006 other postretirement benefit cost is calculated using an expected long-term rate of return on plan assets of 8.17%. A portion of the net periodic benefit cost is capitalized within the Consolidated Balance Sheets.
 
                                 
          Other
 		 
    Pension
 		    Postretirement
 		 
    Benefits
 		    Benefits
 		 
    Three Months
 		    Three Months
 		 
    Ended
 		    Ended
 		 
    June 30,     June 30,  
    2006     2005     2006     2005  
 
Service cost
  $ 38     $ 38     $ 25     $ 23  
Interest cost
    139       139       44       43  
Expected return on assets
    (204 )     (192 )     (27 )     (24 )
Amortization of:
                               
Transition obligation (asset)
    —       (1 )     3       2  
Prior service cost (benefit)
    4       4       (23 )     (22 )
Actuarial loss
    34       30       21       17  
                                 
Net periodic benefit cost
  $ 11     $ 18     $ 43     $ 39  
                                 
 


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Table of Contents

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                                 
    Pension
 		    Other
 		 
    Benefits
 		    Postretirement
 		 
    Six Months
 		    Benefits
 		 
    Ended
 		    Six Months Ended
 		 
    June 30,     June 30,  
    2006     2005     2006     2005  
 
Service cost
  $ 79     $ 76     $ 50     $ 47  
Interest cost
    281       278       91       86  
Expected return on assets
    (408 )     (385 )     (53 )     (49 )
Amortization of:
                               
Transition obligation (asset)
    —       (2 )     5       5  
Prior service cost (benefit)
    8       8       (46 )     (45 )
Actuarial loss
    74       60       44       33  
                                 
Net periodic benefit cost
  $ 34     $ 35     $ 91     $ 77  
                                 
 
The following table presents the allocation by registrant of Exelon’s pension and postretirement benefit costs during the three and six months ended June 30, 2006 and 2005:
 
                                 
    Three Months
 		    Six Months
 		 
    Ended
 		    Ended
 		 
    June 30,     June 30,  
Pension and Postretirement Benefit Costs(a),(b)
  2006     2005     2006     2005  
 
ComEd
  $ 20     $ 22     $ 43     $ 43  
PECO
    6       7       18       14  
Generation
    28       27       63       54  
 
 
(a) Includes capitalized costs and operating and maintenance expense.
 
(b) Includes allocated amounts from BSC.
 
Exelon sponsors savings plans for the majority of its employees. The plans allow employees to contribute a portion of their pre-tax income in accordance with specified guidelines. Exelon matches a percentage of the employee contribution up to certain limits. The following table presents, by registrant, the matching contribution to the savings plans during the three and six months ended June 30, 2006 and 2005:
 
                                 
    Three Months
 		    Six Months
 		 
    Ended
 		    Ended
 		 
    June 30,     June 30,  
Savings Plan Matching Contributions
  2006     2005     2006     2005  
 
Exelon
  $ 15     $ 15     $ 30     $ 29  
ComEd
    4       4       8       8  
PECO
    1       1       3       3  
Generation
    8       7       16       14  
 
The U.S. Congress is currently considering legislation that, if adopted, would affect the manner in which Exelon administers its pensions. This proposed legislation is designed, among other things, to increase the amount by which companies fund their pension plans and to require companies that sponsor defined benefit plans to pay higher premiums to the Pension Benefit Guaranty Corporation. If this proposed legislation becomes law, Exelon, under certain future circumstances, could become subject to additional material funding requirements.

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Table of Contents

 
EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
10.  Income Taxes (Exelon, ComEd, PECO and Generation)
 
Exelon
 
Exelon’s effective income tax rate from continuing operations varied from the U.S. Federal statutory rate principally due to the following:
 
                                 
    Three Months
 		    Six Months
 		 
    Ended
 		    Ended
 		 
    June 30,     June 30,  
    2006     2005     2006     2005  
 
U.S. Federal statutory rate
    35.0 %     35.0 %     35.0 %     35.0 %
Increase (decrease) due to:
                               
State income taxes, net of Federal income tax benefit
    3.7       3.4       3.6       3.7  
Synthetic fuel-producing facilities credit(a)
    —       (8.8 )     (1.6 )     (8.1 )
Qualified nuclear decommissioning trust fund income
    0.3       1.0       0.4       0.7  
Domestic production activities deduction
    (0.5 )     (0.2 )     (0.6 )     (0.2 )
Tax exempt income
    (0.3 )     (0.4 )     (0.4 )     (0.4 )
Nontaxable postretirement benefits
    (0.3 )     (0.2 )     (0.3 )     (0.3 )
Amortization of investment tax credit
    (0.3 )     (0.3 )     (0.4 )     (0.3 )
Other
    (1.4 )     (0.9 )     (0.6 )     (0.3 )
                                 
Effective income tax rate
    36.2 %     28.6 %     35.1 %     29.8 %
                                 
 
 
(a) See Notes 3 and 12 of Exelon’s Notes to Consolidated Financial Statements within Exelon’s 2005 Annual Report on Form 10-K for further information regarding investments in synthetic fuel-producing facilities.
 
ComEd
 
ComEd’s effective income tax rate varied from the U.S. Federal statutory rate principally due to the following:
 
                                 
    Three Months
 		    Six Months
 		 
    Ended
 		    Ended
 		 
    June 30,     June 30,  
    2006     2005     2006     2005  
 
U.S. Federal statutory rate
    35.0 %     35.0 %     35.0 %     35.0 %
Increase (decrease) due to:
                               
State income taxes, net of Federal income tax benefit
    4.9       4.8       4.8       4.8  
Amortization of regulatory asset
    0.7       0.8       0.7       0.8  
Nontaxable postretirement benefits
    (0.3 )     (0.4 )     (0.4 )     (0.5 )
Amortization of investment tax credit
    (0.3 )     (0.4 )     (0.5 )     (0.5 )
Other
    0.4       (0.4 )     0.9       0.1  
                                 
Effective income tax rate
    40.4 %     39.4 %     40.5 %     39.7 %
                                 


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Table of Contents

 
EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
PECO
 
PECO’s effective income tax rate varied from the U.S. Federal statutory rate principally due to the following:
 
                                 
    Three Months
 		    Six Months
 		 
    Ended
 		    Ended
 		 
    June 30,     June 30,  
    2006     2005     2006     2005  
 
U.S. Federal statutory rate
    35.0 %     35.0 %     35.0 %     35.0 %
Increase (decrease) due to:
                               
State income taxes, net of Federal income tax benefit
    (2.1 )     (3.5 )     (1.3 )     (1.7 )
Plant basis differences
    0.8       (0.7 )     0.4       (0.2 )
Nontaxable postretirement benefits
    (0.3 )     (0.3 )     (0.3 )     (0.2 )
Amortization of investment tax credit
    (0.4 )     (0.4 )     (0.4 )     (0.3 )
Other
    (0.4 )     (0.2 )     (0.1 )     0.5  
                                 
Effective income tax rate
    32.6 %     29.9 %     33.3 %     33.1 %
                                 
 
Generation
 
Generation’s effective income tax rate from continuing operations varied from the U.S. Federal statutory rate principally due to the following:
 
                                 
    Three Months
 		    Six Months
 		 
    Ended
 		    Ended
 		 
    June 30,     June 30,  
    2006     2005     2006     2005  
 
U.S. Federal statutory rate
    35.0 %     35.0 %     35.0 %     35.0 %
Increase (decrease) due to:
                               
State income taxes, net of Federal income tax benefit
    4.4       4.3       4.4       4.6  
Qualified nuclear decommissioning trust fund income
    0.4       1.5       0.5       1.0  
Domestic production activities deduction
    (0.6 )     (0.3 )     (0.8 )     (0.3 )
Tax exempt income
    (0.4 )     (0.6 )     (0.5 )     (0.5 )
Nontaxable postretirement benefits
    (0.2 )     (0.2 )     (0.2 )     (0.2 )
Amortization of investment tax credit
    (0.1 )     (0.2 )     (0.2 )     (0.2 )
Other
    (1.3 )     (1.1 )     (1.0 )     (0.9 )
                                 
Effective income tax rate
    37.2 %     38.4 %     37.2 %     38.5 %
                                 
 
Investments in Synthetic Fuel-Producing Facilities (Exelon)
 
Exelon, through three separate wholly owned subsidiaries, owns interests in two limited liability companies and one limited partnership that own synthetic fuel-producing facilities. Section 45K (formerly Section 29) of the Internal Revenue Code (IRC) provides tax credits for the sale of synthetic fuel produced from coal. However, Section 45K contains a provision under which the tax credits are phased out (i.e., eliminated) in the event crude oil prices for a year exceed certain thresholds. On April 11, 2006, the Internal Revenue Service (IRS) published the 2005 oil Reference Price and it did not exceed the beginning of the phase-out range. As such, there was not a phase-out of tax credits for calendar year 2005.


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Table of Contents

 
EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
The following table (in dollars) provides the estimated phase-out range for 2006 based on the per barrel price of oil as of June 30, 2006. The table also contains the estimated 2006 annual average New York Mercantile Exchange, Inc. index (NYMEX) price per barrel at June 30, 2006 based on year-to-date and futures prices.
 
         
    Estimated
 		 
    2006  
 
Beginning of Phase-Out Range(a)
  $ 60  
End of Phase-Out Range(a)
    76  
2006 Annual Average NYMEX
    71  
 
 
(a) The estimated 2006 phase-out range is based upon the actual 2005 phase-out range. The actual 2005 phase-out range was determined using the inflation adjustment factor published by the IRS in April 2006. The actual 2005 phase-out range was increased by 2% (Exelon’s estimate of inflation) to arrive at the estimated 2006 phase-out range.
 
Exelon and the operators of the synthetic fuel-producing facilities in which Exelon has interests idled the facilities in May 2006. The decision to idle synthetic fuel production was primarily driven by the level and volatility of oil prices in the second quarter of 2006. In addition, the proposed Federal legislation that would have provided certainty that tax credits would exist for 2006 production was not included in the Tax Increase Prevention and Reconciliation Act of 2005. Synthetic fuel production may resume in the future, but is dependent upon various factors, including a reduction in oil prices or the enactment of future federal tax legislation.
 
The net carrying value of the intangible assets associated with the synthetic fuel-producing facilities was $143 million at December 31, 2005. See Note 6 — Intangible Assets for additional information. As a result of the suspension of production at the synthetic fuel-producing facilities and the level of oil prices, Exelon does not anticipate earning sufficient future tax credits to support the value of the intangible asset associated with its investment in synthetic fuel-producing facilities. In the second quarter of 2006, Exelon recorded an impairment charge of $115 million ($69 million after tax) to impair the aforementioned intangible asset.
 
Prior to the idling of the synthetic fuel-producing facilities, Exelon was required to pay for tax credits based on the production of the facilities regardless of whether or not a phase-out of the tax credits was anticipated. However, Exelon has the legal right to recover a portion of the payments made to its counterparties related to phased-out tax credits. At June 30, 2006, Exelon had receivables on its Consolidated Balance Sheet from the counterparties totaling $53 million associated with the portion of the payments previously made to the counterparties related to tax credits that are anticipated to be phased out in 2006. This receivable is net of adjustments made for the credit risk associated with the counterparties. As of June 30, 2006, Exelon has estimated the 2006 phase-out to be 70%, which has reduced Exelon’s after-tax credits of $86 million to $26 million for the six months ended June 30, 2006. These credits may be further phased out during the remainder of 2006 depending on the price of oil; however, as these tax credits are phased out, Exelon anticipates recording income from derivatives entered into in 2005 (as more fully described below).
 
In 2005, Exelon and Generation entered into certain derivatives in the normal course of trading operations to economically hedge a portion of the exposure to a phase-out of the tax credits. One of the counterparties has security interests in these derivatives. Including the related mark-to-market gains on these derivatives, interests in synthetic fuel-producing facilities reduced Exelon’s net income by $55 million and increased Exelon’s net income by $29 million during the three months ended June 30, 2006 and 2005, respectively. Additionally, interests in synthetic fuel-producing facilities reduced net income by $43 million and increased net income by $45 million during the six months ended June 30, 2006 and 2005, respectively. Exelon anticipates that it will continue to record income or losses related to the mark-to-market gains/losses, changes to the tax credits earned by Exelon during the period of production as a result of volatility in oil prices and a gain on the eventual settlement of the derivatives.


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Net income from interests in synthetic fuel-producing facilities is reflected in the Consolidated Statements of Income and Comprehensive Income as a benefit within income taxes and a mark-to-market gain in operating and maintenance expense, offset by charges to operating and maintenance expense, depreciation and amortization expense, interest expense and equity in losses of unconsolidated affiliates.
 
There are provisions in the agreements between the parties, such as low production volume, unanimous consents between the parties and defaults by the parties, which would allow or cause an early termination of the partnerships. If none of the parties to the agreements takes action to terminate the partnerships early, the partnerships will terminate in 2008.
 
The non-recourse notes payable principal balance was $125 million and $158 million at June 30, 2006 and December 31, 2005, respectively. The non-recourse notes payable can be relieved either through eventual payments or possibly through extinguishment which may occur subsequent to termination of the partnership pursuant to the agreements between the parties.
 
1999 Sale of Fossil Generating Assets (Exelon and ComEd)
 
Exelon, through its ComEd subsidiary, has taken certain tax positions, which have been disclosed to the IRS, to defer the tax gain on the 1999 sale of its fossil generating assets. As of June 30, 2006 and December 31, 2005, deferred tax liabilities related to the fossil plant sale are reflected in Exelon’s Consolidated Balance Sheets with the majority allocated to ComEd and the remainder to Generation. Exelon’s ability to continue to defer all or a portion of this liability depends on whether its treatment of the sales proceeds as having been received in connection with an involuntary conversion is proper pursuant to applicable law. Exelon’s ability to continue to defer the remainder of this liability may depend in part on whether its tax characterization of a lease transaction ComEd entered into in connection with the sale is proper pursuant to applicable law. The Federal tax returns and related tax return disclosures covering the period of the 1999 sale are currently under IRS audit. The IRS has recently indicated its position that the ComEd lease transaction is substantially similar to a leasing transaction the IRS is treating as a “listed transaction” pursuant to guidance it issued in 2005. A listed transaction is one which the IRS considers to be a potentially abusive tax shelter. As a result of the IRS characterization of the lease transaction as a listed transaction, it is likely to vigorously challenge the transaction and will seek to obtain information not normally requested in audits. Exelon believes its position is correct and will aggressively defend that position upon audit and any subsequent appeals or litigation. However, a successful IRS challenge to ComEd’s positions would have the impact of accelerating future income tax payments and increasing interest expense related to the deferred tax gain that becomes currently payable. As of June 30, 2006, Exelon’s potential cash outflow, including tax and interest (after tax), could be as much as $954 million. If the deferral were successfully challenged by the IRS, it could negatively affect Exelon’s results of operations by as much as $149 million (after tax). Exelon’s management believes a reserve for interest has been appropriately recorded in accordance with FASB Statement No. 5, “Accounting for Contingencies” (SFAS No. 5); however, the ultimate outcome of this matter could result in unfavorable or favorable adjustments to the results of operations, and such adjustments could be material. Final resolution of this matter is not anticipated for several years.
 
Impact of Illinois Auction on State Income Taxes (Exelon and Generation)
 
Generation has supplied nearly 100% of ComEd’s requirements since its formation in 2001, representing between 40% and 50% of Generation’s supply resources. Commencing January 2, 2007, ComEd will no longer have a purchase power agreement (PPA) with Generation and instead ComEd will procure power through a reverse-auction competitive bidding process. In addition to the power Generation may sell directly to ComEd (restricted to 35% of power purchased by ComEd in the reverse-auction competitive bidding process for each auction section),


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Generation will enter into contractual arrangements with third parties that may provide power to ComEd under contracts entered into pursuant to the reverse-auction competitive bidding process.
 
Also as a result of the termination of the PPA and the transition to market based rates, Exelon’s revenues are anticipated to increase due to the increase in the amount of power Generation will sell to third parties in the wholesale energy market instead of through its previous intercompany transactions with ComEd through the PPA, and, based on recent increases in market prices, ComEd’s revenues will increase as the price of power will be passed onto customers. For Illinois income tax purposes, income is apportioned to Illinois based on the relationship of Illinois-sourced gross receipts to total gross receipts, determined on a consolidated basis. As a result of the increase in revenues resulting from the termination of the PPA and transition to market based rates, most or all of which is likely to be sourced to Illinois for income tax purposes, the proportion of consolidated income subject to Illinois tax is likely to increase. Similarly, the proportion of temporary differences apportioned to Illinois, for which deferred taxes are provided, is also likely to increase. Such an increase would have the effect of requiring an increase in the net state deferred income tax liability. This increased Illinois apportionment factor will be applied to Exelon’s temporary income tax differences in the period in which the new factor can be reasonably estimated, which may be in connection with the reverse-auction competitive bidding process. The increase is likely to be partially, but not wholly, offset by decreases in taxes attributable to other states. Exelon is in the process of evaluating these potential impacts on its state income tax obligations. In the course of that evaluation, Exelon will consider potential strategies and/or alternative interpretations that it may be able to employ to mitigate these impacts. While the potential impact and mitigation strategies are still being investigated, the tax-related impacts of the auction and the reduction in sales from Generation to ComEd could have an adverse impact on Exelon’s results of operations. See Note 5 — Regulatory Issues for information regarding the reverse-auction competitive bidding process.
 
Pennsylvania Tax Law (Exelon and Generation)
 
On July 12, 2006, the Governor of Pennsylvania approved a law which increases the threshold for the usage of net operating losses for Pennsylvania corporate net income taxes. Under the new law, previously limited Pennsylvania net operating losses will be available to offset future taxable income, primarily at Generation. As a result, Exelon expects to record an approximate $10 million tax benefit to income taxes in the third quarter of 2006.
 
11.  Asset Retirement Obligations (Exelon, ComEd, PECO and Generation)
 
Nuclear Decommissioning Asset Retirement Obligations (ARO) (Exelon and Generation)
 
Both Generation and AmerGen Energy Company, LLC (AmerGen), a wholly owned subsidiary of Generation, have a legal obligation to decommission their nuclear power plants following the expiration of their respective operating licenses. Generation and AmerGen will pay for this obligation using trust funds that have been established for this purpose. Refer to Notes 13 and 16 of Exelon’s Notes to Consolidated Financial Statements within Exelon’s 2005 Annual Report on Form 10-K for a full discussion of the accounting for nuclear decommissioning obligations, nuclear decommissioning trust funds and the corresponding accounting implications resulting from agreements entered into with ComEd and PECO at the time of the corporate restructuring effective January 1, 2001, and intercompany balances between Generation, ComEd and PECO reflecting the obligation to refund to customers any decommissioning-related assets in excess of the related decommissioning obligations.


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Generation updates its ARO on a periodic basis. During the second quarter of 2006, Generation recorded a net decrease in the ARO of approximately $604 million and pre-tax income of $149 million resulting from revisions to estimated future nuclear decommissioning cash flows, primarily due to the following:
 
  •  Revised management assumptions concerning an increased likelihood of successful nuclear license renewal efforts due to an increasingly favorable environment for nuclear power and, therefore, an increased likelihood of operating the nuclear plants through a full license extension period; and
 
  •  A change in management’s expectation of when the U.S. Department of Energy (DOE) will establish a repository for and begin accepting spent nuclear fuel.
 
The impact of the above items is effectively to push the estimated future nuclear decommissioning cash flows further into the future and, therefore, reduce the present value of the ARO. This decrease in the ARO resulted in the following corresponding impacts:
 
  •  A decrease in Generation’s asset retirement cost (ARC), which is included in property, plant and equipment in Exelon’s and Generation’s Consolidated Balance Sheets, of approximately $393 million;
 
  •  An increase in Generation’s intercompany payable to ComEd and PECO, which is included in non-current payable to affiliates in Generation’s Consolidated Balance Sheets, of approximately $62 million;
 
  •  An increase in ComEd’s and PECO’s intercompany receivables from Generation, which are included in non-current receivables from affiliates in ComEd’s and PECO’s Consolidated Balance Sheets, of approximately $36 million and $26 million, respectively, offset by equivalent increases in ComEd’s and PECO’s regulatory liabilities of approximately $36 million and $26 million, respectively (these increases are reflected as increases in Exelon’s regulatory liabilities on Exelon’s Consolidated Balance Sheet); and
 
  •  The recognition of other operating income by Generation (and, therefore, also by Exelon) of $149 million (pre-tax), which is included in operating and maintenance expense in Exelon’s and Generation’s Consolidated Statements of Income and Comprehensive Income, representing the reduction in the ARO in excess of the existing ARC balance for the AmerGen units.
 
The net decrease in the ARO for the former ComEd units, the former PECO units and the AmerGen units was approximately $219 million, $183 million and $202 million, respectively. As of June 30, 2006, the ARO balances for the former ComEd, the former PECO and the AmerGen units totaled approximately $2,114 million, $887 million and $433 million, respectively.
 
The following table presents the activity of the ARO reflected on Exelon’s and Generation’s Consolidated Balance Sheets from January 1, 2006 to June 30, 2006:
 
         
    Exelon and Generation  
 
Nuclear decommissioning AROs at January 1, 2006
  $ 3,921  
Net decrease resulting from updates to estimated future cash flows
    (604 )
Accretion expense
    123  
Payments to decommission retired plants
    (6 )
         
Nuclear decommissioning AROs at June 30, 2006
  $ 3,434  
         
 
During the second quarter of 2005, Generation recorded a $281 million net decrease in the ARO resulting from revisions to estimated future nuclear decommissioning cash flows, primarily due to a year-over-year decline in the cost escalation factors used to estimate future undiscounted costs, partially offset by an increase resulting from


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

updated decommissioning cost studies received for two nuclear stations. Independent third-party appraisers provided both the updated escalation factors and the updated cost studies. There was no net impact to any of the Registrant’s Consolidated Statements of Income and Comprehensive Income resulting from the 2005 ARO update.
 
Nuclear Decommissioning Trust Fund Investments (Exelon and Generation)
 
The trust funds that have been established to satisfy Generation’s nuclear decommissioning obligations were originally funded with amounts collected from customers. In certain circumstances, these trust funds will continue to be funded by future collections from customers.
 
At June 30, 2006 and December 31, 2005, both Exelon and Generation had nuclear decommissioning trust fund investments in the amounts of $5,809 million and $5,585 million, respectively.
 
At June 30, 2006, Exelon and Generation had gross unrealized gains of $855 million and gross unrealized losses of $63 million related to the nuclear decommissioning trust fund investments. At December 31, 2005, Exelon and Generation had gross unrealized gains of $734 million and gross unrealized losses of $47 million.
 
During the three and six months ended June 30, 2005, both Exelon and Generation realized gains resulting from the sale of nuclear decommissioning trust fund investments of $54 million and $55 million, respectively. Of these gains, $36 million and $39 million, in the three and six months ended June 30, 2005, respectively, related to investments held in the AmerGen decommissioning trust funds. These gains were recognized primarily as a result of changes to the investment strategy associated with the mix of investments in the nuclear decommissioning trust funds in the first half of 2005. For the former ComEd and PECO units, these gains and losses have been reflected as a component of other income and, due to the impact of regulatory accounting, had no impact on the results of operations of Exelon and Generation. See Note 14 — Supplemental Financial Information for the 2006 results.
 
Exelon and Generation evaluate decommissioning trust fund investments for other-than-temporary impairments by analyzing the historical performance, cost basis and market value of securities in unrealized loss positions in comparison to related market indices. During the three and six months ended June 30, 2006, Exelon and Generation concluded that certain trust fund investments were other-than-temporarily impaired based on various factors assessed in the aggregate, including the duration and severity of the impairment, the anticipated recovery of the value of the securities and consideration of Exelon’s and Generation’s ability and intent to hold the investments until the recovery of their cost basis. This determination resulted in impairment charges of $7 million and $10 million for the three and six months ended June 30, 2006, respectively, which were recorded in other income and deductions associated with the trust funds for the decommissioning of the former ComEd plants. During the three and six months ended June 30, 2005, both Exelon and Generation recorded impairment charges of $1 million and $2 million, respectively, which were recorded in other income and deductions associated with the trust funds for the decommissioning of the AmerGen plants. Also during the three and six months ended June 30, 2005, both Exelon and Generation realized $5 million and $12 million, respectively, of the previously unrealized losses associated with the trust investments for the decommissioning of the former ComEd plants. The realization of these losses associated with the former ComEd plants had no impact on Exelon’s and Generation’s results of operations or financial position since both realized and unrealized losses are already reflected in the fair value of the investments and in the fair value of the regulatory liability at ComEd.
 
Non-Nuclear AROs (Exelon, ComEd, PECO and Generation)
 
As of December 31, 2005, Exelon adopted FIN 47, “Accounting for Conditional Asset Retirement Obligations” (FIN 47), which clarified that a legal obligation associated with the retirement of a long-lived asset whose


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

timing and/or method of settlement are conditional on a future event is within the scope of SFAS No. 143. Under FIN 47, Exelon is required to record liabilities associated with its conditional AROs at their estimated fair values if those fair values can be reasonably estimated. The liabilities associated with conditional AROs will be adjusted periodically due to the passage of time, new laws and regulations, and revisions to either the timing or amount of the original estimates of undiscounted cash flows. See Note 14 of Exelon’s Notes to Consolidated Financial Statements within Exelon’s 2005 Annual Report on Form 10-K for a discussion of the accounting for non-nuclear asset retirement obligations.
 
The following table presents the activity of the non-nuclear AROs reflected on the Registrants’ Consolidated Balance Sheets from January 1, 2006 to June 30, 2006:
 
                                 
    Exelon     ComEd     PECO     Generation  
 
Non-nuclear AROs at January 1, 2006
  $ 236     $ 151     $ 20     $ 65  
Accretion expense(a)
    6       4       1       1  
                                 
Non-nuclear AROs at June 30, 2006
  $ 242     $ 155     $ 21     $ 66  
                                 
 
 
(a) For ComEd and PECO, the majority of the accretion is recorded as an increase to a regulatory asset due to the associated regulations.
 
12.   Earnings Per Share and Shareholders’ Equity (Exelon)
 
Earnings per Share
 
Diluted earnings per share are calculated by dividing net income by the weighted average number of shares of common stock outstanding, including shares to be issued upon exercise of stock options outstanding under Exelon’s stock option plans considered to be common stock equivalents. The following table sets forth the components of basic and diluted earnings per share and shows the effect of these stock options on the weighted average number of shares outstanding used in calculating diluted earnings per share:
 
                                 
    Three Months
 		    Six Months
 		 
    Ended
 		    Ended
 		 
    June 30,     June 30,  
    2006     2005     2006     2005  
 
Income from continuing operations
  $ 641     $ 516     $ 1,041     $ 1,023  
Income (loss) from discontinued operations
    3       (2 )     3       12  
                                 
Net income
  $ 644     $ 514     $ 1,044     $ 1,035  
                                 
Average common shares outstanding — basic
    670       670       669       669  
Assumed exercise of stock options, performance share awards and restricted stock
    6       7       6       7  
                                 
Average common shares outstanding — diluted
    676       677       675       676  
                                 
 
The number of stock options not included in the calculation of diluted common shares outstanding due to their antidilutive effect was 4 million for the three and six months ended June 30, 2006. There were no stock options excluded for the three or six months ended June 30, 2005.


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Share Repurchase Program
 
In April 2004, Exelon’s Board of Directors approved a discretionary share repurchase program that allows Exelon to repurchase shares of its common stock on a periodic basis in the open market. See Note 18 of Exelon’s Notes to Consolidated Financial Statements within Exelon’s 2005 Annual Report on Form 10-K for further information regarding Exelon’s share repurchase program. As of June 30, 2006, 10 million shares of common stock have been purchased under the share repurchase program for $483 million. During the six months ended June 30, 2006, Exelon repurchased 0.9 million shares of common stock under the share repurchase program for $53 million.
 
Other Share Repurchases
 
During the six months ended June 30, 2005, Exelon repurchased 0.2 million shares of common stock from a retired executive for $8 million. These repurchased shares are held as treasury shares and are recorded at cost.
 
13.  Commitments and Contingencies (Exelon, ComEd, PECO and Generation)
 
For information regarding contingencies, capital commitments and nuclear decommissioning at December 31, 2005, see Notes 13 and 20 of Exelon’s Notes to Consolidated Financial Statements within Exelon’s 2005 Annual Report on Form 10-K.
 
Energy Commitments
 
Generation’s total commitments for future sales of energy to unaffiliated third-party utilities and others increased by approximately $1.7 billion in the six months ended June 30, 2006, reflecting increases of approximately $2.2 billion and $0.5 billion in 2007 and 2008 sales commitments, respectively, primarily due to increased overall hedging activity in the normal course of business and other smaller increases in commitments in years beyond 2008, offset by the fulfillment of approximately $1.0 billion of 2006 commitments during the six months ended June 30, 2006.
 
Commercial Commitments
 
Exelon’s, ComEd’s, PECO’s and Generation’s commercial commitments as of June 30, 2006, representing commitments potentially triggered by future events, did not change significantly from December 31, 2005, except for the following:
 
  •  Exelon’s letters of credit increased $61 million and guarantees (outside the scope of FIN 45) decreased $85 million primarily as a result of energy trading activities.
 
  •  ComEd’s letters of credit increased $16 million.
 
  •  Generation’s letters of credit increased $45 million and guarantees (outside the scope of FIN 45) decreased $62 million primarily as a result of energy trading activities.
 
Environmental Liabilities
 
Exelon, ComEd, PECO and Generation accrue amounts for environmental investigation and remediation costs that can be reasonably estimated, including amounts for manufactured gas plant (MGP) investigation and remediation. ComEd and PECO have identified 42 and 27 sites, respectively, where former MGP activities have or may have resulted in actual site contamination. Of these 42 sites identified by ComEd, the Illinois Environmental Protection Agency (Illinois EPA) has approved the clean up of seven sites, and of the 27 sites identified by PECO, the Pennsylvania Department of Environmental Protection has approved the cleanup of nine sites. Of the remaining


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

sites identified by ComEd and PECO, 22 and 10 sites, respectively, are currently under some degree of active study and/or remediation.
 
ComEd and Nicor Gas Company, a subsidiary of Nicor Inc. (Nicor), are parties to an interim agreement under which they cooperate in remediation activities at 38 former MGP sites for which ComEd or Nicor, or both, may have responsibility. Under the interim agreement, costs are split evenly between ComEd and Nicor on an interim basis pending their final agreement on allocation of costs at each site, but either party may demand arbitration if the parties cannot agree on a final allocation of costs. For most of the sites, the interim agreement contemplates that neither party will pay less than 20%, nor more than 80% of the final costs for each site. ComEd’s accrual for these environmental liabilities is based on ComEd’s estimate of its 50% share of costs under the interim agreement with Nicor. On April 17, 2006, Nicor submitted a demand for arbitration of the cost allocation for 38 MGP sites. Although ComEd believes that the arbitration proceedings will not result in an allocation of costs materially different from ComEd’s current estimate of its aggregate remediation costs for MGP sites, the outcome of the arbitration proceedings is not certain and could result in a material increase or decrease of ComEd’s estimate of its share of the aggregate remediation costs.
 
Pursuant to a PAPUC order, PECO is currently recovering a provision for environmental costs annually for the remediation of former MGP facility sites, for which PECO has recorded a regulatory asset. Based on the final order received in ComEd’s Rate Case, beginning in 2007, ComEd will also recover its MGP remediation costs from customers for which it will set up a regulatory asset (see ComEd Rate Case below). See Note 14 — Supplemental Financial Information for further information regarding regulatory assets and liabilities. As of June 30, 2006 and December 31, 2005, Exelon, ComEd, PECO and Generation had accrued the following amounts for environmental liabilities:
 
                 
    Total
 		       
    Environmental
 		       
    Investigation and
 		    Portion of Total Related
 		 
    Remediation
 		    to MGP Investigation
 		 
June 30, 2006
  Reserve     and Remediation(a)  
 
ComEd
  $ 53     $ 46  
PECO
    42       40  
Generation
    20       —  
                 
Exelon
  $ 115     $ 86  
                 
 
 
(a) Discounted.
 
                 
    Total
 		       
    Environmental
 		       
    Investigation and
 		    Portion of Total Related
 		 
    Remediation
 		    to MGP Investigation
 		 
December 31, 2005
  Reserve     and Remediation(a)  
 
ComEd
  $ 54     $ 48  
PECO
    47       41  
Generation
    27       —  
                 
Exelon
  $ 128     $ 89  
                 
 
 
(a) Discounted.


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EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
During the first quarter of 2006, a court-approved settlement was completed between PECO and various potentially responsible parties associated with the remediation of a Superfund site commonly referred to as the Metal Bank or Cottman Avenue site. As a result of this settlement, PECO reversed a $4 million reserve it had previously recorded related to the site.
 
The Registrants cannot predict the extent to which they will incur other significant liabilities for additional investigation and remediation costs at these or additional sites identified by environmental agencies or others, or whether such costs may be recoverable from third parties.
 
Section 316(b) of the Clean Water Act
 
In July 2004, the U.S. Environmental Protection Agency (EPA) issued the final Phase II rule implementing Section 316(b) of the Clean Water Act. This rule establishes national requirements for reducing the adverse environmental impacts from the entrainment and impingement of aquatic organisms at existing power plants. The rule identifies particular standards of performance with respect to entrainment and impingement and requires each facility to monitor and validate this performance in future years. The requirements will be implemented through state-level National Pollutant Discharge Elimination System (NPDES) permit programs. All of Generation’s power generation facilities with cooling water systems are subject to the regulations. Facilities without closed-cycle recirculating systems (e.g., cooling towers) are potentially most affected. Those facilities are Clinton, Cromby, Dresden, Eddystone, Fairless Hills, Handley, Mountain Creek, New Boston, Oyster Creek, Peach Bottom, Quad Cities and Salem. Generation is currently evaluating compliance options at its affected plants. At this time, Generation cannot estimate the effect that compliance with the Phase II rule requirements will have on the operation of its generating facilities and its future results of operations, financial condition and cash flows. There are many factors to be considered and evaluated to determine how Generation will comply with the Phase II rule requirements and the extent to which such compliance may result in financial and operational impacts. The considerations and evaluations include, but are not limited to, obtaining clarifying interpretations of the requirements from state regulators, resolving outstanding litigation proceedings concerning the requirements, completing studies to establish biological baselines for each facility and performing environmental and economic cost benefit evaluations of the potential compliance alternatives in accordance with the requirements.
 
In a pre-draft permit dated May 13, 2005 and a draft permit issued on July 19, 2005, as part of the pending NPDES permit renewal process for Oyster Creek, the New Jersey Department of Environmental Protection (NJDEP) preliminarily determined that closed-cycle cooling and environmental restoration are the only viable compliance options for Section 316(b) compliance at Oyster Creek. AmerGen has not made a determination regarding how it will demonstrate compliance with the Section 316(b) regulations, but believes that other compliance options under the final Phase II rule are viable and will be analyzed as part of the plant’s comprehensive demonstration study. If application of the Section 316(b) regulations requires the retrofitting of Oyster Creek’s cooling water intake structure or system, or extensive wetlands restoration, this could result in material costs of compliance and increased depreciation expense. In addition, the amount of the costs required to retrofit Oyster Creek may negatively impact Generation’s decision to renew the operating license.
 
In June 2001, the NJDEP issued a renewed NDPES permit for Salem, expiring in July 2006, allowing for the continued operation of Salem with its existing cooling water system. NJDEP advised PSEG in a letter dated July 12, 2004 that it strongly recommended reducing cooling water intake flow commensurate with closed-cycle cooling as a compliance option for Salem. PSEG submitted an application for a renewal of the permit on February 1, 2006. In the permit renewal application, PSEG analyzed closed-cycle cooling and other options and demonstrated that the continuation of the Estuary Enhancement Program, an extensive environmental restoration program at Salem, is the best technology to meet the Section 316(b) requirements. If application of the Section 316(b) regulations ultimately


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