EXELON CORP - 10-Q Quarterly Report

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, 2004

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) 10 South Dearborn Street – 37th Floor P.O. Box 805379 Chicago, Illinois 60680-5379 (312) 394-4321		36-0938600
	1-1401	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, 2004 was:


Exelon Corporation Common Stock, without par value		660,149,965
Commonwealth Edison Company Common Stock, $12.50 par value		127,016,486
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 an accelerated filer (as defined in Rule 12b-2 of the Act). Exelon Corporation Yes þ No o Commonwealth Edison Company, PECO Energy Company and Exelon Generation Company, LLC Yes o No þ.

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TABLE OF CONTENTS


		Page No.

FILING FORMAT			3
FORWARD-LOOKING STATEMENTS			3
WHERE TO FIND MORE INFORMATION			3

PART I.	FINANCIAL INFORMATION		5
Item 1.	Financial Statements		5
	Exelon Corporation
	Consolidated Statements of Income and Comprehensive Income		6
	Consolidated Statements of Cash Flows		7
	Consolidated Balance Sheets		8
	Commonwealth Edison Company
	Consolidated Statements of Income and Comprehensive Income		10
	Consolidated Statements of Cash Flows		11
	Consolidated Balance Sheets		12
	PECO Energy Company
	Consolidated Statements of Income and Comprehensive Income		14
	Consolidated Statements of Cash Flows		15
	Consolidated Balance Sheets		16
	Exelon Generation Company, LLC
	Consolidated Statements of Income and Comprehensive Income		18
	Consolidated Statements of Cash Flows		19
	Consolidated Balance Sheets		20
	Combined Notes to Consolidated Financial Statements		22
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		70
	Exelon Corporation		72
	Commonwealth Edison Company		110
	PECO Energy Company		126
	Exelon Generation Company, LLC		140
Item 3.	Quantitative and Qualitative Disclosure About Market Risk		157
Item 4.	Controls and Procedures		165

PART II.	OTHER INFORMATION		165
Item 1.	Legal Proceedings		165
	Exelon Corporation		165
	Commonwealth Edison Company		165
	Exelon Generation Company, LLC		165
Item 2.	Changes in Securities and Use of Proceeds		166
	Exelon Corporation		166
Item 4.	Submission of Matters to a Vote of Security Holders		166
	Exelon Corporation		166
	PECO Energy Company		166


		Page No.

Item 5.	Other Information		167
	Exelon Corporation		167
	Commonwealth Edison Company		167
	PECO Energy Company		167
	Exelon Generation Company, LLC		167
Item 6.	Exhibits and Reports on Form 8-K		168
SIGNATURES			170
	Exelon Corporation		170
	Commonwealth Edison Company		170
	PECO Energy Company		171
	Exelon Generation Company, LLC		171

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 those factors discussed herein, as well as the items discussed in (a) the Registrants’ 2003 Annual Report on Form 10-K — ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Outlook and the Challenges in Managing Our Business for each of Exelon, ComEd, PECO and Generation, (b) the Registrants’ 2003 Annual Report on Form 10-K — ITEM 8. Financial Statements and Supplementary Data: Exelon — Note 19, ComEd — Note 15, PECO — Note 14 and Generation — Note 13 and (c) other factors discussed in 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 450 Fifth Street, N.W., 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 at www.exeloncorp.com.

PAGE INTENTIONALLY LEFT BLANK

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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,

			2004			2003			2004			2003
(In millions, except per share data)
Operating revenues			$	3,550		$	3,721		$	7,272		$	7,795
Operating expenses
	Purchased power			673			746			1,234			1,586
	Purchased power from AmerGen Energy Company, LLC			—			110			—			177
	Fuel			538			531			1,374			1,356
	Operating and maintenance			1,056			1,100			2,165			2,212
	Depreciation and amortization			315			275			616			549
	Taxes other than income			185			159			378			358

		Total operating expenses		2,767			2,921			5,767			6,238

Operating income				783			800			1,505			1,557

Other income and deductions
	Interest expense			(156	)		(217	)		(286	)		(437	)
	Interest expense to affiliates			(90	)		(3	)		(183	)		(6	)
	Distributions on preferred securities of subsidiaries			(1	)		(10	)		(2	)		(22	)
	Equity in earnings (losses) of unconsolidated affiliates			(31	)		15			(55	)		33
	Other, net			230			10			287			(131	)

		Total other income and deductions		(48	)		(205	)		(239	)		(563	)

Income before income taxes, minority interest and cumulative effect of changes in accounting principles				735			595			1,266			994
Income taxes				226			222			376			370

Income before minority interest and cumulative effect of changes in accounting principles				509			373			890			624
Minority interest				12			(1	)		11			(3	)

Income before cumulative effect of changes in accounting principles				521			372			901			621
Cumulative effect of changes in accounting principles (net of income taxes of $22 and $69 for the six months ended June 30, 2004 and 2003, respectively)				—			—			32			112

Net income				521			372			933			733

Other comprehensive income (loss) (net of income taxes)
	Change in net unrealized gain (loss) on cash-flow hedges			50			62			(154	)		(84	)
	Foreign currency translation adjustment			(4	)		1			(2	)		2
	Unrealized gain (loss) on marketable securities			(31	)		3			22			(2	)
	SFAS No. 143 transition adjustment			—			—			—			168
	Interest in other comprehensive income (loss) of unconsolidated affiliates			—			17			(8	)		8

		Total other comprehensive income (loss)		15			83			(142	)		92

Total comprehensive income			$	536		$	455		$	791		$	825

Average shares of common stock outstanding — Basic				661			650			660			649

Average shares of common stock outstanding — Diluted				667			655			666			653

Earnings per average common share — Basic:
	Income before cumulative effect of changes in accounting principles		$	0.79		$	0.57		$	1.36		$	0.96
	Cumulative effect of changes in accounting principles			—			—			0.05			0.17

	Net income		$	0.79		$	0.57		$	1.41		$	1.13

Earnings per average common share — Diluted:
	Income before cumulative effect of changes in accounting principles		$	0.78		$	0.57		$	1.35		$	0.95
	Cumulative effect of changes in accounting principles			—			—			0.05			0.17

	Net income		$	0.78		$	0.57		$	1.40		$	1.12

Dividends per common share			$	0.28		$	0.23		$	0.55		$	0.46

See Combined Notes to Consolidated Financial Statements

EXELON CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



				Six Months
				Ended June 30,

				2004			2003
(In millions)
Cash flows from operating activities
	Net income			$	933		$	733
	Adjustments to reconcile net income to net cash flows provided by operating activities
		Depreciation, amortization and accretion, including nuclear fuel			930			846
		Cumulative effect of changes in accounting principles (net of income taxes)			(32	)		(112	)
		Impairment of investments			1			238
		Impairment of goodwill and other long-lived assets			—			53
		Deferred income taxes and amortization of investment tax credits			154			(100	)
		Provision for uncollectible accounts			39			43
		Equity in losses (earnings) of unconsolidated affiliates			55			(33	)
		Gains on sales of investments and wholly-owned subsidiaries			(155	)		—
		Net realized losses (gains) on nuclear decommissioning trust funds			1			(12	)
		Other operating activities			(16	)		52
		Changes in assets and liabilities
			Receivables		269			70
			Inventories		14			(16	)
			Other current assets		(66	)		(219	)
			Accounts payable, accrued expenses and other current liabilities		(134	)		(143	)
			Net realized and unrealized mark-to-market and hedging transactions		54			76
			Pension and non-pension postretirement benefits obligations		(175	)		(146	)
			Other noncurrent assets and liabilities		35			(38	)

Net cash flows provided by operating activities					1,907			1,292

Cash flows from investing activities
	Capital expenditures				(844	)		(1,019	)
	Proceeds from liquidated damages				—			86
	Proceeds from nuclear decommissioning trust fund sales				1,042			1,262
	Investment in nuclear decommissioning trust funds				(1,178	)		(1,368	)
	Note receivable from unconsolidated affiliate				—			35
	Proceeds from sales of investments and wholly-owned subsidiaries				227			6
	Change in restricted cash				(2	)		(29	)
	Net cash increase from consolidation of Sithe Energies, Inc.				19			—
	Other investing activities				67			11

Net cash flows used in investing activities					(669	)		(1,016	)

Cash flows from financing activities
	Issuance of long-term debt				75			1,813
	Retirement of long-term debt				(312	)		(1,479	)
	Retirement of long-term debt to financing affiliates				(345	)		—
	Change in short-term debt				(65	)		(100	)
	Issuance of mandatorily redeemable preferred securities				—			300
	Retirement of mandatorily redeemable preferred securities				—			(300	)
	Payment on acquisition note payable to Sithe Energies, Inc.				(27	)		(210	)
	Dividends paid on common stock				(364	)		(285	)
	Proceeds from employee stock plans				140			91
	Purchase of treasury stock				(75	)		—
	Other financing activities				36			(85	)

Net cash flows used in financing activities					(937	)		(255	)

Increase in cash and cash equivalents					301			21
Cash and cash equivalents at beginning of period					493			469

Cash and cash equivalents, including cash classified as held for sale					794			490
Cash classified as held for sale on the consolidated balance sheet					—			(26	)

Cash and cash equivalents at end of period				$	794		$	464

Supplemental cash flow information
Noncash investing and financing activities:
	Consolidation of Sithe Energies, Inc. pursuant to FASB Interpretation No. 46-R, “Consolidation of Variable Interest Entities”			$	85		$	—

See Combined Notes to Consolidated Financial Statements

EXELON CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


			June 30,		December 31,
			2004		2003
(In millions)
ASSETS
Current assets
	Cash and cash equivalents		$	794	$	493
	Restricted cash and investments			179		97
	Accounts receivable, net
		Customer		1,645		1,567
		Other		403		582
	Mark-to-market derivative assets			433		337
	Inventories, at average cost
		Fossil fuel		165		212
		Materials and supplies		318		310
	Notes receivable from affiliate			—		92
	Deferred income taxes			145		162
	Assets held for sale			20		242
	Other			449		413

		Total current assets		4,551		4,507

Property, plant and equipment, net				20,228		20,630
Deferred debits and other assets
	Regulatory assets			5,038		5,226
	Nuclear decommissioning trust funds			4,890		4,721
	Investments			922		955
	Goodwill			4,714		4,719
	Mark-to-market derivative assets			391		133
	Other			1,368		991

		Total deferred debits and other assets		17,323		16,745

Total assets			$	42,102	$	41,882

See Combined Notes to Consolidated Financial Statements

EXELON CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


			June 30,			December 31,
			2004			2003
(In millions)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
	Commercial paper		$	261		$	326
	Note payable to Sithe Energies, Inc.			—			90
	Long-term debt due within one year			177			1,385
	Long-term debt to ComEd Transitional Funding Trust and PECO Energy Transition Trust due within one year			478			470
	Accounts payable			1,221			1,238
	Mark-to-market derivative liabilities			805			584
	Accrued expenses			1,080			1,166
	Liabilities held for sale			14			61
	Other			293			306

		Total current liabilities		4,329			5,626

Long-term debt				8,672			7,889
Long-term debt to ComEd Transitional Funding Trust and PECO Energy Transition Trust				4,702			5,055
Long-term debt to other financing trusts				545			545
Deferred credits and other liabilities
	Deferred income taxes			4,580			4,360
	Unamortized investment tax credits			281			288
	Asset retirement obligation			3,100			2,997
	Pension obligations			1,445			1,668
	Non-pension postretirement benefits obligations			1,102			1,053
	Spent nuclear fuel obligation			872			867
	Regulatory liabilities			1,967			1,891
	Mark-to-market derivative liabilities			425			141
	Other			919			912

		Total deferred credits and other liabilities		14,691			14,177

		Total liabilities		32,939			33,292

Commitments and contingencies
Minority interest of consolidated subsidiaries				50			—
Preferred securities of subsidiaries				87			87
Shareholders’ equity
	Common stock			7,463			7,292
	Treasury stock, at cost			(75	)		—
	Retained earnings			2,889			2,320
	Accumulated other comprehensive income (loss)			(1,251	)		(1,109	)

		Total shareholders’ equity		9,026			8,503

Total liabilities and shareholders’ equity			$	42,102		$	41,882

See Combined Notes to Consolidated Financial Statements

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,

			2004			2003			2004			2003
(In millions)
Operating revenues
	Operating revenues		$	1,397		$	1,345		$	2,722		$	2,756
	Operating revenues from affiliates			6			16			17			29

		Total operating revenues		1,403			1,361			2,739			2,785

Operating expenses
	Purchased power			60			5			65			11
	Purchased power from affiliate			514			528			1,043			1,099
	Operating and maintenance			178			197			348			431
	Operating and maintenance from affiliates			45			24			90			52
	Depreciation and amortization			103			96			205			190
	Taxes other than income			72			68			151			148

		Total operating expenses		972			918			1,902			1,931

Operating income				431			443			837			854

Other income and deductions
	Interest expense			(68	)		(106	)		(144	)		(215	)
	Interest expense to affiliates			(28	)		—			(58	)		—
	Distributions on mandatorily redeemable preferred securities			—			(6	)		—			(14	)
	Equity in (losses) of unconsolidated affiliates			(6	)		—			(9	)		—
	Interest income from affiliates			5			7			11			13
	Other, net			2			5			6			21

		Total other income and deductions		(95	)		(100	)		(194	)		(195	)

Income before income taxes and cumulative effect of a change in accounting principle				336			343			643			659
Income taxes				132			138			255			263

Income before cumulative effect of a change in accounting principle				204			205			388			396
Cumulative effect of a change in accounting principle (net of income taxes of $0)				—			—			—			5

Net income				204			205			388			401

Other comprehensive income (loss) (net of income taxes)
	Change in net unrealized gain (loss) on cash-flow hedges			—			(3	)		—			28
	Unrealized gain on marketable securities			—			1			—			1
	Foreign currency translation adjustment			—			1			—			2

		Total other comprehensive income (loss)		—			(1	)		—			31

Total comprehensive income			$	204		$	204		$	388		$	432

See Combined Notes to Consolidated Financial Statements

COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



				Six Months
				Ended June 30,

				2004			2003
(In millions)
Cash flows from operating activities
	Net income			$	388		$	401
	Adjustments to reconcile net income to net cash flows provided by operating activities
		Depreciation and amortization			205			190
		Cumulative effect of a change in accounting principle (net of income taxes)			—			(5	)
		Deferred income taxes and amortization of investment tax credits			86			60
		Provision for uncollectible accounts			16			20
		Equity in losses of unconsolidated affiliates			9			—
		Other operating activities			24			25
		Changes in assets and liabilities
			Receivables		(38	)		9
			Inventories		(1	)		2
			Accounts payable, accrued expenses and other current liabilities		12			(115	)
			Receivables and payables to affiliates		15			(155	)
			Other current assets		5			(2	)
			Pension and non-pension postretirement benefits obligations		(93	)		(72	)
			Other noncurrent assets and liabilities		(26	)		11

Net cash flows provided by operating activities					602			369

Cash flows from investing activities
	Capital expenditures				(369	)		(355	)
	Changes in Exelon intercompany money pool investment				207			(165	)
	Change in restricted cash				18			(18	)
	Other investing activities				11			14

Net cash flows used in investing activities					(133	)		(524	)

Cash flows from financing activities
	Issuance of long-term debt				—			1,135
	Retirement of long-term debt				(178	)		(662	)
	Retirement of long-term debt to ComEd Transitional Funding Trust				(179	)		—
	Issuance of mandatorily redeemable preferred securities				—			200
	Retirement of mandatorily redeemable preferred securities				—			(200	)
	Change in short-term debt				—			(71	)
	Dividends paid on common stock				(207	)		(211	)
	Contributions from parent				62			61
	Settlement of cash-flow and fair-value hedges				26			(51	)
	Other financing activities				—			(28	)

Net cash flows (used in) provided by financing activities					(476	)		173

(Decrease) increase in cash and cash equivalents					(7	)		18
Cash and cash equivalents at beginning of period					34			16

Cash and cash equivalents at end of period				$	27		$	34

Supplemental cash flow information
Noncash investing and financing activities:
	Adoption of SFAS No. 143 — adjustment to other paid in capital and goodwill			$	—		$	210

See Combined Notes to Consolidated Financial Statements

COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


			June 30,		December 31,
			2004		2003
(In millions)
ASSETS
Current assets
	Cash and cash equivalents		$	27	$	34
	Restricted cash			2		20
	Accounts receivable, net
		Customer		720		683
		Other		53		68
	Inventories, at average cost			44		43
	Deferred income taxes			5		6
	Receivables from affiliates			22		23
	Investment in Exelon intercompany money pool			198		405
	Other			26		31

		Total current assets		1,097		1,313

Property, plant and equipment, net				9,288		9,096
Deferred debits and other assets
	Investments			37		36
	Investment in affiliates			63		73
	Goodwill			4,714		4,719
	Receivables from affiliates			2,300		2,271
	Pension asset			117		4
	Other			394		453

		Total deferred debits and other assets		7,625		7,556

Total assets			$	18,010	$	17,965

See Combined Notes to Consolidated Financial Statements

COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


			June 30,			December 31,
			2004			2003
(In millions)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
	Long-term debt due within one year		$	59		$	236
	Long-term debt to ComEd Transitional Funding Trust due within one year			307			317
	Accounts payable			184			170
	Accrued expenses			526			540
	Payables to affiliates			222			207
	Customer deposits			80			78
	Other			12			9

		Total current liabilities		1,390			1,557

Long-term debt				4,158			4,167
Long-term debt to ComEd Transitional Funding Trust				1,190			1,359
Long-term debt to other affiliates				361			361
Deferred credits and other liabilities
	Deferred income taxes			1,775			1,686
	Unamortized investment tax credits			47			48
	Non-pension postretirement benefits obligation			210			190
	Payables to affiliates			27			28
	Regulatory liabilities			1,967			1,891
	Other			300			336

		Total deferred credits and other liabilities		4,326			4,179

		Total liabilities		11,425			11,623

Commitments and contingencies
Shareholders’ equity
	Common stock			1,588			1,588
	Preference stock			7			7
	Other paid in capital			4,115			4,115
	Receivable from parent			(188	)		(250	)
	Retained earnings			1,064			883
	Accumulated other comprehensive income (loss)			(1	)		(1	)

		Total shareholders’ equity		6,585			6,342

Total liabilities and shareholders’ equity			$	18,010		$	17,965

See Combined Notes to Consolidated Financial Statements

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,

				2004			2003			2004			2003
(In millions)
Operating revenues
	Operating revenues			$	1,027		$	958		$	2,262		$	2,173
	Operating revenues from affiliates				5			3			9			5

			Total operating revenues		1,032			961			2,271			2,178

Operating expenses
	Purchased power				53			62			100			127
	Purchased power from affiliate				349			324			699			681
	Fuel				76			67			325			257
	Fuel from affiliate				7			—			7			—
	Operating and maintenance				104			110			215			236
	Operating and maintenance from affiliates				28			11			51			25
	Depreciation and amortization				125			116			250			236
	Taxes other than income				60			47			118			110

			Total operating expenses		802			737			1,765			1,672

Operating income					230			224			506			506
Other income and deductions
	Interest expense				(14	)		(83	)		(28	)		(168	)
	Interest expense to affiliates				(62	)		—			(125	)		—
	Distributions on mandatorily redeemable preferred securities				—			(2	)		—			(5	)
	Equity in losses of unconsolidated affiliates				(7	)		—			(13	)		—
	Other, net				3			1			5			10

			Total other income and deductions		(80	)		(84	)		(161	)		(163	)

Income before income taxes					150			140			345			343
Income taxes					50			52			112			119

Net income					100			88			233			224
Preferred stock dividends					1			2			2			3

Net income on common stock				$	99		$	86		$	231		$	221

Other comprehensive income (net of income taxes)
	Net income			$	100		$	88		$	233		$	224
	Other comprehensive income (net of income taxes):
		Change in net unrealized gain on cash-flow hedges			2			—			3			—
		Unrealized gain on marketable securities			—			—			1			—

			Total other comprehensive income		2			—			4			—

Total comprehensive income				$	102		$	88		$	237		$	224

See Combined Notes to Consolidated Financial Statements

PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



				Six Months
				Ended June 30,

				2004			2003
(In millions)
Cash flows from operating activities
	Net income			$	233		$	224
	Adjustments to reconcile net income to net cash flows provided by operating activities
		Depreciation and amortization			250			236
		Deferred income taxes and amortization of investment tax credits			(95	)		(28	)
		Provision for uncollectible accounts			19			21
		Equity in losses of unconsolidated affiliates			13			—
		Other operating activities			(4	)		5
		Changes in assets and liabilities
			Receivables		21			48
			Receivables and payables to affiliates		21			27
			Inventories		24			(1	)
			Accounts payable, accrued expenses and other current liabilities		56			11
			Prepaid taxes		(96	)		(91	)
			Deferred energy costs		56			(24	)
			Other current assets		(2	)		(4	)
			Pension and non-pension postretirement benefits obligations		15			16
			Other noncurrent assets and liabilities		(2	)		(15	)

Net cash flows provided by operating activities					509			425

Cash flows from investing activities
	Capital expenditures				(105	)		(132	)
	Changes in Exelon intercompany money pool investment				(35	)		—
	Change in restricted cash				—			28
	Other investing activities				3			6

Net cash flows used in investing activities					(137	)		(98	)

Cash flows from financing activities
	Issuance of long-term debt				75			450
	Retirement of long-term debt				(75	)		(592	)
	Retirement of long-term debt to PECO Energy Transition Trust				(166	)		—
	Change in short-term debt				(46	)		(30	)
	Issuance of mandatorily redeemable preferred securities				—			100
	Retirement of mandatorily redeemable preferred securities				—			(50	)
	Retirement of preferred stock				—			(50	)
	Dividends paid on preferred and common stock				(182	)		(168	)
	Contribution from parent				71			17
	Other financing activities				6			(6	)

Net cash flows used in financing activities					(317	)		(329	)

Increase (decrease) in cash and cash equivalents					55			(2	)
Cash and cash equivalents at beginning of period					44			63

Cash and cash equivalents at end of period				$	99		$	61

See Combined Notes to Consolidated Financial Statements

PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


			June 30,		December 31,
			2004		2003
(In millions)
ASSETS
Current assets
	Cash and cash equivalents		$	99	$	44
	Accounts receivable, net
		Customer		318		363
		Other		32		27
	Inventories, at average cost
		Gas		76		99
		Materials and supplies		6		7
	Investment in Exelon intercompany money pool			35		—
	Deferred income taxes			81		64
	Deferred energy costs			25		81
	Prepaid taxes			97		1
	Other			12		10

		Total current assets		781		696

Property, plant and equipment, net				4,286		4,256
Deferred debits and other assets
	Regulatory assets			5,038		5,226
	Investments			20		20
	Investment in affiliates			114		123
	Receivables from affiliates			35		13
	Pension asset			76		68
	Other			10		8

		Total deferred debits and other assets		5,293		5,458

Total assets			$	10,360	$	10,410

See Combined Notes to Consolidated Financial Statements

PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


			June 30,			December 31,
			2004			2003
(In millions)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
	Commercial paper		$	—		$	46
	Payables to affiliates			170			150
	Long-term debt to PECO Energy Transition Trust due within one year			171			153
	Accounts payable			74			92
	Accrued expenses			310			237
	Other			36			35

		Total current liabilities		761			713

Long-term debt				1,360			1,359
Long-term debt to PECO Energy Transition Trust				3,512			3,696
Long-term debt to other affiliates				184			184
Deferred credits and other liabilities
	Deferred income taxes			2,925			2,986
	Unamortized investment tax credits			20			22
	Non-pension postretirement benefits obligation			310			287
	Other			146			147

		Total deferred credits and other liabilities		3,401			3,442

		Total liabilities		9,218			9,394

Commitments and contingencies
Shareholders’ equity
	Common stock			2,000			1,999
	Receivable from parent			(1,553	)		(1,623	)
	Preferred stock			87			87
	Retained earnings			597			546
	Accumulated other comprehensive income			11			7

		Total shareholders’ equity		1,142			1,016

Total liabilities and shareholders’ equity			$	10,360		$	10,410

See Combined Notes to Consolidated Financial Statements

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,

				2004			2003			2004			2003
(In millions)
Operating revenues
	Operating revenues			$	1,077		$	990		$	2,150		$	1,876
	Operating revenues from affiliates				871			896			1,750			1,889

		Total operating revenues			1,948			1,886			3,900			3,765

Operating expenses
	Purchased power				560			675			1,069			1,436
	Purchased power from affiliates				3			125			12			206
	Fuel				462			348			1,048			706
	Operating and maintenance				554			411			1,139			861
	Operating and maintenance from affiliates				69			40			134			82
	Depreciation and amortization				69			46			124			91
	Taxes other than income				48			40			95			88

		Total operating expenses			1,765			1,685			3,621			3,470

Operating income					183			201			279			295

Other income and deductions
	Interest expense				(50	)		(16	)		(75	)		(30	)
	Interest expense to affiliates				(1	)		(4	)		(2	)		(8	)
	Equity in earnings (losses) of unconsolidated affiliates				—			18			(2	)		37
	Other, net				134			34			183			(132	)

		Total other income and deductions			83			32			104			(133	)

Income before income taxes, minority interest and cumulative effect of changes in accounting principles					266			233			383			162
Income taxes					100			91			146			71

Income before minority interest and cumulative effect of changes in accounting principles					166			142			237			91
Minority interest					12			—			11			(2	)

Income before cumulative effect of changes in accounting principles					178			142			248			89
Cumulative effect of changes in accounting principles (net of income taxes of $22 and $70 for the six months ended June 30, 2004 and 2003, respectively)					—			—			32			108

Net income					178			142			280			197

	Other comprehensive income (loss) (net of income taxes)
		Change in net unrealized gain (loss) on cash-flow hedges			48			64			(147	)		(116	)
		Unrealized gain (loss) on marketable securities			(31	)		2			8			(3	)
		Foreign currency translation adjustment			(4	)		—			(4	)		—
		SFAS No. 143 transition adjustment			—			—			—			168
		Interest in other comprehensive income of unconsolidated affiliates			—			17			2			8

			Total other comprehensive income (loss)		13			83			(141	)		57

Total comprehensive income				$	191		$	225		$	139		$	254

See Combined Notes to Consolidated Financial Statements

EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



				Six Months
				Ended June 30,

				2004			2003
(In millions)
Cash flows from operating activities
	Net income			$	280		$	197
	Adjustments to reconcile net income to net cash flows provided by operating activities
		Depreciation, amortization and accretion, including nuclear fuel			438			388
		Cumulative effect of changes in accounting principles (net of income taxes)			(32	)		(108	)
		Gain on sale of investment			(90	)		—
		Impairment of investment			—			200
		Impairment of long-lived assets			—			5
		Deferred income taxes and amortization of investment tax credits			148			(107	)
		Provision for uncollectible accounts			2			1
		Equity in (earnings) losses of unconsolidated affiliates			2			(37	)
		Net realized losses (gains) on nuclear decommissioning trust funds			1			(12	)
		Other operating activities			15			1
		Changes in assets and liabilities
			Receivables		(108	)		(112	)
			Receivables and payables to affiliates, net		(35	)		238
			Inventories		(10	)		(19	)
			Accounts payable, accrued expenses and other current liabilities		24			10
			Other current assets		(15	)		(104	)
			Net realized and unrealized mark-to-market and hedging transactions		39			76
			Pension and non-pension postretirement benefits obligations		(59	)		(59	)
			Other noncurrent assets and liabilities		16			(19	)

Net cash flows provided by operating activities					616			539

Cash flows from investing activities
	Capital expenditures				(366	)		(510	)
	Proceeds from liquidated damages				—			86
	Proceeds from nuclear decommissioning trust fund sales				1,042			1,262
	Investment in nuclear decommissioning trust funds				(1,178	)		(1,368	)
	Note receivable from affiliate				—			35
	Net cash increase from consolidation of Sithe Energies, Inc. and Exelon Energy Company				24			—
	Change in restricted cash				(18	)		(38	)
	Other investing activities				58			(1	)

Net cash flows used in investing activities					(438	)		(534	)

Cash flows from financing activities
	Issuance of long-term debt				—			211
	Retirement of long-term debt				(4	)		(3	)
	Change in short-term debt				211			—
	Payment on acquisition note payable to Sithe Energies, Inc.				(27	)		(210	)
	Changes in Exelon intercompany money pool borrowings				(218	)		165
	Change in note payable, affiliate				—			(107	)
	Distribution to member				(109	)		(45	)
	Other financing activities				6			—

Net cash flows (used in) provided by financing activities					(141	)		11

Increase in cash and cash equivalents					37			16
Cash and cash equivalents at beginning of period					158			58

Cash and cash equivalents at end of period				$	195		$	74

Supplemental cash flow information
Noncash investing and financing activities:
	Consolidation of Sithe Energies, Inc. pursuant to FASB Interpretation No. 46-R, “Consolidation of Variable Interest Entities”			$	85		$	—
	Contribution of Exelon Energy Company from Exelon Corporation				(9	)		—
	Distribution to member				—			17

See Combined Notes to Consolidated Financial Statements

EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


			June 30,		December 31,
			2004		2003
(In millions)
ASSETS
Current assets
	Cash and cash equivalents		$	195	$	158
	Restricted cash			173		75
	Accounts receivable, net
		Customer		575		389
		Other		444		402
	Mark-to-market derivative assets			433		322
	Receivables from affiliates			335		421
	Inventories, at average cost
		Fossil fuel		90		98
		Materials and supplies		267		259
	Notes receivable			6		5
	Deferred income taxes			43		40
	Assets held for sale			9		36
	Other			222		233

		Total current assets		2,792		2,438

Property, plant and equipment, net				6,493		7,106
Deferred debits and other assets
	Nuclear decommissioning trust funds			4,890		4,721
	Investments			98		65
	Receivable from affiliate			22		22
	Pension asset			173		79
	Mark-to-market derivative asset			390		100
	Other			544		118

		Total deferred debits and other assets		6,117		5,105

Total assets			$	15,402	$	14,649

See Combined Notes to Consolidated Financial Statements

EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


			June 30,			December 31,
			2004			2003
(In millions)
Liabilities and member’s equity
Current liabilities
	Long-term debt due within one year		$	61		$	1,068
	Commercial paper			211			—
	Accounts payable			906			848
	Mark-to-market derivative liabilities			805			581
	Payables to affiliates			32			1
	Notes payable to affiliates			198			506
	Accrued expenses			401			423
	Liabilities held for sale			3			—
	Other			99			126

		Total current liabilities		2,716			3,553

Long-term debt				2,469			1,649
Deferred credits and other liabilities
	Deferred income taxes			378			195
	Unamortized investment tax credits			214			218
	Asset retirement obligation			3,099			2,996
	Pension obligation			20			21
	Non-pension postretirement benefits obligation			592			555
	Spent nuclear fuel obligation			872			867
	Payable to affiliates			1,247			1,195
	Mark-to-market derivative liabilities			425			133
	Other			331			308

		Total deferred credits and other liabilities		7,178			6,488

		Total liabilities		12,363			11,690

Commitments and contingencies
Minority interest of consolidated subsidiary				52			3
Member’s equity
	Membership interest			2,495			2,490
	Undistributed earnings			773			602
	Accumulated other comprehensive loss			(281	)		(136	)

		Total member’s equity		2,987			2,956

Total liabilities and member’s equity			$	15,402		$	14,649

See Combined Notes to Consolidated Financial Statements

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, wholesale generation and enterprises businesses discussed below (see Note 17 — Segment Information). The energy delivery business segment consists of the purchase and sale of electricity and distribution and transmission services by Commonwealth Edison Company (ComEd) in northern Illinois and by PECO Energy Company (PECO) in southeastern Pennsylvania and the purchase and sale of natural gas and related distribution services by PECO in the Pennsylvania counties surrounding the City of Philadelphia. The generation business segment consists of the electric generating facilities and energy marketing operations of Exelon Generation Company, LLC (Generation) and Generation’s equity interest in EXRES SHC, Inc., the holding company of Sithe Energies, Inc. and its subsidiaries, referred to herein as Sithe. Effective January 1, 2004, Enterprises’ competitive retail sales business, Exelon Energy Company, became part of Generation. As of June 30, 2004, the enterprises business segment consists of the energy, infrastructure and electrical contracting services of Exelon Enterprises Company, LLC (Enterprises) and other investments related to the communications, energy services and retail services industries. See Note 3 — Acquisitions and Dispositions for further information regarding the disposition of businesses within the Enterprises segment.

The consolidated financial statements of Exelon, ComEd, PECO and Generation each include the accounts of entities in which it has a controlling financial interest, other than certain financing trusts of ComEd and PECO described below, 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 the registrant as the primary beneficiary of the variable interest entity. Investments and joint ventures in which Exelon, ComEd, PECO and Generation do not have a controlling financial interest and certain financing trusts of ComEd and PECO are accounted for under the equity or cost methods of accounting.

In accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (FIN No. 46-R), Sithe, a 50% owned subsidiary of Generation, was consolidated in the financial statements of Exelon and Generation as of March 31, 2004. Certain trusts and limited partnerships that are financing subsidiaries of ComEd and PECO have issued debt or mandatorily redeemable preferred securities. Due to the adoption of FIN No. 46-R, these trusts and limited partnerships are no longer consolidated within the financial statements of Exelon, ComEd or PECO as of December 31, 2003, or as of July 1, 2003 for PECO Energy Capital Trust IV (PECO Trust IV). See Note 2 — New Accounting Principles for further discussion of the adoption of FIN 46-R and the resulting consolidation of Sithe and the deconsolidation of these financing entities.

The accompanying consolidated financial statements as of June 30, 2004 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, 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 share and per-share amounts included in Exelon’s consolidated financial statements and combined notes to consolidated financial statements have been adjusted for all periods presented to reflect a 2-for-1 stock split of Exelon’s common stock. See Note 14 — Earnings Per Share and Shareholders’ Equity for additional information regarding the stock split. The December 31, 2003 Consolidated Balance Sheets were derived from audited financial statements. These combined notes to consolidated financial statements do not include all disclosures required by GAAP. Certain prior-year amounts have been reclassified for comparative purposes.

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)

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 or incorporated by reference in ITEM 8 of their Annual Reports on Form 10-K for the year ended December 31, 2003.


2.	New Accounting Principles (Exelon, ComEd, PECO and Generation)


	*New Accounting Principles with a Cumulative Effect upon Adoption*


	FIN No. 46 and FIN No. 46-R

The FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN No. 46) in January 2003 and subsequently issued its revision in FIN No. 46-R in December 2003, which addressed the requirements for consolidating certain variable interest entities. FIN No. 46 was effective for Exelon’s variable interest entities created after January 31, 2003 and FIN No. 46-R was effective December 31, 2003 for Exelon’s other variable interest entities that were considered to be special-purpose entities. FIN No. 46-R applied to all other variable interest entities as of March 31, 2004.

Exelon and Generation consolidated Sithe as of March 31, 2004 pursuant to the provisions of FIN No. 46-R and recorded income of $32 million (net of income taxes) as a result of the elimination of a guarantee of Sithe’s commitments previously recorded by Generation. This income was reported as a cumulative effect of a change in accounting principle in the first quarter of 2004. Generation is a 50% owner of Sithe, and Exelon and Generation had accounted for Sithe as an unconsolidated equity method investment prior to March 31, 2004. Sithe owns and operates power-generating facilities. See Note 4 — Sithe for additional information on the consolidation of Sithe.

PECO Trust IV, a financing subsidiary of PECO created in May 2003, was deconsolidated from the financial statements of Exelon and PECO pursuant to the provisions of FIN No. 46 as of July 1, 2003. Pursuant to the provisions of FIN No. 46-R, as of December 31, 2003, the financing trusts of ComEd, namely ComEd Financing II, ComEd Financing III, ComEd Funding LLC and ComEd Transitional Funding Trust, were deconsolidated from the financial statements of Exelon and ComEd, and the other financing trusts of PECO, namely PECO Energy Capital Trust III (PECO Trust III) and PECO Energy Transition Trust (PETT), were deconsolidated from the financial statements of Exelon and PECO. Amounts owed to these financing trusts were recorded as debt to financing trusts or affiliates within the Consolidated Balance Sheets at June 30, 2004 and December 31, 2003 as follows:


	June 30, 2004		December 31, 2003

Exelon	$	5,725	$	6,070
ComEd		1,858		2,037
PECO		3,867		4,033

This change in presentation had no effect on the net income of Exelon, ComEd or PECO. In accordance with FIN No. 46-R, prior periods were not reclassified.


	SFAS No. 143

FASB Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143), provides accounting requirements for retirement obligations (whether statutory, contractual or as a result of principles of promissory estoppel) associated with tangible long-lived assets. Exelon, ComEd, PECO and Generation were required to adopt SFAS No. 143 as of January 1, 2003.

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)

A significant retirement obligation is Generation’s obligation to decommission its nuclear plants at the end of their license lives. See Note 13 — Asset Retirement Obligations for additional information.

Exelon recorded income of $112 million (net of income taxes) as a cumulative effect of a change in accounting principle in connection with its adoption of SFAS No. 143 in the first quarter of 2003. The components of the cumulative effect of a change in accounting principle, net of income taxes, were as follows:


Generation (net of income taxes of $52)	$	80
Generation’s investments in AmerGen Energy Company, LLC and Sithe (net of income taxes of $18)		28
ComEd (net of income taxes of $0)		5
Enterprises (net of income taxes of $(1))		(1	)

Total	$	112

The cumulative effect of the change in accounting principle in adopting SFAS No. 143 had no effect on PECO’s income statement.


	*Other New Accounting Principles*


	EITF 03-11

In July 2003, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on EITF Issue No. 03-11, “Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133, ‘Accounting for Derivative Instruments and Hedging Activities,’ and Not ‘Held for Trading Purposes’ as Defined in EITF Issue No. 02-3, ‘Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities’ ” (EITF 03-11), which was ratified by the FASB in August 2003. The EITF concluded that determining whether realized gains and losses on physically settled derivative contracts not “held for trading purposes” should be reported in the income statement on a gross or net basis is a matter of judgment that depends on the relevant facts and circumstances. Exelon and Generation adopted EITF 03-11 as of January 1, 2004 and presented $239 million of revenue, $238 million of purchased power and $1 million of fuel expense net within revenues during the three months ended June 30, 2004 and $452 million of revenue, $444 million of purchased power and $8 million of fuel expense net within revenues during the six months ended June 30, 2004. Prior periods were not reclassified. The adoption of EITF 03-11 had no effect on the net income of Exelon or Generation. Had EITF 03-11 been retroactively applied to 2003, operating revenues, purchased power and fuel expense would have been affected as follows:


	Exelon


			EITF 03-11
For the Three Months Ended June 30, 2003	As Reported		Impact			Pro Forma

Operating revenue	$	3,721	$	(234	)	$	3,487
Purchased power		856		(216	)		640
Fuel expense		531		(18	)		513

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)


			EITF 03-11
For the Six Months Ended June 30, 2003	As Reported		Impact			Pro Forma

Operating revenue	$	7,795	$	(485	)	$	7,310
Purchased power		1,763		(448	)		1,315
Fuel expense		1,356		(37	)		1,319


	Generation


			EITF 03-11
For the Three Months Ended June 30, 2003	As Reported		Impact			Pro Forma

Operating revenue	$	1,886	$	(234	)	$	1,652
Purchased power		800		(216	)		584
Fuel expense		348		(18	)		330


			EITF 03-11
For the Six Months Ended June 30, 2003	As Reported		Impact			Pro Forma

Operating revenue	$	3,765	$	(485	)	$	3,280
Purchased power		1,642		(448	)		1,194
Fuel expense		706		(37	)		669


	FSP FAS 106-2

Through its postretirement benefit plans, Exelon provides retirees with prescription drug coverage. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Prescription Drug Act) was enacted on December 8, 2003. The Prescription Drug Act introduced a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare prescription drug benefit. Actuarial equivalence has not yet been formally defined by the U.S. Department of Health and Human Services and thus is a matter of judgment by the plan sponsor and its actuaries. Management believes the prescription drug benefit provided under Exelon’s postretirement benefit plans is at least actuarially equivalent to the Medicare prescription drug benefit. In response to the enactment of the Prescription Drug Act, in May 2004, the FASB issued FASB Staff Position (FSP) FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (FSP FAS 106-2), which provides transition guidance for accounting for the effects of the Prescription Drug Act and supersedes FSP FAS 106-1, which had been issued in January 2004. FSP FAS 106-1 permitted a plan sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer the accounting for the effects of the Prescription Drug Act. Exelon made the one-time election allowed by FSP FAS 106-1 during the first quarter of 2004.

During the second quarter of 2004, Exelon early adopted the provisions of FSP FAS 106-2, resulting in a remeasurement of its postretirement benefit plans’ assets and accumulated postretirement benefit obligations (APBO) as of December 31, 2003. Upon adoption, the effect of the subsidy on benefits attributable to past service was accounted for as an actuarial experience gain, resulting in a decrease of the APBO of approximately $177 million. The annualized reduction in the net periodic postretirement benefit cost is estimated to be approximately $32 million compared to the annual cost calculated without considering the effects of the Prescription Drug Act. The effect of the subsidy on the components of net periodic

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)

postretirement benefit cost for the three and six months ended June 30, 2004 included in the consolidated financial statements and Note 11 — Retirement Benefits was as follows:


	Three Months Ended		Six Months Ended
	June 30, 2004		June 30, 2004

Amortization of the actuarial experience gain	$	4	$	8
Reduction in current period service cost		1		2
Reduction in interest cost on the APBO		3		6

The following table presents Exelon’s net income and earnings per share for the three months ended March 31, 2004 as if FSP FAS 106-2 was adopted as of January 1, 2004. Previously reported historical financial information for the three months ended March 31, 2004 has been adjusted in the table below and will be adjusted when presented for comparative purposes in future periods to reflect a reduction in net periodic postretirement benefit cost due to the adoption of FSP FAS 106-2.


		Three Months Ended
		March 31, 2004

Net income — as reported		$	406
Reduction in net periodic postretirement benefit expense(a)			6

Adjusted net income		$	412

Earnings per share:
	Basic — as reported	$	0.62
	Basic — as adjusted	$	0.63
	Diluted — as reported	$	0.61
	Diluted — as adjusted	$	0.62

(a) A portion of the net periodic postretirement benefit cost is capitalized within Exelon’s Consolidated Balance Sheets.

The following table presents net income of ComEd and Generation and net income on common stock of PECO for the three months ended March 31, 2004 as if FSP FAS 106-2 was adopted as of January 1, 2004. Historical financial information for the three months ended March 31, 2004 has been adjusted in the table below and will be adjusted when presented for comparative purposes in future periods to reflect a reduction in net periodic postretirement benefit cost due to the adoption of FSP FAS 106-2.


Three Months Ended March 31, 2004	ComEd		PECO			Generation

Net income — as reported	$	182	$	130	(a)	$	99
Reduction in net periodic postretirement benefit expense(b)		2		1			3

Adjusted net income	$	184	$	131		$	102

(a) Represents PECO’s net income on common stock.

(b) A portion of the net periodic postretirement benefit cost is capitalized within the Consolidated Balance Sheets.


	EITF 03-01

In March 2004, the EITF reached a consensus on and the FASB ratified EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-01). EITF 03-01 provides guidance for evaluating whether an investment is other-than-temporarily impaired and

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)

will be applied in other-than-temporary impairment evaluations made by Exelon beginning in the third quarter of 2004. Exelon adopted the disclosure requirements of EITF 03-01 for investments accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” within its financial statements for the year ended December 31, 2003. For all other investments within the scope of EITF 03-01 and for cost method investments, the disclosures will be effective for Exelon for the year ended December 31, 2004. Comparative information for periods prior to initial application is not required. Exelon, ComEd, PECO and Generation are still evaluating the potential impact of the adoption of EITF 03-01.


	EITF 03-16

In March 2004, the EITF reached a consensus on and the FASB ratified EITF Issue No. 03-16, “Accounting for Investments in Limited Liability Companies” (EITF 03-16). The EITF concluded that if investors in a limited liability company have specific ownership accounts, they should follow the guidance prescribed in Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures,” and EITF Topic No. D-46, “Accounting for Limited Partnership Investments.” Otherwise, investors should follow the significant influence model prescribed in Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” EITF 03-16 will be effective for Exelon, ComEd, PECO and Generation during the third quarter of 2004. Exelon, ComEd, PECO and Generation are still evaluating the potential impact of the adoption of EITF 03-16.


3.	Acquisitions and Dispositions (Exelon and Generation)


	*Sale of Ownership Interest in Boston Generating, LLC (Exelon and Generation)*

On May 25, 2004, Exelon and Generation completed the sale, transfer and assignment of ownership of their indirect wholly owned subsidiary Boston Generating, LLC (Boston Generating), which owns the companies that own Mystic 4-7, Mystic 8 and 9 and Fore River generating facilities, to a special purpose entity owned by the lenders under Boston Generating’s $1.25 billion credit facility (Boston Generating Credit Facility).

The sale was pursuant to a settlement agreement reached with Boston Generating’s lenders on February 23, 2004. The Federal Energy Regulatory Commission (FERC) approved the sale of Boston Generating in May 2004. Responsibility for plant operations and power marketing activities will be transferred to the lenders’ special purpose entity in a separate transaction. Certain aspects of the transfer of operations and marketing are also subject to approval of the FERC. On June 24, 2004, the parties filed an application with the FERC for an order authorizing the transfer of responsibility for plant operations and power marketing, and the parties expect to complete that transfer during the third quarter of 2004. Pending completion of the transfer of operations and marketing activities, Generation affiliates will continue to operate and market power from the plants on behalf of the owners. Due to ongoing power marketing agreements between Generation and Boston Generating, the results of Boston Generating have not been classified as a discontinued operation within the Consolidated Statements of Income and Comprehensive Income of Exelon and Generation. Exelon and Generation are hedged to eliminate the financial effects of these power-marketing-agreements from their results of operations.

In connection with the settlement reached on February 23, 2004, Exelon, Generation, the lenders and Raytheon Company (Raytheon), the guarantor of the obligations of the turnkey contractor under the projects’ engineering, procurement and construction agreements, entered into a global settlement of all disputes relating to the construction of the Mystic 8 and 9 and Fore River generating facilities. See Note 15 — Commitments and Contingencies for information regarding the settlement of litigation associated with the projects.

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)

In connection with the decision to transition out of Boston Generating and the generating units, Generation recorded during the third quarter of 2003 an impairment charge of its long-lived assets pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144), of $945 million ($573 million net of income taxes) in operating expenses within its Consolidated Statements of Income and Comprehensive Income. As a result of Boston Generating’s liabilities being greater than its assets at the time of the sale, transfer and assignment of ownership, Exelon and Generation recorded a gain of $85 million ($52 million net of income taxes) in other income and deductions within the Consolidated Statements of Income and Comprehensive Income in the second quarter of 2004. In connection with the sale, Exelon and Generation recorded a liability associated with a guarantee by their subsidiary Exelon New England Holdings, LLC (Exelon New England) of fuel purchase obligations of Boston Generating. See Note 15 — Commitments and Contingencies for further information regarding the guarantee.

Boston Generating was reported in the Generation segment of Exelon’s consolidated financial statements prior to its sale. At the date of the sale, Boston Generating had approximately $1.2 billion in assets, primarily consisting of property, plant and equipment, and approximately $1.3 billion of liabilities of which approximately $1.0 billion was debt outstanding under the Boston Generating Credit Facility. As of the date of transfer, these amounts were eliminated from the Consolidated Balance Sheets of both Exelon and Generation. Exelon’s and Generation’s Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2004 and 2003 include the following financial results related to Boston Generating:



	Three Months						Six Months
	Ended June 30,						Ended June 30,

	2004			2003			2004			2003

Operating revenues	$	89		$	130		$	248		$	183
Operating income (loss)		(15	)		(10	)		(47	)		8
Net income (loss)(a)		42			(8	)		24			3

(a) Net income for the three and six months ended June 30, 2004 included an after-tax gain of $52 million related to the sale of Boston Generating in the second quarter of 2004.

See Note 5 — Selected Pro Forma and Consolidating Financial Information for the effect of the sale of Boston Generating as if the transaction had occurred on January 1, 2003 and was included in Exelon and Generation’s results from that date.


	*Disposition of Enterprises Entities (Exelon)*

Exelon Thermal Holdings Inc. On June 30, 2004, Enterprises sold its Chicago business of Exelon Thermal Holdings, Inc. (Thermal) for net cash proceeds of $134 million. A pre-tax gain of $45 million was recorded in other income and deductions on Exelon’s Consolidated Statements of Income and Comprehensive Income. Enterprises repaid $37 million of debt outstanding of the Chicago thermal operations prior to closing, resulting in prepayment penalties of $9 million, which were recorded in interest expense.

Exelon Services, Inc. During the six months ended June 30, 2004, Enterprises disposed of certain businesses of Exelon Services, Inc. (Services), including Exelon Solutions and certain businesses of the Mechanical and Integrated Technology Group. Total expected proceeds and the net gain on sale (before income taxes) recorded during the six months ended June 30, 2004 related to the disposition of these Services businesses were $34 million and $9 million, respectively. The gain was recorded in other income and deductions on Exelon’s Consolidated Statements of Income and Comprehensive Income. As of June 30, 2004,

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)

Services had assets and liabilities of $58 million and $90 million, respectively, which primarily represented the corporate operations and the remaining businesses of the Mechanical and Integrated Technology Group. See Assets and Liabilities Held for Sale below for information regarding the classification of the assets and liabilities of the remaining business of Services as held for sale as of June 30, 2004.

PECO TelCove. On June 30, 2004, Enterprises sold its investment in PECO TelCove, a communications joint venture, along with certain telecommunications assets, for proceeds of $49 million. A pre-tax gain of $9 million was recorded in other income and deductions on Exelon’s Consolidated Statements of Income and Comprehensive Income. An impairment charge of $5 million (before income taxes) related to the telecommunications assets had been recorded in the fourth quarter of 2003.

InfraSource, Inc. On September 24, 2003, Enterprises sold the electric construction and services, underground and telecom businesses of InfraSource, Inc. (InfraSource). See the Notes to Consolidated Financial Statements in Exelon’s 2003 Form 10-K for further information regarding this sale. Enterprises’ results of operations for the three and six months ended June 30, 2004 compared to the same periods in 2003 were significantly affected by the sale of InfraSource.

The results of Exelon Thermal and Services have been included in income from continuing operations within Exelon’s Consolidated Statements of Income and Comprehensive Income (as opposed to discontinued operations) as the impact of these entities on Exelon’s consolidated financial statements was not significant.


	*Exelon Energy Company (Generation)*

Effective January 1, 2004, Exelon contributed its interest in Exelon Energy Company to Generation. The transaction had no effect on the assets and liabilities of Exelon Energy Company, which were previously reported as a part of the Enterprises segment. Beginning in 2004, Exelon Energy Company’s assets and liabilities and results of operations are included in Generation’s financial statements. Generation and Enterprises’ 2003 segment information has been adjusted to reflect this transfer in Note 17 — Segment Information.

The following summary represents the assets and liabilities of Exelon Energy Company that were transferred to Generation as of January 1, 2004:


Current assets (including $5 million of cash)	$	89
Property, plant and equipment		2
Deferred debits and other assets		13
Current liabilities		(96	)
Deferred credits and other liabilities		(10	)
Accumulated other comprehensive loss		(2	)
Member’s equity		4

See Note 5 — Selected Pro Forma and Consolidating Financial Information for the effect of the transfer of Exelon Energy Company to Generation as if the transaction had occurred on January 1, 2003 and was included in Generation’s results from that date.


	*AmerGen Energy Company, LLC (Exelon and Generation)*

On December 22, 2003, Generation purchased British Energy plc’s (British Energy) 50% interest in AmerGen Energy Company, LLC (AmerGen) for $277 million. The allocation of fair value related to the

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)

valuation of long-lived assets will be affected by the finalization of the purchase price based on the completion of the review of the closing AmerGen balances at December 31, 2003.

Prior to the purchase, Generation was a 50% owner of AmerGen and had accounted for the investment as an unconsolidated equity method investment. For the three and six months ended June 30, 2003, Generation recorded $20 million and $84 million, respectively, of equity in earnings of unconsolidated affiliates related to its investment in AmerGen and recorded $110 million and $177 million, respectively, of purchased power from AmerGen. The book value of Generation’s investment in AmerGen prior to the purchase was $311 million. For the six months ended June 30, 2004, AmerGen’s assets and liabilities and results of operations are included in Generation’s financial statements.

See Note 5 — Selected Pro Forma and Consolidating Financial Information for the effect of the acquisition of the remaining 50% interest in AmerGen by Generation as if the transaction had occurred on January 1, 2003 and was included in Exelon and Generation’s results from that date.


	*Synthetic Fuel-Producing Facilities (Exelon)*

In November 2003, Exelon purchased interests in two synthetic fuel-producing facilities. The purchase price for these facilities included a combination of cash, notes payable and contingent consideration dependent upon the production level of the facilities. These facilities are not consolidated within Exelon’s financial statements because Exelon does not have a controlling financial interest in these facilities. The notes payable recorded for the purchase of the facilities was $238 million. Exelon’s right to acquire its share of tax credits generated by the facilities was recorded as an intangible asset and will be amortized as the tax credits are earned. Synthetic fuel facilities chemically change coal, including waste and marginal coal, into a fuel used at power plants. In April 2004, the Internal Revenue Service (IRS) issued two private letter rulings that affirmed that the process used by the facilities will produce a solid synthetic fuel that qualifies for tax credits under Section 29 of the Internal Revenue Code. See Note 19 — Subsequent Events for information regarding investments in synthetic fuel-producing facilities that occurred in July 2004.


	*Assets and Liabilities Held for Sale (Exelon and Generation)*

The major classes of assets and liabilities classified as held for sale within Exelon’s and Generation’s Consolidated Balance Sheets as of June 30, 2004 consisted of the following:


	Generation		Enterprises		Exelon

Accounts receivable, net	$	—	$	8	$	8
Other current assets		—		2		2
Property, plant and equipment, net		9		1		10

Assets classified as held for sale	$	9	$	11	$	20


	Generation		Enterprises		Exelon

Accounts payable, accrued expenses and other current liabilities	$	—	$	11	$	11
Debt		3		—		3

Liabilities classified as held for sale	$	3	$	11	$	14

Generation. Generation classified certain assets and liabilities of Sithe as held for sale as of June 30, 2004. Sithe is consolidated within the financial statements of Generation pursuant to FIN No. 46-R. During

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 three months ended June 30, 2004, Sithe completed the sale of its gas and Australian businesses, which represented $151 million and $140 million of assets and liabilities held for sale, respectively, at March 31, 2004.

Enterprises. Enterprises classified the assets and liabilities of certain Services businesses as held for sale as of June 30, 2004 due to ongoing efforts to dispose of these businesses. These businesses are expected to be sold in 2004. See “Disposition of Enterprises Entities” above for further information.


4.	Sithe (Exelon and Generation)

Sithe is primarily engaged in the development, construction, ownership and operation of electric wholesale generating facilities in North America. At June 30, 2004, excluding assets held for sale, Sithe operated nine power plants with total average net capacity of 1,323 megawatts (MW). Sithe also has 49.5% interests in two 230-MW projects in Mexico, which commenced commercial operations during the second quarter of 2004.

The financial statements of all foreign subsidiaries were prepared in their respective local currencies and translated into U.S. dollars based on the current exchange rates at the end of the periods for the Consolidated Balance Sheets and on weighted-average rates for the periods for the Consolidated Statements of Income and Comprehensive Income. Foreign currency translation adjustments, net of deferred income tax benefits, are reflected as a component of other comprehensive income on the Consolidated Statements of Income and Comprehensive Income and accordingly have no effect on net income.

On November 25, 2003, Generation, Reservoir Capital Group (Reservoir) and Sithe completed a series of transactions resulting in Generation and Reservoir each indirectly owning a 50% interest in Sithe (Generation owned 49.9% prior to November 25, 2003). Generation’s intent is to fully divest its interest in Sithe. See the 2003 Form 10-K for further details regarding these transactions.

Exelon and Generation had accounted for the investment in Sithe as an unconsolidated equity method investment prior to its consolidation on March 31, 2004 pursuant to FIN No. 46-R. See Note 2 — New Accounting Principles for further discussion.

As a result of the series of transactions referred to above, the consolidation of Sithe at March 31, 2004 was accounted for as a step acquisition pursuant to purchase accounting policies. Under the provisions of FIN No. 46-R, the operating results of Sithe were included in Exelon’s and Generation’s results of operations beginning April 1, 2004. Sithe has entered into tolling arrangements (Tolling Agreement) with Dynegy Power Marketing and its affiliates with respect to Sithe’s Independence Station. The Tolling Agreement commenced on July 1, 2001 and runs through 2014. Additionally, Sithe has entered into an energy purchase agreement (Energy Purchase Agreement) with Consolidated Edison Company relating to the Independence Station, which continues through 2014. As a result of the acquisition accounting described above, values were assigned to the Tolling Agreement and the Energy Purchase Agreement on March 31, 2004 of approximately $91 million and $282 million, respectively, which have been recorded as intangible assets on Exelon’s and Generation’s Consolidated Balance Sheets in deferred debits and other assets. These amounts were determined based on fair value techniques utilizing the contract terms and various other estimates including forward power prices, discount rates and option pricing models. The intangible assets representing the Tolling Agreement and the Energy Purchase Agreement are being amortized using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or used up in accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142), not to exceed the

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)

terms of the related contracts. The allocation of fair value related to the valuation of long-lived assets is preliminary and is anticipated to be finalized in the third quarter of 2004.

Sithe’s intangible assets are subject to amortization and are included in other non-current assets on Generation’s Consolidated Balance Sheet. Amortization expense for intangible assets was $15 million for the three months ended June 30, 2004. The components of Sithe’s intangible assets at June 30, 2004 were as follows:


			Accumulated
	Gross Carrying		Amortization		Intangible
Agreement Type	Amount		June 30, 2004		Asset, net

Energy Purchase Agreement	$	376	$	13	$	363
Tolling Agreement		71		2		69

Total	$	447	$	15	$	432

Annual amortization expense for intangible assets is estimated to be $43 million for 2004, $58 million for 2005, $56 million for 2006, $50 million for 2007, and $44 million for 2008.

In connection with the consolidation of Sithe, certain indemnification guarantees, which were previously recorded in accordance with the provisions of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN No. 45), at Generation on November 25, 2003 pursuant to the series of transactions referred to above, were reversed in accordance with FIN No. 45 as Generation can no longer record liabilities associated with guarantees for the performance of a consolidated entity. The reversal of the guarantees resulted in Exelon and Generation recording income of $32 million (net of income taxes) as a cumulative effect of a change in accounting principle. The condensed consolidating financial information included in Note 5 — Selected Pro Forma and Consolidating Financial Information presents the financial position of Exelon, Generation and Sithe, as well as consolidating entries related primarily to acquisition notes payables and receivables between Generation and Sithe.

The book value of Generation’s investment in Sithe immediately prior to its consolidation on March 31, 2004 was $49 million. For the three months ended June 30, 2004, Generation recorded no equity method income or loss as Sithe is consolidated in Generation’s results. For the three months ended June 30, 2003, Generation recorded $2 million of equity method losses. Generation recorded $2 million of equity method losses during the six months ended June 30, 2004 and no equity method income or losses for the six months ended June 30, 2003.

Substantially all of Sithe’s property, plant and equipment and project agreements secure Sithe’s outstanding long-term debt, which consists primarily of project debt. During 2003, Sithe entered into an agreement with Exelon and Generation under which Exelon would obtain letters of credit to support contractual obligations of Sithe and its subsidiaries. As of June 30, 2004, Exelon has obtained $60 million of letters of credit in support of Sithe’s obligations not including a $50 million letter of credit which is not guaranteed by Exelon. With the exception of the issuance of letters of credit to support contractual obligations, the creditors of Sithe have no recourse against the general credit of Exelon or Generation.

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 details the Sithe balance sheet classification of the mark-to-market energy contract net assets recorded as of June 30, 2004:


Current assets		$	24
Noncurrent assets			232

	Total mark-to-market energy contract assets		256

Current liabilities			(16	)
Noncurrent liabilities			(140	)

	Total mark-to-market energy contract liabilities		(156	)

Total mark-to-market energy contract net assets		$	100


5.	Selected Pro Forma and Consolidating Financial Information


	*Exelon*

The following unaudited pro forma financial information gives effect to the acquisition of the remaining 50% interest in AmerGen by Generation and the sale of Boston Generating by Generation, in each case, as if the transaction had occurred on January 1, 2003 and was included in or excluded from Exelon’s results from that date.


			Acquisition		Sale of						Pro Forma
	Exelon		of 50% of		Boston			Eliminating			Exelon
Three Months Ended June 30, 2003	As Reported		AmerGen		Generating			Entries			Consolidated

Total operating revenue	$	3,721	$	159	$	130		$	(110	)	$	3,640
Operating income (loss)		800		21		(10	)		—			831
Income (loss) before cumulative effect of changes in accounting principles		372		38		(8	)		(20	)		398


			Acquisition		Sale of					Pro Forma
	Exelon		of 50% of		Boston		Eliminating			Exelon
Six Months Ended June 30, 2003	As Reported		AmerGen		Generating		Entries			Consolidated

Total operating revenue	$	7,795	$	307	$	183	$	(177	)	$	7,742
Operating income		1,557		59		8		—			1,608
Income before cumulative effect of changes in accounting principles		621		72		3		(37	)		653

The above unaudited pro forma financial information should not be relied upon as being indicative of the historical results that would have been obtained if the transactions had actually occurred on January 1, 2003, nor of the results that might be obtained in the future.

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)


	*Exelon Condensed Consolidating Balance Sheet at June 30, 2004*

The following condensed consolidating financial information presents the financial position of Exelon and Sithe, as well as eliminating entries related primarily to acquisition notes payables and receivables between Generation and Sithe.


								Exelon
					Eliminating			Consolidated
June 30, 2004	Exelon		Sithe		Entries			(As Reported)

Assets
Current assets	$	4,317	$	370	$	(156	)	$	4,531
Assets held for sale(a)		11		9		—			20
Property, plant and equipment, net		19,954		274		—			20,228
Other noncurrent assets		16,589		770		(36	)		17,323

Total assets	$	40,871	$	1,423	$	(192	)	$	42,102


Liabilities and stockholders’ equity
Current liabilities	$	4,150	$	321	$	(156	)	$	4,315
Liabilities held for sale(a)		11		3		—			14
Long-term debt		13,100		819		—			13,919
Other long-term liabilities(b)		14,497		195		49			14,741
Stockholders’ equity(c)		9,113		85		(85	)		9,113

Total liabilities and stockholders’ equity	$	40,871	$	1,423	$	(192	)	$	42,102

(a) Excludes assets and liabilities held for sale.

(b) Includes minority interest of consolidated subsidiaries.

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*

The following unaudited pro forma financial information gives effect to the acquisition of the remaining 50% interest in AmerGen, the transfer of Exelon Energy Company to Generation and the sale of Boston Generating, in each case, as if the transaction had occurred on January 1, 2003 and was included in or excluded from Generation’s results from that date.


											Pro Forma
	Generation		Businesses		Businesses			Eliminating			Generation
Three Months Ended June 30, 2003	As Reported		Acquired(a)		Disposed(b)			Entries			Consolidated

Total operating revenue	$	1,886	$	333	$	130		$	(154	)	$	1,935
Operating income (loss)		201		23		(10	)		—			234
Income (loss) before cumulative effect of changes in accounting principles		142		38		(8	)		(20	)		168

(a) Includes the acquisition of the remaining 50% interest in AmerGen, and the transfer of Exelon Energy Company to Generation.

(b) Includes the sale of Boston Generating.


										Pro Forma
	Generation		Businesses		Businesses		Eliminating			Generation
Six Months Ended June 30, 2003	As Reported		Acquired(a)		Disposed(b)		Entries			Consolidated

Total operating revenue	$	3,765	$	811	$	183	$	(285	)	$	4,108
Operating income		295		45		8		—			332
Income before cumulative effect of changes in accounting principles		89		62		3		(37	)		111

(a) Includes the acquisition of the remaining 50% interest in AmerGen, and the transfer of Exelon Energy Company to Generation.

(b) Includes the sale of Boston Generating.

The above unaudited pro forma financial information should not be relied upon as being indicative of the historical results that would have been obtained if these acquisitions had actually occurred on January 1, 2003, nor of the results that might be obtained in the future.

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 Condensed Consolidating Balance Sheet at June 30, 2004*

The following condensed consolidating financial information presents the financial position of Generation, Sithe and Exelon Energy, as well as eliminating entries related primarily to acquisition notes payables and receivables between Generation and Sithe.


										Generation
					Exelon		Eliminating			Consolidated
June 30, 2004	Generation		Sithe		Energy		Entries			(As Reported)

Assets
Current assets(a)	$	2,515	$	370	$	68	$	(170	)	$	2,783
Assets held for sale		—		9		—		—			9
Property, plant and equipment, net		6,218		274		1		—			6,493
Other noncurrent assets		5,367		770		16		(36	)		6,117

Total assets	$	14,100	$	1,423	$	85	$	(206	)	$	15,402


Liabilities and members’ equity
Current liabilities(a)	$	2,496	$	321	$	66	$	(170	)	$	2,713
Liabilities held for sale		—		3		—		—			3
Long-term debt		1,650		819		—		—			2,469
Other long-term liabilities(b)		6,981		195		5		49			7,230
Members’ equity		2,973		85		14		(85	)		2,987

Total liabilities and members’ equity	$	14,100	$	1,423	$	85	$	(206	)	$	15,402

(a) Excludes assets and liabilities held for sale.

(b) Includes minority interest of consolidated subsidiaries.


6.	Stock-Based Compensation (Exelon, ComEd, PECO and Generation)

Exelon accounts for its stock-based compensation plans under the intrinsic method prescribed by Accounting Principles Board No. 25, “Accounting for Stock Issued to Employees” and related interpretations and follows the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123), and SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123.” The tables below show the effect on net income

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)

and earnings per share for Exelon had Exelon elected to account for its stock-based compensation plans using the fair-value method under SFAS No. 123 for the three and six months ended June 30, 2004 and 2003:


	*Exelon*



		Three Months
		Ended June 30,

		2004			2003

Net income — as reported		$	521		$	372
Deduct: Total stock-based compensation expense determined under fair-value method for all awards, net of income taxes			(5	)		(5	)

Pro forma net income		$	516		$	367

Earnings per share:
	Basic — as reported	$	0.79		$	0.57
	Basic — pro forma	$	0.78		$	0.56
	Diluted — as reported	$	0.78		$	0.57
	Diluted — pro forma	$	0.77		$	0.56



		Six Months
		Ended June 30,

		2004			2003

Net income — as reported		$	933		$	733
Deduct: Total stock-based compensation expense determined under fair-value method for all awards, net of income taxes			(10	)		(10	)

Pro forma net income		$	923		$	723

Earnings per share:
	Basic — as reported	$	1.41		$	1.13
	Basic — pro forma	$	1.40		$	1.11
	Diluted — as reported	$	1.40		$	1.12
	Diluted — pro forma	$	1.38		$	1.11

The net income of ComEd, PECO and Generation for the three and six months ended June 30, 2004 and 2003 would not have been significantly affected had Exelon elected to account for its stock-based compensation plans using the fair-value method under SFAS No. 123.


7.	Regulatory Issues (Exelon, ComEd and Generation)


	*Exelon and ComEd*

PJM Integration. On April 1, 2003, ComEd received approval from the FERC to transfer control of its transmission assets to PJM Interconnection (PJM). The FERC also accepted for filing the amended PJM Tariff to reflect the inclusion of the transmission assets of ComEd and other new members, subject to a compliance filing and hearing on certain issues. On June 2, 2003, ComEd began receiving electric transmission reservation services from PJM and transferred control of ComEd’s Open Access Same Time Information System to PJM. On March 18, 2004, the FERC approved ComEd’s plan to complete its integration into PJM, subject to the North American Electric Reliability Council (NERC) approval of the

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)

PJM and Midwest ISO reliability plans to assure no adverse effects. The NERC granted the required approval on April 2, 2004. On April 27, 2004, the FERC issued its order approving ComEd’s application, subject to certain stipulations, including a provision to hold certain other utilities harmless from the impacts of ComEd joining PJM. ComEd agreed to these stipulations and fully integrated into PJM on May 1, 2004.

Open Access Transmission Tariff. On November 10, 2003, the FERC issued an order allowing ComEd to put into effect, subject to refund and rehearing, new transmission rates designed to reflect nearly $500 million of infrastructure investments made since 1998. However, because of the Illinois retail rate freeze and the method for calculating competitive transition charges, the increase is not expected to have a significant effect on operating revenues until after December 31, 2006. ComEd began charging the new rates May 1, 2004. ComEd’s management believes an adequate reserve for any required refunds has been established in the event that the new rates are adjusted based on rehearing or settlement negotiations.


	*Exelon and Generation*

Service Life Extension. Effective January 1, 2004, Generation changed its accounting estimates related to the depreciation of certain AmerGen generating facilities. The estimated service lives were extended by 20 years for the three AmerGen stations. These changes were based on engineering and economic feasibility analyses performed by Generation. The service life extensions are subject to approval by the Nuclear Regulatory Commission (NRC) extensions of the existing NRC operating licenses. Generation has not applied for license extensions at the AmerGen facilities, but has announced its plan to file an extension request for the Oyster Creek Nuclear Generating Station (Oyster Creek), and is planning on filing for license extensions at Unit 1 at the Three Mile Island Nuclear Station (TMI) and the Clinton Nuclear Power Station (Clinton) on a timeline consistent and integrated with the other planned extension filings for the Generation nuclear fleet.

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)


8.	Goodwill (Exelon and ComEd)


	*Exelon*

As of June 30, 2004 and December 31, 2003, Exelon had recorded goodwill of approximately $4.7 billion. Under the provisions of SFAS No. 142, goodwill is tested for impairment at least annually, or more frequently if events or circumstances indicate that goodwill might be impaired. Exelon will perform its annual goodwill impairment assessment in the fourth quarter of 2004. The changes in the carrying amount of goodwill by reportable segment (see Note 17 — Segment Information for further information regarding Exelon’s segments) for the periods ended June 30, 2004 and December 31, 2003 were as follows:


		Energy
		Delivery			Enterprises			Total

Balances as of January 1, 2003		$	4,916		$	76		$	4,992
Impairment losses			—			(72	)		(72	)
Adoption of SFAS No. 143(a):
	Reduction of asset retirement obligation		(210	)		—			(210	)
	Cumulative effect of change in accounting principle		5			—			5
Resolution of certain tax matters			8			—			8
Other			—			(4	)		(4	)

Balances as of December 31, 2003			4,719			—			4,719
Resolution of certain tax matters			(5	)		—			(5	)

Balances as of June 30, 2004		$	4,714		$	—		$	4,714

(a) See Notes to Consolidated Financial Statements of Exelon in the 2003 Form 10-K for information regarding the adoption of SFAS No. 143.


	*ComEd*

As of June 30, 2004 and December 31, 2003, ComEd had recorded goodwill of approximately $4.7 billion. Under the provisions of SFAS No. 142, goodwill is tested for impairment at least annually, or more frequently if events or circumstances indicate that goodwill might be impaired. ComEd will perform its annual goodwill impairment assessment in the fourth quarter of 2004. The changes in the carrying amount of goodwill for the periods ended June 30, 2004 and December 31, 2003 were as follows:


Balance as of January 1, 2003		$	4,916
Adoption of SFAS No. 143(a):
	Reduction of asset retirement obligation		(210	)
	Cumulative effect of change in accounting principle		5
Resolution of certain tax matters			8

Balance as of December 31, 2003			4,719
Resolution of certain tax matters			(5	)

Balance as of June 30, 2004		$	4,714

(a) See Notes to Consolidated Financial Statements of ComEd in the 2003 Form 10-K for information regarding the adoption of SFAS No. 143.

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)


9.	Long-Term Debt (Exelon, ComEd, PECO and Generation)


	*Boston Generating Credit Facility*

Approximately $1.0 billion of debt was outstanding under the non-recourse Boston Generating Credit Facility at December 31, 2003, all of which was reflected in the Consolidated Balance Sheets of Exelon and Generation as a current liability due to certain events of default under the Boston Generating Credit Facility.

The outstanding debt under the Boston Generating Credit Facility was eliminated from the financial statements of Exelon and Generation upon the sale of Generation’s ownership interest in Boston Generating in May 2004. See Note 3 — Acquisitions and Dispositions for additional information regarding the sale.


	*Long-Term Debt*

Issuance of Long-Term Debt. During the six months ended June 30, 2004, the following long-term debt was issued:

Interest

Company

Type

Rate

Maturity

Amount

PECO

First and Refunding Mortgage Bonds

5.90%

May 1, 2034

Total issuances

Debt Retirements and Redemptions. During the six months ended June 30, 2004, the following debt was retired or redeemed:

Interest

Company

Type

Rate

Maturity

Amount

PECO

First and Refunding Mortgage Bonds

6.375%

August 15, 2005

ComEd

Note

7.375%

January 15, 2004

150

ComEd

Pollution Control Revenue Bonds

5.30%

January 15, 2004

ComEd

Sinking Fund Debentures

3.125%

April 1, 2004

ComEd

Sinking Fund Debentures

4.750%

June 1, 2004

Enterprises

Note

7.68%

June 30, 2023

Enterprises

Note

9.09%

January, 31, 2020

Total retirements and redemptions

290

During the three and six months ended June 30, 2004, ComEd made payments of $86 million and $179 million, respectively, related to its obligation to the ComEd Transitional Funding Trust, and PECO made payments of $78 million and $166 million, respectively, related to its obligation to the PETT. Additionally, Exelon made payments on other long-term debt obligations of $22 million.

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 Long-Term Debt. At June 30, 2004, the following long-term debt of Sithe was consolidated in Exelon’s and Generation’s Consolidated Balance Sheets as a result of the adoption of FIN No. 46-R. See Note 2 — New Accounting Principles and Note 4 — Sithe for further information regarding the consolidation of Sithe.


			Stated					Face
			Interest					Amount
			Rate			Maturity		of Debt

Non-recourse project debt:
	Independence notes and bonds:
		Secured bonds payable in semiannual installments commencing June 2003		8.50%	(a)		2007	$	122
		Secured bonds payable in semiannual installments commencing December 2007		9.00%	(a)		2013		409
	Term loan repayable primarily in quarterly installments:
		Batavia		18.00%			2007		1
Subordinated debt:
		Tracking account loan payable in semiannual installments commencing June 2015		7.00%	(a)		2035		419

Total face amount of debt								$	951
	Unamortized debt discount and premium, net								(99	)
	Long-term debt due within one year								(33	)

Total long-term debt								$	819

(a) In addition to the stated interest rate, an additional 1.97% and 0.99% of interest on the carrying amount of the secured bonds payable is being credited due to debt premiums and 1.63% of interest on the carrying amount of the subordinated debt is being incurred due to the debt discount recorded at the time of the purchase.

Additionally, $3 million of Sithe’s long-term debt was classified as liabilities held for sale at June 30, 2004.

Aggregate maturities of Sithe’s long-term debt relating to continuing operations are as follows:


2004	$	33
2005		34
2006		37
2007		40
2008		44
2009 and thereafter		763

Total minimum payments		951
Net debt discount to be amortized to interest expense		(99	)

Present value of minimum payments	$	852

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.	Severance Benefits (Exelon, ComEd, PECO and Generation)

Exelon, ComEd, PECO and Generation provide severance and health and welfare benefits to terminated employees pursuant to pre-existing severance plans primarily based upon each employee’s years of service with Exelon and compensation level. The registrants account for their ongoing severance plans in accordance with SFAS No. 112, “Employer’s Accounting for Postemployment Benefits, an amendment of FASB Statements No. 5 and 43,” and SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” and accrue amounts associated with severance benefits that are considered probable and that can be reasonably estimated.

In conjunction with The Exelon Way, a company-wide effort to define how Exelon will conduct business in years to come, Exelon, ComEd, PECO and Generation have collectively identified 1,650 positions for elimination through June 30, 2004. Exelon, ComEd, PECO and Generation based their estimates of the number of positions to be eliminated on management’s current plans and ability to determine the appropriate staffing levels to effectively operate the businesses. Exelon, ComEd, PECO and Generation may incur further severance costs associated with The Exelon Way if additional positions are identified for elimination. These costs will be recorded in the period in which the costs can be first reasonably estimated.

The following table presents, by segment, Exelon’s total salary continuance severance costs for the three and six months ended June 30, 2004. There were no significant salary continuance severance costs recorded during the three and six months ended June 30, 2003.


	Energy											Exelon
Salary continuance severance	Delivery			Generation			Enterprises			Corporate		Consolidated

Expense (income) recorded for three months ended June 30, 2004	$	(1	)	$	1		$	(1	)	$	4	$	3
Expense (income) recorded for six months ended June 30, 2004(a,b)		4			(5	)		—			5		4

(a) In 2004, PECO recorded a charge of $4 million for new positions identified.

(b) In 2004, Generation recorded a charge of $2 million for new positions identified and reversed $7 million to reduce accruals for individuals previously identified under The Exelon Way.

The following table provides total salary continuance severance costs for ComEd, PECO and Generation for the three and six months ended June 30, 2004. There were no significant salary continuance severance costs recorded during the three and six months ended June 30, 2003.


Salary continuance severance	ComEd		PECO			Generation

Expense (income) recorded for three months ended June 30, 2004	$	—	$	(1	)	$	1
Expense (income) recorded for six months ended June 30, 2004(a,b)		—		4			(5	)

(a) In 2004, PECO recorded a charge of $4 million for new positions identified.

(b) In 2004, Generation recorded a charge of $2 million for new positions identified and reversed $7 million to reduce accruals for individuals previously identified under The Exelon Way.

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 tables provide a roll forward of the salary continuance severance obligations from January 1, 2003 through June 30, 2004 for Exelon, ComEd, PECO and Generation:


	Exelon
Salary continuance obligations	Consolidated			ComEd			PECO			Generation

Balance at January 1, 2003	$	39		$	15		$	—		$	11
Additions		135			61			16			38
Payments		(39	)		(21	)		(2	)		(9	)
Other adjustments		4			—			—			3

Balance at January 1, 2004		139			55			14			43
Additions (reductions)(a)(b)		4			—			4			(5	)
Payments		(42	)		(13	)		(4	)		(16	)
Other adjustments(c)		(3	)		—			—			—

Balance at June 30, 2004	$	98		$	42		$	14		$	22

(a) In 2004, Generation recorded a charge of $2 million for new positions identified and reversed $7 million to reduce accruals for individuals previously identified under The Exelon Way.

(b) In 2004, PECO recorded a charge of $4 million for new positions identified.

(c) In 2004, Generation increased the reserve for liabilities acquired upon the transfer of the operations of Exelon Energy Company to Generation and reduced the reserve for liabilities associated with Boston Generating, which was sold in May 2004.


11.	Retirement Benefits (Exelon, ComEd, PECO and Generation)

Exelon sponsors defined benefit pension plans and postretirement welfare benefit plans applicable to essentially all ComEd, PECO, Generation and Exelon Business Services Company (BSC) employees and certain employees of Enterprises. Substantially all non-union employees and electing union employees hired on or after January 1, 2001 participate in Exelon-sponsored cash balance pension plans. Substantially all non-union employees hired prior to January 1, 2001 were offered a choice to remain in Exelon’s traditional pension plan or transfer to a cash balance pension plan for management employees. Employees of AmerGen participate in separate defined benefit pension plans and postretirement welfare benefit plans sponsored by AmerGen.

The defined benefit pension plans and postretirement welfare benefit plans are accounted for in accordance with SFAS No. 87, “Employer’s Accounting for Pensions,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions,” and are disclosed in accordance with SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits — an Amendment of FASB Statements No. 87, 88, and 106” (revised 2003). The costs of providing benefits under these plans are dependent on historical information, such as employee age, length of service and level of compensation, and the actual rate of return on plan assets, in addition to assumptions about the future, including the expected rate of return on plan assets, the discount rate applied to benefit obligations, rate of compensation increase and the anticipated rate of increase in health care costs. The effects of changes in these factors on pension and other postretirement welfare benefit obligations are generally recognized over the expected remaining service life of the employees rather than immediately recognized in the income statement. Exelon uses a December 31 measurement date for the majority of its plans.

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)

Exelon’s traditional and cash balance pension plans are intended to be tax-qualified defined benefit plans, and Exelon has submitted applications to the IRS for rulings on the tax-qualification of the form of each plan. By letters dated April 21, 2004, the IRS notified Exelon that the rulings on its applications for the traditional and management cash balance plans were delayed pending advice from its National Office, pursuant to a previously announced moratorium on rulings with respect to plans involved in so called cash balance “conversions.” On June 1, 2004, the IRS issued a favorable ruling on the union cash balance plan.

On June 15, 2004, the U.S. Treasury Department announced the withdrawal of its proposed regulations covering cash balance plans in order to provide Congress an opportunity to consider proposed legislation. In addition, various methods used by other employers to accrue and calculate benefits under cash balance plans have been challenged in recent lawsuits. The design of Exelon’s cash balance plans differs in certain material respects from the cash balance plans involved in the cases decided to date, and the courts have not reached uniform decisions on certain issues. As a result, considerable uncertainty remains regarding the application of the Employee Retirement Income Security Act of 1974, the Internal Revenue Code and federal employment laws to cash balance plans. Exelon does not know how the current uncertainty will be resolved and cannot determine at this time what impact, if any, future developments in this area will have on its pension plans or the funding of its pension obligations.

During the second quarter of 2004, Exelon early adopted FSP FAS 106-2. See Note 2 — New Accounting Principles for information regarding the adoption of FSP FAS 106-2 and the effect on the net periodic benefit cost of the other postretirement benefits plans included in the tables below.

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 tables present the components of Exelon’s net periodic benefit costs recognized for the three and six months ended June 30, 2004 and 2003, including the net periodic benefit costs of AmerGen’s pension and postretirement plans for 2004. The expected long-term rates of return on plan assets used to estimate 2004 pension and other postretirement benefit costs are 9.00% and 8.33%, respectively. A portion of the net periodic benefit cost is capitalized within the Consolidated Balance Sheets.



								Other
								Postretirement
		Pension Benefits						Benefits


		Three Months						Three Months
		Ended June 30,						Ended June 30,

		2004			2003			2004			2003

Service cost		$	33		$	27		$	20		$	17
Interest cost			134			130			44			41
Expected return on assets			(153	)		(146	)		(23	)		(19	)
Amortization of:
	Transition obligation (asset)		(1	)		(1	)		2			3
	Prior service cost		4			4			(19	)		(14	)
	Actuarial loss		15			5			15			12
Curtailment charge(a)			5			—			3			—
Special termination benefits charge(b)			—			—			8			—

Net periodic benefit cost		$	37		$	19		$	50		$	40

(a) ComEd, PECO and Generation were allocated curtailment charges for pension and other postretirement benefits of $3 million, $2 million and $3 million, respectively.

(b) ComEd, PECO and Generation were allocated special termination benefit charges related to other postretirement benefits of $3 million, $2 million and $2 million, respectively.

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)



								Other
								Postretirement
		Pension Benefits						Benefits


		Six Months						Six Months
		Ended June 30,						Ended June 30,

		2004			2003			2004			2003

Service cost		$	66		$	54		$	40		$	34
Interest cost			268			260			89			83
Expected return on assets			(307	)		(292	)		(46	)		(38	)
Amortization of:
	Transition obligation (asset)		(2	)		(2	)		4			5
	Prior service cost		8			8			(38	)		(27	)
	Actuarial loss		30			11			30			24
Curtailment charge(a)			5			—			3			—
Special termination benefits charge(b)			—			—			8			—

Net periodic benefit cost		$	68		$	39		$	90		$	81

(a) ComEd, PECO and Generation were allocated curtailment charges for pension and other postretirement benefits of $3 million, $2 million and $3 million, respectively.

(b) ComEd, PECO and Generation were allocated special termination benefit charges related to other postretirement benefits of $3 million, $2 million and $2 million, respectively.

The following table presents the allocation by registrant of Exelon’s pension and post-retirement benefit costs, excluding curtailment and special termination benefits costs, during the three and six months ended June 30, 2004 and 2003:



	Three Months				Six Months
	Ended June 30,				Ended June 30,

Pension and Postretirement Benefit Costs	2004		2003		2004		2003

ComEd	$	23	$	23	$	47	$	46
PECO		8		13		16		28
Generation		30		24		59		48

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, 2004 and 2003:



	Three Months				Six Months
	Ended June 30,				Ended June 30,

Savings plan matching contributions	2004		2003		2004		2003

Exelon	$	14	$	15	$	28	$	27
ComEd		4		5		8		9
PECO		1		2		3		4
Generation		6		6		13		12

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)


12.	Income Taxes (Exelon, ComEd, PECO and Generation)


	*Exelon*

Exelon’s effective income tax rate varied from the U.S. Federal statutory rate principally due to the following:



		Three Months						Six Months
		Ended June 30,						Ended June 30,

		2004			2003			2004			2003

U.S. Federal statutory rate			35.0	%		35.0	%		35.0	%		35.0	%
Increase (decrease) due to:
	Synthetic fuel-producing facilities credit(a)		(6.5	)		—			(7.2	)		—
	Low income housing credit		(0.5	)		(0.6	)		(0.5	)		(0.7	)
	Plant basis differences		(0.4	)		(0.6	)		(0.4	)		(0.6	)
	Amortization of investment tax credit		(0.4	)		(0.4	)		(0.4	)		(0.5	)
	Tax exempt interest income		(0.3	)		(0.2	)		(0.4	)		(0.4	)
	State income taxes, net of Federal income tax benefit		2.7			3.4			2.7			3.6
	Nontaxable employee benefits		(0.3	)		—			(0.3	)		—
	Other, net		1.4			0.7			1.2			0.8

Effective income tax rate			30.7	%		37.3	%		29.7	%		37.2	%

(a) See Note 3 — Acquisitions and Dispositions for further information regarding these investments.


	*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 June 30,						Ended June 30,

		2004			2003			2004			2003

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		4.7			4.8			4.8			4.8
	Amortization of regulatory asset		0.5			0.5			0.5			0.5
	Amortization of investment tax credit		(0.2	)		(0.2	)		(0.2	)		(0.2	)
	Nontaxable employee benefits		(0.3	)		—			(0.2	)		—
	Other		(0.4	)		0.1			(0.2	)		(0.2	)

Effective income tax rate			39.3	%		40.2	%		39.7	%		39.9	%

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 June 30,						Ended June 30,

		2004			2003			2004			2003

U.S. Federal statutory rate			35.0	%		35.0	%		35.0	%		35.0	%
Increase (decrease) due to:
	Plant basis differences		(1.4	)		(1.5	)		(1.2	)		(1.0	)
	State income taxes, net of Federal income tax benefit		(0.7	)		(0.2	)		0.3			0.9
	Amortization of investment tax credit		(0.4	)		(0.4	)		(0.4	)		(0.4	)
	Nontaxable employee benefits		(0.5	)		—			(0.2	)		—
	Other		1.3			4.2			(1.0	)		0.2

Effective income tax rate			33.3	%		37.1	%		32.5	%		34.7	%


	*Generation*

Generation’s effective income tax rate varied from the U.S. Federal statutory rate principally due to the following:



		Three Months						Six Months
		Ended June 30,						Ended June 30,

		2004			2003			2004			2003

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		3.1			3.4			3.5			8.0
	Tax exempt interest income		(0.9	)		(0.5	)		(1.3	)		(2.2	)
	Nontaxable employee benefits		(0.6	)		—			(0.5	)		—
	Amortization of investment tax credit		(0.4	)		(0.6	)		(0.6	)		(1.6	)
	Nuclear decommissioning trust income		1.3			1.7			2.0			4.2
	Other		0.1			0.1			—			0.4

Effective income tax rate			37.6	%		39.1	%		38.1	%		43.8	%


13.	Asset Retirement Obligations (Exelon and Generation)

SFAS No. 143 provides accounting guidance for retirement obligations (whether statutory, contractual or as a result of principles of promissory estoppel) associated with tangible long-lived assets. Liabilities for SFAS No. 143 asset retirement obligations (AROs) have been recorded at Generation in connection with its obligation to decommission its nuclear power plants as well as legal obligations associated with the closing of its fossil power plants. Based on the extended license lives of the nuclear plants, decommissioning expenditures are expected to occur primarily during the period 2029 through 2056. Exelon, through its regulated subsidiary utility companies, ComEd and PECO, currently recovers costs for decommissioning Generation’s nuclear generating stations, excluding the AmerGen plants, through regulated rates. The amounts recovered from

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)

customers are deposited into trust accounts and invested for funding the future decommissioning costs of the nuclear generating stations.

Exelon and Generation had $4,890 million and $4,721 million as of June 30, 2004 and December 31, 2003, respectively, recorded as nuclear decommissioning trust funds on Exelon’s and Generation’s Consolidated Balance Sheets which represent decommissioning assets in trust accounts. Generation anticipates that all trust fund assets will ultimately be used to decommission Generation’s nuclear plants.

The following table presents a roll forward of the ARO reflected on the Exelon and Generation Consolidated Balance Sheets from January 1, 2003 to June 30, 2004:


	Generation			Exelon

Asset retirement obligation at January 1, 2003	$	2,363		$	2,366
Consolidation of AmerGen		487			487
Accretion expense		160			161
Expenditures to decommission retired plants		(14	)		(14	)
Reclassification of Thermal ARO as held for sale(a)		—			(3	)

Asset retirement obligation at December 31, 2003		2,996			2,997
Accretion expense for the six months ended June 30, 2004		102			102
Additional liabilities incurred(b)		6			6
Expenditures to decommission retired plants		(5	)		(5	)

Asset retirement obligation at June 30, 2004	$	3,099		$	3,100

(a) The ARO of Thermal was removed from the balance sheet upon its sale in the second quarter of 2004.

(b) Additional liabilities incurred are primarily due to the consolidation of Sithe.

Generation is currently evaluating changes in estimated future cash flows related to the decommissioning of its nuclear units that will impact the recorded amount of the ARO. This evaluation is expected to be completed by the end of 2004.


14.	Earnings Per Share and Shareholders’ Equity (Exelon)


	*Stock Split*

On January 27, 2004, the Board of Directors of Exelon approved a 2-for-1 stock split of Exelon’s common stock. The distribution date was May 5, 2004. The authorized common stock was increased from 600,000,000 shares with no par value to 1,200,000,000 shares with no par value. The share and per-share amounts included in Exelon’s consolidated financial statements and combined notes to consolidated financial statements have been adjusted for all periods presented to reflect the stock split.

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)


	*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 computation 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 June 30,				Ended June 30,

		2004		2003		2004		2003

Income before cumulative effect of changes in accounting principles		$	521	$	372	$	901	$	621
Cumulative effect of changes in accounting principles			—		—		32		112

Net income		$	521	$	372	$	933	$	733

Average common shares outstanding — basic			661		650		660		649
Assumed exercise of stock options			6		5		6		4

Average common shares outstanding — diluted			667		655		666		653

Earnings per average common share — Basic:
	Income before cumulative effect of changes in accounting principles	$	0.79	$	0.57	$	1.36	$	0.96
	Cumulative effect of changes in accounting principles		—		—		0.05		0.17

	Net income	$	0.79	$	0.57	$	1.41	$	1.13

Earnings per average common share — Diluted:
	Income before cumulative effect of changes in accounting principles	$	0.78	$	0.57	$	1.35	$	0.95
	Cumulative effect of changes in accounting principles		—		—		0.05		0.17

	Net income	$	0.78	$	0.57	$	1.40	$	1.12

The number of stock options not included in the calculation of diluted common shares outstanding due to their antidilutive effect was 1 million and 10 million for the three months ended June 30, 2004 and 2003, respectively, and 1 million and 10 million for the six months ended June 30, 2004 and 2003, respectively.


	*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. The share repurchase program is intended to mitigate, in part, the dilutive effect of shares issued under Exelon’s employee stock option plan and Exelon’s Employee Stock Purchase Plan (ESPP). The aggregate value of the shares of common stock repurchased pursuant to the program cannot exceed the economic benefit received after January 1, 2004 due to stock option exercises and share purchases pursuant to Exelon’s ESPP. The economic benefit consists of the direct cash proceeds from purchases of stock and the tax benefits associated with exercises of stock options. The share repurchase program has no specified limit on the number of shares that may be repurchased and no specified termination date. Any shares repurchased are held as treasury shares

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)

unless cancelled or reissued at the discretion of Exelon’s management. Treasury shares are recorded at cost. During the three and six months ended June 30, 2004, 2.3 million shares of common stock were purchased under the share repurchase program for $75 million.


	*Shareholders’ Equity*

The following table summarizes the changes in shareholders’ equity for the six months ended June 30, 2004:


													Accumulated
													Other
													Comprehensive			Total
	Issued		Common		Treasury		Treasury			Retained			Income			Shareholders’
Dollars in millions, shares in thousands	Shares		Stock		Shares		Stock			Earnings			(Loss)			Equity

Balance, December 31, 2003		656,366	$	7,292		—	$	—		$	2,320		$	(1,109	)	$	8,503
Net income				—		—		—			933			—			933
Long-term incentive plan activity		5,956		166		—		—			—			—			166
Employee stock purchase plan issuances		155		5		—		—			—			—			5
Treasury stock purchases		—		—		2,327		(75	)		—			—			(75	)
Common stock dividends declared		—		—		—		—			(364	)		—			(364	)
Other comprehensive income (loss)		—		—		—		—			—			(142	)		(142	)

Balance, June 30, 2004		662,477	$	7,463		2,327	$	(75	)	$	2,889		$	(1,251	)	$	9,026


15.	Commitments and Contingencies (Exelon, ComEd, PECO and Generation)

For information regarding capital commitments, nuclear decommissioning and spent fuel storage at December 31, 2003, see the Commitments and Contingencies and Nuclear Decommissioning and Spent Fuel Storage notes in the Notes to Consolidated Financial Statements of Exelon, ComEd, PECO and Generation in the 2003 Form 10-K.


	*Energy Commitments*

At June 30, 2004, Generation’s long-term commitments, relating to the purchase and sale of energy, capacity and transmission rights from unaffiliated utilities and others, including the Midwest Generation contract, did not change significantly from December 31, 2003, except for the following:

• Sithe has power-only sales commitments of $46 million, transmission rights of $27 million and minimum fuel purchase commitments of $109 million.


	*Commercial Commitments*

Exelon, ComEd, PECO and Generation’s commercial commitments as of June 30, 2004, representing commitments not recorded on the balance sheet but potentially triggered by future events, including obligations to make payments on behalf of other parties and financing arrangements to secure obligations, did not change significantly from December 31, 2003, except for the following:

• In connection with the transfer of Exelon Energy Company to Generation effective January 1, 2004, Generation acquired $162 million in energy marketing contract guarantees. This transfer had no effect on the guarantees of Exelon.

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 acquired a $50 million letter of credit to support the contractual obligations of Sithe and its subsidiaries.

• Mystic Development LLC (Mystic) a former affiliate of Exelon New England has a long-term agreement through January 2020 with Distrigas of Massachusetts Corporation (Distrigas) for gas supply, primarily for the Boston Generating units. Under the agreement, gas purchase prices from Distrigas are indexed to the New England gas markets. Exelon New England has guaranteed Mystic’s financial obligations to Distrigas under the long-term supply agreement. Exelon New England’s guarantee to Distrigas remained in effect following the transfer of ownership interest in Boston Generating in May 2004. Under FIN No. 45, approximately $17 million is included as a liability within the Consolidated Balance Sheets of Exelon and Generation as of June 30, 2004 related to this guarantee. The terms of the guarantee do not limit the potential future payments that Exelon New England could be required to make under the guarantee.


	*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. Exelon has identified 69 sites where former MGP activities have or may have resulted in actual site contamination. Of these 69 sites, the Illinois Environmental Protection Agency has approved the clean up of 4 sites and the Pennsylvania Department of Environmental Protection has approved the clean up of 8 sites. Pursuant to a Pennsylvania Public Utility Commission (PUC) 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 (see Note 16 — Supplemental Financial Information). As of June 30, 2004 and December 31, 2003, Exelon, ComEd, PECO and Generation had accrued the following amounts for environmental liabilities:


	Total environmental		Portion of total related
	investigation and		to MGP investigation
June 30, 2004	remediation reserve		and remediation(a)

Exelon	$	130	$	101
ComEd		66		61
PECO		50		40
Generation		14		—

(a) Discounted.


	Total environmental		Portion of total related
	investigation and		to MGP investigation
December 31, 2003	remediation reserve		and remediation(a)

Exelon	$	129	$	105
ComEd		69		64
PECO		50		41
Generation		10		—

(a) Discounted.

Exelon, ComEd, PECO and Generation 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.

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)


	*Litigation*


	ComEd

Retail Rate Law. In 1996, three developers of non-utility generating facilities filed litigation against various Illinois officials claiming that the enforcement against those facilities of an amendment to Illinois law removing the entitlement of those facilities to state-subsidized payments for electricity sold to ComEd after March 15, 1996 violated their rights under federal and state constitutions. The developers also filed suit against ComEd for a declaratory judgment that their rights under their contracts with ComEd were not affected by the amendment and for breach of contract. On November 25, 2002, the court granted the developers’ motions for summary judgment. The judge also entered a permanent injunction enjoining ComEd from refusing to pay the retail rate on the grounds of the amendment and Illinois from denying ComEd a tax credit on account of such purchases. ComEd and Illinois each appealed the ruling. On March 9, 2004, the Illinois Appellate Court reversed the trial court. The Appellate Court held that the 1996 law does apply to the developers’ facilities and, therefore, they are not entitled to subsidized payments. The Court expressly ruled that the breach of contract claims against ComEd are dismissed with prejudice. Two of the developers sought review of the Appellate Court’s decision by the Illinois Supreme Court. On May 26, 2004, the Supreme Court declined to hear the earlier-filed of the two appeals. There is no set date by which the Court must decide if it will hear the remaining appeal. While ComEd cannot currently predict the ultimate outcome of this action, it does not believe that the action will have a material adverse effect on its results of operations or its cash flows.


	PECO and Generation

Real Estate Tax Appeals. PECO and Generation each have been challenging real estate taxes assessed on nuclear plants. PECO is involved in litigation in which it is contesting taxes assessed in 1997 under the Pennsylvania Public Utility Realty Tax Act of March 4, 1971, as amended (PURTA), and has appealed local real estate assessments for 1998 and 1999 on the Limerick Generating Station (Montgomery County, PA) (Limerick) and Peach Bottom Atomic Power Station (York County, PA) (Peach Bottom) plants. Generation is involved in real estate tax appeals for 2000 through 2004, also regarding the valuation of its Limerick and Peach Bottom plants, its Quad Cities Station (Rock Island County, IL) and, through its wholly owned subsidiary AmerGen, Three Mile Island Nuclear Station (Dauphin County, PA) and Oyster Creek Nuclear Generating Station (Forked River, NJ).

PECO and Generation believe their reserve balances for exposures associated with the real estate taxes as of June 30, 2004 reflect the probable expected outcome of the litigation and appeals proceedings in accordance with SFAS No. 5, “Accounting for Contingencies.” The ultimate outcome of such matters, however, could result in additional unfavorable or favorable adjustments to the consolidated financial statements of Exelon, PECO and Generation and such adjustments could be material.


	Generation

Cotter Corporation Litigation. During 1989 and 1991, actions were brought in federal and state courts in Colorado against ComEd and its subsidiary, Cotter Corporation (Cotter), seeking unspecified damages and injunctive relief based on allegations that Cotter permitted radioactive and other hazardous material to be released from its mill into areas owned or occupied by the plaintiffs, resulting in property damage and potential adverse health effects. Several of these actions resulted in nominal jury verdicts or were settled or dismissed. One action resulted in an award for the plaintiffs of a more substantial amount, but was reversed on April 22, 2003 by the Tenth Circuit Court of Appeals and remanded for retrial. An appeal by the plaintiffs to the United States Supreme Court was denied on November 10, 2003. No date has been set for a new trial.

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 February 18, 2000, ComEd sold Cotter to an unaffiliated third party. As part of the sale, ComEd agreed to indemnify Cotter for any liability incurred by Cotter as a result of these actions, as well as any liability arising in connection with the West Lake Landfill discussed in the next paragraph. In connection with Exelon’s 2001 corporate restructuring, the responsibility to indemnify Cotter for any liability related to these matters was transferred by ComEd to Generation. Generation cannot predict the ultimate outcome of the cases.

The U.S. Environmental Protection Agency (EPA) has advised Cotter that it is potentially liable in connection with radiological contamination at a site known as the West Lake Landfill in Missouri. Cotter is alleged to have disposed of approximately 39,000 tons of soils mixed with 8,700 tons of leached barium sulfate at the site. Cotter, along with three other companies identified by the EPA as potentially responsible parties (PRPs), has submitted a draft feasibility study addressing options for remediation of the site. The PRPs are also engaged in discussions with the State of Missouri and the EPA. The estimated costs of the anticipated remediation strategy for the site may range up to $22 million. Once a remedy is selected, it is expected that the PRPs will agree on an allocation of responsibility for the costs. Generation has accrued what it believes to be an adequate amount to cover its anticipated share of the liability.

Raytheon and Mitsubishi Litigation. In connection with the February 2004 settlement among Exelon, Generation and the lenders under the Boston Generating Credit Facility more fully described in Note 3 — Acquisitions and Dispositions, Exelon, Generation, the lenders and Raytheon, the guarantor of the obligations of the turnkey contractor under the projects’ engineering, procurement and construction agreements entered into a global settlement of all disputes relating to the construction of the Mystic 8 and 9 and Fore River generating facilities. Under the global settlement, Generation agreed to pay approximately $31.1 million to Raytheon and approximately $1.4 million to Boston Generating. Raytheon released Exelon, Generation, their affiliates and the lenders from construction claims related to the projects. Raytheon also resolved all of the pending Mitsubishi Heavy Industries, LTD (MHI) and Mitsubishi Heavy Industries of America (MHIA) claims relating to work performed on the projects prior to the settlement, and has indemnified Exelon, Generation, their affiliates and the lenders from certain subcontractor claims relating to the projects. In return, Exelon, Generation, their affiliates and the lenders released all of their claims against Raytheon. All litigation by and between Raytheon, MHI, MHIA and the project companies relating to the projects has been dismissed. Raytheon has also ceased all construction activities related to the Mystic 8 and 9 and Fore River generating facilities and assigned subcontracts to the project companies, and will cooperate with the transition of construction to a new contractor. In the event that the transfer of plant operations and power marketing activities are not completed by September 1, 2004, under the settlement documents among Exelon and the lenders, Generation will be reimbursed for the $32.5 million paid in connection with the settlement through a first claim against any payments otherwise payable to the lenders on account of their interests in the projects.

Oyster Creek. On April 7, 2004, AmerGen entered into settlements with the State of New Jersey relating to an environmental incident on September 23, 2002 at Oyster Creek. The incident resulted in a fishkill from heated water discharged from the plant. The State alleged that the plant had violated its water discharge permit. The settlements with the State of New Jersey settled all claims without any admission of liability for payments aggregating $1 million.


	Exelon, ComEd, PECO and Generation

Exelon, ComEd, PECO and Generation are involved in various other litigation matters that are being defended and handled in the ordinary course of business. Exelon, ComEd, PECO and Generation maintain accruals for such costs that are probable of being incurred and subject to reasonable estimation. The ultimate

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)

outcomes of such matters, as well as the matters discussed above, are uncertain and may have a material adverse effect on their respective financial condition, results of operations or cash flows.


	*Credit Contingencies*

Dynegy. Generation is counterparty to Dynegy, Inc. (Dynegy) in various energy transactions. The credit ratings of Dynegy are below investment grade. As of June 30, 2004, Generation has credit risk associated with Dynegy through Generation’s investment in Sithe. Sithe is a 100% owner of the Independence generating station, a 1,028-MW gas-fired facility that has an energy-only long-term tolling agreement with Dynegy, with a related financial swap arrangement. As of March 31, 2004, Generation consolidated the assets and liabilities of Sithe in accordance with the provisions of FIN No. 46-R. As a result, Generation has recorded an asset of $114 million on its Consolidated Balance Sheets related to the fair market value of the financial swap agreement with Dynegy that is marked-to-market under the terms of SFAS No. 133, “Accounting for Derivatives and Hedging Activities.” If Dynegy were unable to fulfill the terms the financial swap agreement, Generation would be required to impair the related asset. Exelon estimates, as a 50% owner of Sithe, that the impairment would result in an after-tax reduction of its net income of approximately $21 million.

In addition to the asset impairment, if Dynegy were unable to fulfill its obligations under the financial swap agreement and the tolling agreement, Generation would likely incur an impairment of the intangible asset associated with the tolling agreement associated with the Independence plant. Depending upon the timing of Dynegy’s failure to fulfill its obligations and the outcome of any restructuring initiatives, Generation could realize an after-tax charge of up to $50 million. In the event of a sale of Generation’s investment in Sithe to a third party, proceeds from the sale could be negatively affected by up to $84 million, which would represent an after-tax loss of up to $50 million. Additionally, the future economic value of AmerGen’s purchased power arrangement with Illinois Power Company (Illinois Power), a subsidiary of Dynegy, could be affected by events related to Dynegy’s financial condition. In February 2004, Dynegy announced an agreement to sell Illinois Power to a third party, which, upon closing of the transaction, would reduce Generation’s credit risk associated with Dynegy.


	*Income Tax Refund Claims*

ComEd and PECO have entered into several agreements with a tax consultant related to the filing of refund claims with the IRS. ComEd and PECO previously made refundable prepayments to the tax consultant of $11 million and $5 million, respectively. The fees for these agreements are contingent upon a successful outcome of the claims and are based upon a percentage of the refunds to be recovered from the IRS, if any. The ultimate net cash outflow to ComEd and PECO related to all the agreements will either be positive or neutral depending upon the outcome of the refund claims with the IRS. These potential tax benefits and associated fees could be material to the financial position, results of operations and cash flows of ComEd and PECO. A portion of ComEd’s tax benefits, including any associated interest for periods prior to the merger of Exelon, Unicom Corporation and PECO on October 20, 2000 (Merger), would be recorded as a reduction of goodwill pursuant to a reallocation of the Merger purchase price. ComEd and PECO cannot predict the timing of the final resolution of the refund claims.

During the three months ended June 30, 2004, the IRS granted preliminary approval for one of ComEd’s refund claims. As such, ComEd believes that it is probable that a fee will ultimately be paid to the tax consultant. Therefore, ComEd has recorded an expense of $5 million (pretax), which resulted in a decrease to the prepayment from $11 million to $6 million. The charge represents an estimate of the fee to the tax

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)

consultant which may be adjusted upward or downward depending on the IRS’ final calculation of the tax and interest benefit. ComEd has not reflected the tax benefit associated with the refund claim pending final approval of the IRS. However, as described above, the net income statement impact for ComEd is not anticipated to be material.


	*Jointly Owned Electric Utility Plant*

On January 28, 2004, the NRC issued a letter requesting PSE&G to conduct a review of its Salem facility, of which Generation owns 42.59%, to assess the workplace environment for raising and addressing safety issues. PSE&G responded to the letter on February 28, 2004, and had independent assessments of the work environment at the facility performed. Assessment results were provided to the NRC in May. The assessments concluded that Salem was safe for continued operation, but also identified issues that need to be addressed. At an NRC public meeting on June 16, 2004, PSE&G outlined its action plans to address these issues, which focus on safety conscious work environment, the corrective action program, and work management. A letter documenting these plans and commitments was sent to the NRC on June 25, 2004.

In June 2001, the NJDEP issued a renewed NPDES permit for Salem, expiring in July 2006, allowing for the continued operation of Salem with its existing cooling water system. An application for renewal of that permit, including a demonstration of compliance with the requirements of the recently published FWPCA Section 316(b) regulations, must be submitted to NJDEP by February 2, 2006 unless the agency grants additional time to collect information to comply with the new regulations. NJDEP advised PSE&G in a letter dated July 12, 2004 that it strongly recommends reducing cooling water intake flow commensurate with closed-cycle cooling as a compliance option for Salem. PSE&G has not made a determination regarding how it will demonstrate compliance with the Section 316(b) regulations. If application of the Section 316(b) regulations require the retrofitting of Salem’s cooling water intake structure to reduce cooling water intake flow commensurate with closed-cycle cooling, the retrofit would result in material costs of compliance to the owners of the facility.

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)


16.	Supplemental Financial Information (Exelon, ComEd, PECO and Generation)

The following tables provide additional information regarding the regulatory assets and liabilities of ComEd and PECO:


	June 30,			December 31,
ComEd	2004			2003

Regulatory Assets (Liabilities)
Nuclear decommissioning	$	(1,212	)	$	(1,183	)
Removal costs		(992	)		(973	)
Recoverable transition costs		109			131
Reacquired debt costs and interest-rate swap settlements		162			172
Deferred income taxes		(60	)		(61	)
Other		26			23

Total	$	(1,967	)	$	(1,891	)


	June 30,			December 31,
PECO	2004			2003

Regulatory Assets (Liabilities)
Competitive transition charge	$	4,129		$	4,303
Deferred income taxes		775			762
Non-pension postretirement benefits		55			58
Reacquired debt costs		45			49
MGP regulatory asset (see Note 15 — Commitments and Contingencies)		30			34
U.S. Department of Energy facility decommissioning		23			26
Nuclear decommissioning		(35	)		(12	)
Other		16			6

Long-term regulatory assets		5,038			5,226
Deferred energy costs (current asset)		25			81

Total	$	5,063		$	5,307

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 tables provide supplemental balance sheet information as of June 30, 2004 and December 31, 2003:


June 30, 2004		Exelon		ComEd		PECO		Generation

Property, plant and equipment:
	Accumulated depreciation	$	6,472	$	879	$	2,105	$	3,370
Accounts receivable:
	Allowance for uncollectible accounts		101		16		61		18


December 31, 2003			Exelon		ComEd		PECO		Generation

Property, plant and equipment:
		Accumulated depreciation	$	6,948	$	771	$	2,048	$	4,025
Accounts receivable:
	Allowance for uncollectible accounts			110		16		72		14


17.	Segment Information (Exelon, ComEd, PECO and Generation)

Exelon operates in three business segments: Energy Delivery (ComEd and PECO), Generation and Enterprises. Exelon evaluates the performance of its business segments on the basis of net income.

ComEd, PECO and Generation each operate in a single business segment; as such, no separate segment information is provided for these registrants.

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)


	Three Months Ended June 30, 2004 and 2003

Exelon’s segment information for the three months ended June 30, 2004 and 2003 is as follows:


									Corporate and
	Energy								Intersegment
	Delivery		Generation			Enterprises			Eliminations			Consolidated

Total revenues(a):
2004	$	2,435	$	1,948		$	43		$	(876	)	$	3,550
2003		2,322		2,058	(b)		269	(b)		(928	)		3,721
Intersegment revenues:
2004	$	11	$	871		$	(4	)	$	(878	)	$	—
2003		19		896			14	(b)		(929	)		—
Income (loss) before income taxes and minority interest:
2004	$	485	$	266		$	51		$	(67	)	$	735
2003		481		234	(b)		(96	)(b)		(24	)		595
Income taxes:
2004	$	182	$	100		$	24		$	(80	)	$	226
2003		190		92	(b)		(35	)(b)		(25	)		222
Net income (loss):
2004	$	303	$	178		$	27		$	13		$	521
2003		291		142	(b)		(61	)(b)		—			372

(a) $57 million and $51 million in utility taxes are included in the revenues and expenses for the three months ended June 30, 2004 and 2003, respectively, for ComEd. $50 million and $47 million in utility taxes are included in the revenues and expenses for the three months ended June 30, 2004 and 2003, respectively, for PECO.

(b) Effective January 1, 2004, Enterprises’ competitive retail sales business, Exelon Energy Company, was transferred to Generation. Segment information for the three months ended June 30, 2003 included in the table above has been adjusted to reflect Exelon Energy Company as part of the Generation segment. For the three months ended June 30, 2003, Exelon Energy Company reported the following:


Total revenues	$	174	Intersegment revenues	$	2
Income (loss) before income taxes	$	1	Income taxes	$	1
Net income (loss)	$	—

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)


	Six Months Ended June 30, 2004 and 2003, June 30, 2004 and December 31, 2003

Exelon’s segment information for the six months ended June 30, 2004 and 2003 and at June 30, 2004 and December 31, 2003 is as follows:


									Corporate and
	Energy								Intersegment
	Delivery		Generation			Enterprises			Eliminations			Consolidated

Total revenues(a):
2004	$	5,010	$	3,900		$	133		$	(1,771	)	$	7,272
2003		4,964		4,260	(b)		518	(b)		(1,947	)		7,795
Intersegment revenues:
2004	$	26	$	1,750		$	—		$	(1,776	)	$	—
2003		35		1,889			26	(b)		(1,950	)		—
Income (loss) before income taxes, minority interest and cumulative effect of changes in accounting principles:
2004	$	986	$	383		$	26		$	(129	)	$	1,266
2003		998		146	(b)		(109	)(b)		(41	)		994
Income taxes:
2004	$	367	$	146		$	15		$	(152	)	$	376
2003		382		65	(b)		(41	)(b)		(36	)		370
Cumulative effect of change in accounting principle:
2004	$	—	$	32		$	—		$	—		$	32
2003		5		108			(1)			—			112
Net income (loss):
2004	$	619	$	280		$	11		$	23		$	933
2003		621		187	(b)		(69	)(b)		(6	)		733
Total assets:
June 30, 2004	$	28,370	$	15,402	(c)	$	592		$	(2,262	)	$	42,102
December 31, 2003		28,369		14,753	(b)		727	(b)		(1,967	)		41,882

(a) $119 million and $113 million in utility taxes are included in the revenues and expenses for the six months ended June 30, 2004 and 2003, respectively, for ComEd. $100 million and $98 million in utility taxes are included in the revenues and expenses for the six months ended June 30, 2004 and 2003, respectively, for PECO.

(b) Effective January 1, 2004, Enterprises’ competitive retail sales business, Exelon Energy Company, was transferred to Generation. Segment information for the six months ended June 30, 2003 and as of December 31, 2003 included in the table above has been adjusted to reflect Exelon Energy Company as part of the Generation segment. Exelon Energy Company’s total assets as of December 31, 2003 were $104 million and for the six months ended June 30, 2003, Exelon Energy Company reported the following:


Total revenues	$	504		Intersegment revenues	$	9
Income (loss) before income taxes	$	(16	)	Income taxes	$	(6	)
Net income (loss)	$	(10	)

(c) Includes $1,423 million of Sithe consolidated assets under the provisions of FIN No. 46-R. See Note 4 — Sithe for further information regarding the consolidation of Sithe.

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)


18.	Related-Party Transactions (Exelon, ComEd, PECO and Generation)


	*Exelon and ComEd*

Effective December 31, 2003, ComEd Financing II, ComEd Financing III, ComEd Funding, LLC and ComEd Transitional Funding Trust were deconsolidated from the financial statements of Exelon and ComEd in conjunction with the adoption of FIN No. 46-R. Prior periods were not restated in accordance with FIN No. 46-R.

The financial statements of Exelon and ComEd include related-party transactions with its unconsolidated affiliates as presented in the tables below.



		Three Months					Six Months Ended
		Ended June 30,					June 30,

		2004			2003		2004			2003

Interest expense to affiliates
	ComEd Transitional Funding Trust	$	21		$	—	$	45		$	—
	ComEd Financing II		4			—		7			—
	ComEd Financing III		3			—		6			—
Equity in losses from unconsolidated affiliates
	ComEd Funding LLC		(6	)		—		(9	)		—


		June 30,		December 31,
		2004		2003

Receivables from affiliates (current)
	ComEd Transitional Funding Trust	$	13	$	9
Investment in affiliates
	ComEd Funding, LLC		47		45
	ComEd Financing II		10		8
	ComEd Financing III		6		6
Receivable from affiliates (noncurrent)
	ComEd Transitional Funding Trust		10		9
Payables to affiliates (current)
	ComEd Financing II		6		6
	ComEd Financing III		4		4
Long-term debt to affiliates (including due within one year)
	ComEd Transitional Funding Trust		1,497		1,676
	ComEd Financing II		155		155
	ComEd Financing III		206		206

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)

In addition to the transactions described above, ComEd’s financial statements include related-party transactions as presented in the tables below.



		Three Months					Six Months
		Ended June 30,					Ended June 30,

		2004			2003		2004		2003

Operating revenues from affiliates
	Generation(a)	$	5		$	15	$	16	$	26
	Enterprises(a)		1			1		1		3
Purchased power from affiliate
	PPA with Generation(b)		514			528		1,043		1,099
Operations & maintenance from affiliates
	BSC(c)		49			21		89		46
	Enterprises(d,e)		(4	)		3		1		6
Interest income from affiliates
	UII(f)		4			6		9		12
	Exelon intercompany money pool(j)		1			1		2		1
Capitalized costs
	BSC(c)		16			5		28		8
	Enterprises(e)		—			6		—		12
Cash dividends paid to parent			104			91		207		211

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)


		June 30,		December 31,
		2004		2003

Receivables from affiliates (current)
	UII(f)	$	9	$	3
	PECO(h)		—		6
	Exelon intercompany money pool(j)		198		405
	Other		—		5
Receivables from affiliates (noncurrent)
	UII(f)		1,071		1,071
	Generation(k)		1,212		1,183
	Other		7		8
Payables to affiliates (current)
	Generation decommissioning(g)		11		11
	Generation(a,b)		182		171
	BSC(c)		19		13
	Other		—		2
Payables to affiliates (noncurrent)
	Generation decommissioning(g)		22		22
	Other		5		6
Shareholders’ equity — receivable from parent(i)			188		250


(a)		ComEd provides electric, transmission and other ancillary services to Generation and Enterprises.

(b)		Effective January 1, 2001, ComEd entered into a full-requirements PPA with Generation.

(c)		ComEd receives a variety of corporate support services from BSC, including legal, human resources, financial, information technology and supply management services. Additionally in 2004, due to the centralization of certain functions, certain employees were transferred from ComEd to BSC. As a result, ComEd now receives additional services from BSC including planning and engineering of delivery systems, management of construction, maintenance and operations of the transmission and delivery systems and management of other support services. A portion of such services, provided at cost including applicable overhead, is capitalized.

(d)		ComEd has contracted with Services (an Enterprises company) to provide energy conservation services to ComEd customers. During the three months ended June 30, 2004, ComEd recorded a true-up of prior billings resulting in a credit balance.

(e)		ComEd received substation and transmission engineering and construction services under contracts with InfraSource, Inc. (InfraSource). A portion of such services is capitalized. Exelon sold InfraSource in September 2003.

(f)		ComEd has a note and interest receivable with a variable rate of the one month forward LIBOR rate plus 50 basis points from Unicom Investments Inc. (UII) relating to ComEd’s December 1999 fossil plant sale. This note matures in December 2011.

(g)		ComEd has a short-term and long-term payable to Generation, primarily representing ComEd’s legal requirements to remit collections of nuclear decommissioning costs from its customers to Generation.

(h)		In 2003, ComEd provided hurricane restoration assistance to PECO.

(i)		ComEd has a non-interest bearing receivable from Exelon related to a corporate restructuring in 2001. The receivable is expected to be settled over the years 2004 through 2008.

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)


(j)		ComEd participates in Exelon’s intercompany money pool. ComEd earns interest on its investment in the money pool at a market rate of interest.

(k)		ComEd has a long-term receivable from Generation related to a regulatory liability as a result of the adoption of SFAS No. 143.


	*Exelon and PECO*

Effective July 1, 2003, PECO Trust IV, a financing subsidiary created in May 2003, was deconsolidated from the financial statements of Exelon and PECO in conjunction with the adoption of FIN No. 46. Additionally, effective December 31, 2003, PECO Trust III and the PETT were deconsolidated from the financial statements of Exelon and PECO in conjunction with the adoption of FIN No. 46-R. Prior periods were not restated.

The financial statements of Exelon and PECO include related-party transactions with unconsolidated financing subsidiaries as presented in the tables below.



		Three Months				Six Months
		Ended June 30,				Ended June 30,

		2004		2003		2004		2003

Operating revenues from affiliate
	PETT(a)	$	3	$	—	$	5	$	—
Interest expense to affiliates
	PETT		59		—		119		—
	PECO Trust III		1		—		3		—
	PECO Trust IV		2		—		3		—


		June 30,		December 31,
		2004		2003

Investment in affiliates
	PETT	$	94	$	104
	PECO Energy Capital Corp		16		16
	PECO Trust IV		4		3
Receivables from affiliates (non-current)
	PECO Trust IV		—		1
Payables to affiliates
	PECO Trust III		10		10
	PECO Energy Capital Corp		1		1
Long-term debt to affiliates (including due within one year)
	PETT		3,683		3,849
	PECO Trust III		81		81
	PECO Trust IV		103		103


(a)		PECO received a monthly service fee from PETT based on a percentage of the outstanding balance of all series of transition bonds.

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)

In addition to the transactions described above, PECO’s financial statements include related-party transactions as presented in the tables below.



		Three Months				Six Months Ended
		Ended June 30,				June 30,

		2004		2003		2004		2003

Operating revenues from affiliate
	Generation(a)	$	2	$	3	$	4	$	5
Purchased power from affiliate
	Generation(b)		349		324		699		681
Fuel from affiliate
	Generation(c)		7		—		7		—
Operating and maintenance from affiliates
	BSC(d)		28		10		51		22
	Enterprises(e)		—		1		—		3
Capitalized costs
	Enterprises(e)		—		7		—		13
	BSC(d)		5		2		9		3
Cash dividends paid to parent			90		76		180		165


		June 30,		December 31,
		2004		2003

Receivable from affiliate (current)
	Exelon intercompany money pool(i)	$	35	$	—
Receivable from affiliate (noncurrent)
	Generation decommissioning(f)		35		12
Payables to affiliates (current)
	Generation(b)		135		115
	BSC(d)		24		15
	ComEd(g)		—		6
	Other		—		3
Shareholder’s equity — receivable from parent(h)			1,553		1,623


(a)		PECO provides energy to Generation for Generation’s own use.

(b)		Effective January 1, 2001, PECO entered into a full-requirements PPA with Generation.

(c)		Effective April 1, 2004, PECO entered into a one year gas procurement agreement with Generation.

(d)		PECO receives a variety of corporate support services from BSC, including legal, human resources, financial, information technology and supply management services. Additionally in 2004, due to the centralization of certain functions, certain employees were transferred from PECO to BSC. As a result, PECO now receives additional services from BSC, including planning and engineering of delivery systems, management of construction, maintenance and operations of the transmission and delivery systems and management of other support services. Such services are provided at cost, including applicable overhead. Some of these costs are capitalized.

(e)		Prior to 2004, PECO received services from Enterprises for construction, which were capitalized, and the deployment of automated meter reading technology, which were expensed.

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)


(f)		PECO has a long-term receivable from Generation related to a regulatory liability as a result of the adoption of SFAS No. 143.

(g)		In 2003, PECO received assistance from ComEd workers during Hurricane Isabel.

(h)		PECO has a non-interest bearing receivable from Exelon related to the 2001 corporate restructuring. The receivable is expected to be settled over the years 2004 through 2010.

(i)		PECO participates in Exelon’s intercompany money pool. PECO earns interest on its investment in the money pool at a market rate of interest.


	*Exelon and Generation*

The financial statements of Exelon and Generation include related-party transactions with unconsolidated affiliates as presented in the tables below. Generation accounted for its investment in AmerGen as an equity method investment prior to the acquisition of British Energy’s 50% interest in December 2003 and its investment in Sithe as an equity method investment prior to its consolidation as of March 31, 2004. Additionally, effective January 1, 2004, Enterprises’ competitive retail sales business, Exelon Energy Company, was transferred to Generation.



		Three Months				Six Months
		Ended June 30,				Ended June 30,

		2004		2003		2004		2003

Operating revenues from affiliates
	ComEd(a)	$	514	$	528	$	1,043	$	1,099
	PECO(a)		356		324		706		681
	Exelon Energy Company(b)		—		44		—		109
	BSC		1		—		1		—
Purchased power from affiliates
	AmerGen(c)		—		110		—		177
	ComEd(a)		3		13		12		20
	Exelon Energy Company(b)		—		2		—		9
Operating and maintenance from affiliates
	Sithe(d)		—		2		—		6
	ComEd(a)		2		2		4		6
	PECO(a)		2		3		4		6
	BSC(e)		65		35		126		70
Interest expense to affiliates
	Sithe(d)		—		3		—		6
	Exelon(f)		—		—		—		1
	Exelon intercompany money pool(f)		1		1		2		1
Services provided to affiliates
	AmerGen(c)		—		18		—		35
Cash distribution paid to member			109		45		109		45

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)


		June 30,		December 31,
		2004		2003

Receivables from affiliates
	ComEd(a)	$	182	$	171
	ComEd decommissioning(g)		11		11
	PECO(a)		135		115
	BSC(e)		—		3
	Exelon Energy Company(b)		—		18
	Sithe(d)		—		3
	Other		6		8
Note receivable from affiliate
	Note receivable from Sithe(d)		—		92
	Other		1		—
Long-term receivable from affiliate
	ComEd decommissioning(g)		22		22
Payables to affiliates
	Exelon(f)		—		1
	BSC(e)		28		—
	Other		4		—
Payables to affiliates (non-current)
	ComEd decommissioning(h)		1,212		1,183
	PECO decommissioning(h)		35		12
Notes payable to affiliates
	Exelon(f)		—		115
	Exelon intercompany money pool(f)		198		301
	Sithe(d)		—		90


(a)		Effective January 1, 2001, Generation entered into full-requirements PPAs with ComEd and PECO. Generation purchases transmission and ancillary services from ComEd and buys power from PECO for Generation’s own use. In order to facilitate payment processing, ComEd processes certain invoice payments on behalf of Generation.

(b)		Generation sells power to Exelon Energy Company. Prior to May 1, 2004, Generation purchased excess power from Exelon Energy Company. Prior to the transfer of Exelon Energy Company’s assets to Generation from Enterprises effective January 1, 2004, Exelon Energy Company was an intercompany affiliate of Generation.

(c)		Prior to Generation’s purchase of British Energy’s 50% interest in AmerGen in December 2003, AmerGen was an unconsolidated affiliate of Exelon and Generation and was considered to be a related party of Exelon and Generation. Generation entered into PPAs dated June 26, 2003, December 18, 2001 and November 22, 1999 with AmerGen. Under the 2003 PPA, Generation agreed to purchase from AmerGen all the energy from Oyster Creek through April 9, 2009. Under the 2001 PPA, Generation agreed to purchase from AmerGen all the energy from TMI from January 1, 2002 through December 31, 2014. Under the 1999 PPA, Generation agreed to purchase from AmerGen all of the residual energy from Clinton through December 31, 2004. Currently, the residual output is approximately 31% of the total output of Clinton. Under a service agreement dated March 1, 1999, Generation provides AmerGen with certain operation and support services to the nuclear facilities owned by AmerGen. This service agreement has

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)

an indefinite term and may be terminated by Generation or AmerGen with 90 days notice. Generation is compensated for these services at cost.


(d)		Under a service agreement dated December 18, 2000, Sithe provides Generation certain fuel and project development services. Sithe is compensated for these services at cost. In December 2003, Sithe received letter of credit proceeds of $3 million, which Generation was billed on behalf of Sithe. Under the terms of the agreement to acquire Exelon New England dated November 1, 2002, Generation issued a note to Sithe which was subsequently modified and increased to $536 million. During 2003, Generation repaid $446 million of this note. In the first quarter of 2004, Generation repaid $27 million prior to consolidation of Sithe in accordance with the provisions of FIN No. 46-R. The balance of the note is to be paid on the earlier of December 1, 2004, certain Sithe liquidity requirements, or upon a change of control of Generation. The note bears interest at the rate equal to LIBOR plus 0.875%. In connection with a series of transactions in November 2003 that restructured the ownership of Sithe (see Note 4 — Sithe for additional information), Generation received a $92 million note receivable from EXRES SHC, Inc., which holds the common stock of Sithe. Generation owns 50% of EXRES SHC, Inc and consolidated its investment pursuant to FIN No. 46-R effective March 31, 2004. Prior to the consolidation of Sithe in connection with FIN No. 46-R, Sithe was an unconsolidated affiliate of Exelon and Generation and was considered to be a related party of Exelon and Generation.

(e)		Generation receives a variety of corporate support services from BSC, including legal, human resources, financial, information technology and supply management services. Such services are provided at cost, including applicable overhead. Some third party reimbursements due Generation are recovered through BSC.

(f)		Represents the outstanding balance of amounts borrowed under the intercompany money pool and other short-term obligations payable to Exelon. In order to facilitate payment processing, Exelon processes certain invoice payments on behalf of Generation.

(g)		Generation has a short-term and a long-term receivable from ComEd, primarily representing ComEd’s legal requirements to remit collections of nuclear decommissioning costs from its customers to Generation resulting from the 2001 corporate restructuring.

(h)		Generation has long-term payables to ComEd and PECO as a result of the adoption of SFAS No. 143.

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)


19.	Subsequent Events (Exelon, ComEd, PECO and Generation)


	*Credit Facility (Exelon, ComEd, PECO and Generation)*

At June 30, 2004, Exelon Corporate, along with ComEd, PECO and Generation, participated in a $750 million 364-day unsecured revolving credit agreement and a $750 million three-year unsecured revolving credit agreement with a group of banks. On July 16, 2004, the $750 million 364-day facility was replaced with a $1 billion five-year facility and the $750 million three-year facility was reduced to $500 million. The terms of the new facilities are consistent with the previous facilities. Both revolving credit agreements are used principally to support the commercial paper programs at Exelon Corporate, ComEd, PECO and Generation and to issue letters of credit.


	*Synthetic Fuel-producing Facilities (Exelon)*

In July 2004, Exelon purchased an interest in a limited partnership that indirectly owns four synthetic fuel-producing facilities. Exelon’s purchase price for these facilities included a combination of cash, a note payable and contingent consideration dependent upon the production levels of the facilities. These facilities are not consolidated within Exelon’s financial statements because Exelon does not have a controlling financial interest in these facilities. The note payable recorded for the purchase of the facilities was $22 million. Exelon’s right to acquire its share of tax credits generated by the facilities was recorded as an intangible asset and will be amortized as the tax credits are earned. Private letter rulings have been received by the partnership that indicate these facilities qualify for tax credits under Section 29 of the Internal Revenue Code.


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Dollars in millions except per share data, unless otherwise noted)

General

Exelon Corporation (Exelon), a registered public utility holding company, through its subsidiaries, operates in three business segments:

• Energy Delivery, whose businesses include the regulated sale of electricity and distribution and transmission services by Commonwealth Edison Company (ComEd) in northern Illinois and PECO Energy Company (PECO) in southeastern Pennsylvania and the purchase and sale of natural gas and distribution services by PECO in the Pennsylvania counties surrounding the City of Philadelphia.

• Generation, consisting of Exelon Generation Company, LLC’s (Generation) owned and contracted for electric generating facilities, energy marketing operations, a 50% interest in EXRES SHC, Inc., the holding company of Sithe Energies, Inc. and its subsidiaries, hereafter referred to as Sithe, and, effective January 1, 2004, the competitive retail sales business of Exelon Energy Company.

• Enterprises, consisting primarily of the remaining energy services business of Exelon Services, Inc. (Services), the remaining district cooling investments of Exelon Thermal Holdings, Inc. (Thermal), the remaining electrical contracting business of F & M Holdings, LLC, and other investments related to the communications, energy services and retail services industries. Effective January 1, 2004, the competitive retail sales business of Exelon Energy Company was transferred to Generation. See Note 3 of the Combined Notes to Consolidated Financial Statements for information regarding the disposition of businesses within the Enterprises segment during 2004.

See Note 17 of the Combined Notes to Consolidated Financial Statements for further segment information. Exelon’s corporate operations, through its business services subsidiary, Exelon Business Services Company (BSC), provide the business segments a variety of support services, including legal, human resources, financial, information technology, supply management and corporate governance services. Additionally, in 2004, due to the centralization of certain functions, certain employees were transferred from ComEd and PECO to BSC. As a result, ComEd and PECO now receive additional services from BSC, including planning and engineering of delivery systems, management of construction, maintenance and operations of the transmission and delivery systems, and management of other support services. These costs are allocated to the business segments. Additionally, the results of Exelon’s corporate operations include costs for strategic long-term planning, certain governmental affairs, and interest costs and income from various investment and financing activities.

Critical Accounting Policies and Estimates

Management of each of the registrants makes a number of significant estimates, assumptions and judgments in the preparation of its financial statements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” in the 2003 Form 10-K for a discussion of the estimates and judgments necessary in the registrants’ accounting for derivative instruments, regulatory assets and liabilities, nuclear decommissioning, depreciable lives of property, plant and equipment, asset impairments, severance accounting, defined benefit pension and other postretirement welfare benefits, taxation, unbilled energy revenues and environmental costs. Set forth below is an update to the 2003 Form 10-K.


	*Accounting for Ownership Interests in Variable Interest Entities (Exelon, ComEd, PECO and Generation)*

Exelon, through Generation, has a 50% interest in Sithe. In accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (FIN No. 46-R), Exelon and Generation consolidated Sithe within their financial statements as of March 31, 2004. The determination that Sithe qualified as a variable interest entity and that

Generation was the primary beneficiary under FIN No. 46-R required analysis of the economic benefits accruing to all parties pursuant to their ownership interests supplemented by management’s judgment. Sithe’s total assets and total liabilities as of June 30, 2004 were $1,423 million and $1,338 million, respectively. As required by FIN No. 46-R, upon the occurrence of a future triggering event, such as a change in ownership, management will reassess its investment in Sithe to determine if Generation continues to qualify as the primary beneficiary. If management determines in a future period that Sithe no longer qualifies to be consolidated within the financial statements of Exelon and Generation pursuant to FIN No. 46-R, the resulting deconsolidation of Sithe could have a significant effect on the Consolidated Balance Sheets of Exelon and Generation and classifications within their Consolidated Statements of Income and Comprehensive Income. The consolidation of Sithe did not have an effect on Exelon’s and Generation’s income before the cumulative effect of changes in accounting principles for the six months ended June 30, 2004, and Exelon and Generation do not anticipate that the consolidation will have a significant effect on net income in future periods.

In addition to Sithe, management reviewed other entities with which Exelon and its subsidiaries have business relationships to determine if those entities were variable interest entities that should be consolidated under FIN No. 46-R and concluded that those entities should not be consolidated within the financial statements of Exelon, ComEd, PECO and Generation.

New Accounting Pronouncements

See Note 2 of the Combined Notes to Consolidated Financial Statements for discussion of new accounting pronouncements.

EXELON CORPORATION

Executive Overview

Financial Results. Exelon’s diluted earnings per average common share increased by 37% for the three months ended June 30, 2004 as compared to the same period in 2003, primarily as a result of decreased losses at Enterprises, an increase in net income at Generation and favorable tax effects from investments in synthetic fuel-producing facilities. Enterprises recorded a gain on the sale of Exelon Thermal Holdings, Inc. (Exelon Thermal) of $36 million (before income taxes and net of debt prepayment penalties), while Enterprises’ 2003 income reflected a goodwill impairment charge of $47 million (before income taxes) and investment-related impairment charges of $35 million (before income taxes). The increase in Generation’s net income reflects an $85 million gain (before income taxes) on the sale of Boston Generating, LLC (Boston Generating) during the second quarter of 2004. Exelon’s investments in synthetic fuel-producing facilities provided a tax benefit of $48 million and increased Exelon’s net income for the three months ended June 30, 2004 by $15 million.

Exelon’s diluted earnings per average common share increased by 25% for the six months ended June 30, 2004 as compared to the same period in 2003, primarily as a result of decreased losses at Enterprises, an increase in net income at Generation and favorable tax effects from investments in synthetic fuel-producing facilities. Enterprises results were affected by the 2004 gain recorded on the sale of Thermal and the 2003 goodwill and investment impairment charges discussed above. The increase in Generation’s net income reflects a 2003 impairment charge of $200 million (before income taxes) related to Generation’s investment in Sithe and an $85 million gain (before income taxes) on the sale of Boston Generating during the second quarter of 2004. In the first quarter of 2004, Exelon recorded an after-tax gain of $32 million in accordance with FIN No. 46-R and the resulting consolidation of Sithe. In the first quarter of 2003, Exelon recorded an after-tax gain of $112 million upon the adoption of Statement of Financial Accounting Standards (SFAS) No. 143, “Asset Retirement Obligations” (SFAS No. 143).

The Exelon Way. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Exelon — Executive Summary” in the 2003 Form 10-K for a discussion of Exelon’s implementation of The Exelon Way.

Investment Strategy. Exelon continued to follow a disciplined approach in investing to maximize the earnings and cash flows from its assets and businesses and to divest those assets and businesses that do not meet its goals. Highlights in the first half of 2004 include:

• On May 25, 2004, Generation completed the sale, transfer and assignment of ownership of its indirect wholly owned subsidiary Boston Generating, which owns the companies that own Mystic 4-7, Mystic 8 and 9 and Fore River generating facilities, to a special purpose entity owned by the lenders under Boston Generating’s $1.25 billion credit facility. The resulting pre-tax gain of $85 million ($52 million after-tax) was recorded within Exelon’s Consolidated Statements of Income and Comprehensive Income during the second quarter of 2004.

• Exelon continued to execute its divestiture strategy for Enterprises by selling five units of Exelon Services, Inc. (Services) during the six months ended June 30, 2004 for total expected proceeds of $34 million subject to post-closing adjustments, and selling its investment in PECO TelCove, a communications joint venture, along with certain telecommunications assets, for proceeds of $49 million in June 2004. Exelon closed on the sale of the Chicago business of Exelon Thermal during the second quarter of 2004 for net cash proceeds of $134 million and expects to close on the sale of the Aladdin thermal facility during the second half of 2004.

Enterprises continues to pursue the divestiture of other businesses and investments; however, it may be unable to fully divest certain businesses and investments for a number of reasons, including an inability to locate appropriate buyers or negotiate acceptable terms for the transactions. In addition, the amount that Enterprises may realize from a divestiture is subject to market conditions that may contribute to pricing and other terms that are materially less than expected and could result in a loss on the sale. Timing of any divestitures may positively or negatively affect the results of operations. As of June 30, 2004, Enterprises had total assets and liabilities of $592 million and $200 million, respectively.

Financing Activities. Exelon made payments of approximately $345 million for the purpose of retiring PECO and ComEd transition trust long-term debt and repaid approximately $237 million of other net long-term debt during the six months ended June 30, 2004. Exelon met all of its capital resource commitments with internally generated cash and expects to do so in the foreseeable future, absent new acquisitions. In January 2004, Exelon announced a 10% increase in its quarterly dividend on its common stock and approved a 2-for-1 split of its common stock. The distribution date was May 5, 2004. The share and per-share amounts included in this Form 10-Q have been adjusted for all periods presented to reflect the stock split. In the second quarter of 2004, Exelon’s Board of Directors approved a discretionary share repurchase program. Exelon purchased common stock, held as treasury shares as of June 30, 2004, totaling $75 million during the second quarter of 2004. Exelon also replaced its $750 million 364-day unsecured revolving credit agreement with a $1 billion five-year facility and reduced its $750 million three-year facility to $500 million in a transaction that closed on July 16, 2004.

Regulatory Developments. On May 1, 2004, ComEd fully integrated its transmission facilities into PJM Interconnection (PJM). PECO and ComEd’s membership in PJM supports Exelon’s commitment to competitive wholesale electric markets and will provide Exelon the benefits of more transparent, liquid and competitive markets for the sale and purchase of electric energy and capacity. Upon joining PJM, ComEd began incurring administrative fees, which are expected to approximate $30 million annually. Exelon believes such costs will ultimately be partially offset by the benefits of full access to a wholesale competitive marketplace, particularly after ComEd’s regulatory transition period ends in 2006; however, changes in market dynamics could affect the ultimate financial impact on Exelon.

ComEd currently earns approximately $66 million annually from through and out (T&O) rates for energy flowing across ComEd’s transmission system. On March 19, 2004, the Federal Energy Regulatory Commission (FERC) issued an order to eliminate these rates effective May 1, 2004, which was subsequently deferred until December 1, 2004. The T&O rates are to be replaced by a new long-term transmission pricing structure that will eliminate seams in the PJM and Midwest ISO regions. Transmission owners in PJM and Midwest ISO and other parties must file one or more pricing proposals with the FERC on or before October 1, 2004, with an effective date of December 1, 2004. While Exelon and ComEd cannot predict the outcome of the FERC’s final determination of a new long-term transmission pricing structure, such pricing structure could adversely impact Exelon’s and ComEd’s results of operations.

See ComEd’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Overview” for further information regarding Regulatory Developments.

Operations. Generation’s nuclear fleet achieved a 93.3% capacity factor for the six months ended June 30, 2004 compared to 94.2% in the same period of 2003 primarily as a result of increased planned outage days.

Outlook for the Remainder of 2004 and Beyond. Exelon’s outlook for the remainder of 2004 is consistent with the discussion within “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Exelon — Executive Summary” in the 2003 Form 10-K.

Results of Operations — Exelon Corporation


	Three Months Ended June 30, 2004 Compared To Three Months Ended June 30, 2003


	2004			2003			Variance			% Change

Operating revenues	$	3,550		$	3,721		$	(171	)		(4.6	)%
Purchased power and fuel expense		1,211			1,387			(176	)		(12.7	)%
Operating and maintenance expense		1,056			1,100			(44	)		(4.0	)%
Operating income		783			800			(17	)		(2.1	)%
Other income and deductions		(48	)		(205	)		157			(76.6	)%
Income before income taxes and minority interest		735			595			140			23.5	%
Net income		521			372			149			40.1	%
Diluted earnings per share		0.78			0.57			0.21			36.8	%

Operating Revenues. Operating revenues decreased for the three months ended June 30, 2004 as compared to the same period in 2003 primarily due to decreased revenues at Enterprises due to the sale of the majority of the businesses of InfraSource, Inc. (InfraSource) during the third quarter of 2003, decreased competitive transition charge (CTC) collections at ComEd and Generation’s adoption of Emerging Issues Task Force (EITF) Issue No. 03-11, “Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133, ‘Accounting for Derivative Instruments and Hedging Activities,’ and Not ‘Held for Trading Purposes’ as Defined in EITF Issue No. 02-3, ‘Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities’ ” (EITF 03-11) in 2004. Generation’s adoption of EITF 03-11 during 2004 changed the presentation of certain power transactions and decreased operating revenues by $239 million for the three months ended June 30, 2004 but had no effect on net income. The decreases in operating revenues were partially offset by higher delivery volume and favorable weather conditions at Energy Delivery and an increase in market sales at Generation due to the acquisition of the remaining 50% of AmerGen Energy Company, LLC (AmerGen) and the consolidation of Sithe. See further discussion of operating revenues by segment below.

Purchased Power and Fuel Expense. Purchased power and fuel expense decreased during the three months ended June 30, 2004 as compared to the same period in 2003 primarily due to Generation’s adoption of EITF 03-11 during 2004, which resulted in a decrease in purchased power and fuel expense of $239 million. In addition, purchased power decreased due to Generation’s acquisition of the remaining 50% of AmerGen in December 2003, which was only partially offset by an increase in fuel expense. Purchased power represented 23% of Generation’s total supply for the three months ended June 30, 2004 compared to 36% for the same period in 2003. See further discussion of purchased power and fuel expense by segment below.

Operating and Maintenance Expense. Operating and maintenance expense decreased for the three months ended June 30, 2004 as compared to the same period in 2003 primarily due to decreased expenses at Enterprises due to the sale of the majority of the businesses of InfraSource during the third quarter of 2003 and a goodwill impairment charge recorded during 2003, partially offset by increased expenses at Generation due to the acquisition of the remaining 50% of AmerGen, the consolidation of Sithe and increased costs at Boston Generating. Investments made by Exelon in the fourth quarter of 2003 in synthetic fuel-producing facilities increased operating and maintenance expense by $24 million. See further discussion of operating and maintenance expenses by segment below.

Operating Income. The change in operating income, exclusive of the changes in operating revenues, purchased power and fuel expense and operating and maintenance expense discussed above, was primarily the result of increased depreciation expense due to additional plant placed in service after the second quarter of 2003 and increased amortization expense due to investments made in the fourth quarter of 2003 in synthetic fuel-producing facilities. Taxes other than income were higher in 2004 as compared to 2003, primarily at Energy Delivery, as a result of a refund of Illinois Electricity Distribution taxes at ComEd and the reversal of a use tax accrual resulting from an audit settlement at PECO, both in 2003.

Other Income and Deductions. Other income and deductions changed primarily due to 2004 gains on the sales of Boston Generating and Exelon Thermal and 2003 investment impairments of $35 million recorded by Enterprises. Equity in earnings of unconsolidated affiliates decreased by $46 million due to the acquisition of the remaining 50% of AmerGen in December 2003, the deconsolidation of certain financing trusts during 2003 and investments made in the fourth quarter of 2003 in synthetic fuel-producing facilities. Interest expense and distributions on preferred securities of subsidiaries collectively increased $17 million, primarily due to increased interest expense at Generation.

Effective Income Tax Rate. Exelon’s effective income tax rate decreased from 37% for the three months ended June 30, 2003 to 31% for the same period in 2004, primarily due to investments made in synthetic fuel-producing facilities during the fourth quarter of 2003. See Note 12 of the Combined Notes to the Consolidated Financial Statements for further discussion of the change in the effective income tax rate.


	*Results of Operations by Business Segment*

Exelon evaluates its performance on a business segment basis. The comparisons of operating results and other statistical information for the three months ended June 30, 2004 and 2003 set forth below reflect intercompany transactions, which are eliminated in Exelon’s consolidated financial statements.


	Net Income (Loss) by Business Segment



	Three Months
	Ended June 30,

	2004		2003			Variance		% Change

Energy Delivery	$	303	$	291		$	12		4.1	%
Generation		178		142			36		25.4%
Enterprises		27		(61	)		88		n.m.
Corporate		13		—			13		n.m.

Total	$	521	$	372		$	149		40.1	%

n.m. — not meaningful

Effective January 1, 2004, Enterprises’ competitive retail sales business, Exelon Energy Company, was transferred to Generation. The information for the three months ended June 30, 2003 related to the Enterprises and Generation segments discussed below has not been adjusted to reflect the transfer of Exelon Energy Company from the Enterprises segment to the Generation segment. Exelon Energy Company’s results for the three months ended June 30, 2003 were as follows:


Total revenues	$	174
Intersegment revenues		2
Income before income taxes		1
Income taxes		1
Net income (loss)		—


	*Results of Operations — Energy Delivery*



	Three Months
	Ended June 30,

	2004		2003		Variance			% Change

Operating revenues	$	2,435	$	2,322	$	113			4.9	%
Purchased power and fuel expense		1,059		986		73			7.4	%
Operating and maintenance expense		355		342		13			3.8	%
Depreciation and amortization expense		228		213		15			7.0	%
Operating income		661		666		(5	)		(0.8	)%
Interest expense		172		189		(17	)		(9.0	)%
Net income		303		291		12			4.1	%

Operating Revenues. The changes in Energy Delivery’s operating revenues for the three months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


							Total
	Electric			Gas			Variance

Volume	$	107		$	4		$	111
ComEd’s integration into PJM		43			—			43
Weather		43			(14	)		29
Rate changes and mix		(11	)		13			2
Customer choice		(67	)		—			(67	)
Other effects		(11	)		6			(5	)

Increase (decrease) in operating revenues	$	104		$	9		$	113

Volume. Both ComEd’s and PECO’s electric revenues increased as a result of higher delivery volume, exclusive of the effect of weather and customer choice, due to an increased number of customers and increased usage per customer, primarily residential and large commercial and industrial customers for ComEd and across all customer classes for PECO.

ComEd’s Integration into PJM. Energy Delivery’s operating revenues and purchased power expense each increased by $43 million in the three months ended June 30, 2004 relative to 2003 due to ComEd’s May 1, 2004 entry into PJM. The increases relate to the change in control of the transmission assets from ComEd to PJM as a result of which ComEd receives revenues for its proportionate share of the transmission revenues generated by PJM, but also pays PJM for the use of its transmission assets. This is consistent with how PECO accounts for its PJM transmission revenues and expenses. For 2004, ComEd’s operating revenues are estimated to increase by approximately $180 million, offset by a corresponding and equal increase in purchased power expense. Starting in 2005, on an annual basis, ComEd’s operating revenues and purchased power expense are estimated to increase between $200 to $250 million. However, there is no expected effect on revenues net of purchased power expense.

Weather. The demand for electricity is affected by weather conditions. Very warm weather in summer months and very cold weather in other months are referred to as “favorable weather conditions” because these weather conditions result in increased sales of electricity. Conversely, mild weather reduces demand. Energy Delivery’s electric revenues were positively affected by favorable weather conditions. Cooling degree-days in the ComEd and PECO service territories were 68% and 66% higher, respectively. Heating degree-days in the ComEd and PECO service territories were 18% lower and 32% lower, respectively.

Energy Delivery’s gas revenues were negatively affected by unfavorable weather conditions.

Rate Changes and Mix. ComEd’s CTC is reset in the second quarter of each year to reflect market price adjustments. Starting in the June 2003 billing cycle, the increased wholesale market price of electricity and other adjustments to the energy component decreased the collection of CTCs as compared to the

respective prior year period. As a result, ComEd’s CTC revenues decreased $44 million for the three months ended June 30, 2004 as compared to the same period in 2003. This decrease was partially offset by increased wholesale market prices which increased energy revenue received under ComEd’s power purchase option (PPO) by $28 million.

Decreased average rates paid by ComEd’s residential customers resulted in a $10 million decrease in revenues. Although residential rates are frozen through 2006, ComEd’s average effective residential rates fluctuate due to the usage patterns of customers.

Electric revenues increased $17 million at PECO as a result of $12 million of favorable rate mix due to changes in monthly usage patterns in all customer classes and $5 million related to a scheduled phase-out of merger-related rate reductions. In connection with the Pennsylvania Public Utility Commission’s (PUC) approval of the merger of PECO, Unicom Corporation, and Exelon in 2000, PECO entered into a settlement agreement with the PUC and agreed to $200 million in aggregate rate reductions for all customers over the period January 1, 2002 through 2005. Rates were reduced by $60 million per year in 2002 and 2003 and will be reduced by $40 million per year in 2004 and 2005.

Energy Delivery’s gas revenues reflect increases in rates through PUC approved changes to the purchased gas adjustment clause that became effective June 1, 2003 and March 1, 2004. The average purchased gas cost rate per million cubic feet for the three months ended June 30, 2004 was 30% higher than the rate for the same period in 2003. PECO’s purchased gas cost rates are subject to periodic adjustments by the PUC and are designed to recover from or refund to customers the difference between the actual cost of purchased gas and the amount included in rates. PECO has asked the PUC for a decrease in its rates through the purchased gas adjustment clause effective December 1, 2004 as a result of lower current gas costs. This proposed decrease would have no impact on PECO’s operating income.

Customer Choice. For the three months ended June 30, 2004 and 2003, 29% and 25%, respectively, of energy delivered to Energy Delivery’s retail customers was provided by alternative electric suppliers (AES) or under the ComEd PPO. The decrease in electric retail revenues attributable to customer choice included a decrease in revenues of $51 million from customers in Illinois electing to purchase energy from an AES or under ComEd’s PPO and a decrease in revenues of $16 million from customers in Pennsylvania being assigned to or selecting an AES.

Purchased Power and Fuel Expense. The changes in Energy Delivery’s purchased power and fuel expense for the three months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


							Total
	Electric			Gas			Variance

Volume	$	44		$	3		$	47
ComEd’s integration into PJM		43			—			43
Prices		13			13			26
Weather		16			(10	)		6
Customer choice		(56	)		—			(56	)
Other		(3	)		10			7

Increase in purchased power and fuel expense	$	57		$	16		$	73

Volume. ComEd’s purchased power and fuel expense increased due to increases, exclusive of the effect of weather and customer choice, in the number of customers and average usage per customer, primarily residential and large commercial and industrial customers. PECO’s electric purchased power and fuel expense increased as a result of higher delivery volume, exclusive of the effect of weather and customer choice, due to increased customer growth and usage per customer across all customer classes.

Prices. Energy Delivery’s electric purchased power increased primarily due to an increase at PECO as a result of higher wholesale market prices associated with certain large commercial and industrial customers whose billing rates are tied to wholesale market prices for energy. Fuel expense for gas increased due to higher gas prices. See “Operating Revenues” above.

Weather. Energy Delivery’s purchased power and fuel expense increased due to the effect of favorable weather conditions.

Customer Choice. An increase in customer switching resulted in a reduction of purchased power expense, primarily due to ComEd’s non-residential customers electing to purchase energy from an AES or ComEd’s PPO and PECO’s residential and small commercial and industrial customers selecting or being assigned to purchase energy from an AES.

Operating and Maintenance Expense. The changes in operating and maintenance expense for the three months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

Higher corporate allocations(a)	$	29
Severance, pension and postretirement benefit costs associated with The Exelon Way		12
Tax consultant fees(b)		5
Employee fringe benefits(c)		(15	)
Contractors		(8	)
Environmental matters		(4	)
Other		(6	)

Increase in operating and maintenance expense	$	13


(a)		Higher corporate allocations primarily result from a higher percentage allocation to Energy Delivery due to the sale of certain Enterprises businesses.

(b)		ComEd recorded a $5 million charge for contingent fees paid to a tax consultant (see Note 15 of the Combined Notes to Consolidated Financial Statements for more information).

(c)		During the second quarter of 2004, ComEd and PECO adopted the provisions of FASB Staff Position (FSP) FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (FSP FAS 106-2). Employee fringe benefits include a $2 million reduction in net periodic postretirement benefit cost due to the adoption of FSP FAS 106-2. See Note 11 of the Combined Notes to Consolidated Financial Statements for additional information related to employee fringe benefits.

Depreciation and Amortization Expense. The increase in depreciation and amortization expense was primarily due to increased competitive transition charge amortization of $7 million at PECO and increased depreciation of $5 million due to capital additions across Energy Delivery.

Operating Income. The change in operating income, exclusive of the changes in operating revenues, purchased power and fuel expense and operating and maintenance expense discussed above, was the result of increased taxes other than income. This increase was primarily attributable to $12 million related to the reversal of a PECO use tax accrual resulting from an audit settlement in 2003 and a 2003 ComEd refund of $5 million for Illinois Electricity Distribution Taxes.

Interest Expense. The reduction in interest expense was primarily due to scheduled principal payments.


	Energy Delivery Operating Statistics and Revenue Detail

Energy Delivery’s electric sales statistics and revenue detail were as follows:



		Three Months
		Ended June 30,

Retail Deliveries — (in gigawatthours (GWhs))(a)		2004		2003		Variance			% Change

Full service(b)
Residential			8,065		7,437		628			8.4	%
Small commercial & industrial			6,477		6,646		(169	)		(2.5	)%
Large commercial & industrial			5,129		5,378		(249	)		(4.6	)%
Public authorities & electric railroads			1,424		1,555		(131	)		(8.4	)%

	Total full service		21,095		21,016		79			0.4	%

PPO (ComEd only)
Small commercial & industrial			870		869		1			0.1	%
Large commercial & industrial			877		1,318		(441	)		(33.5	)%
Public authorities & electric railroads			577		531		46			8.7	%

			2,324		2,718		(394	)		(14.5	)%

Delivery only(c)
Residential			488		186		302			162.4	%
Small commercial & industrial			2,194		1,580		614			38.9	%
Large commercial & industrial			3,280		2,320		960			41.4	%
Public authorities & electric railroads			406		247		159			64.4	%

			6,368		4,333		2,035			47.0	%

	Total PPO and delivery only		8,692		7,051		1,641			23.3	%

Total retail deliveries			29,787		28,067		1,720			6.1	%


(a)		One GWh is the equivalent of one million kilowatthours (kWh).

(b)		Full service reflects deliveries to customers taking electric generation service under tariffed rates.

(c)		Delivery only service reflects customers receiving electric generation service from an AES.



		Three Months
		Ended June 30,

Electric Revenue		2004		2003		Variance			% Change

Full service(a)
Residential		$	819	$	769	$	50			6.5	%
Small commercial & industrial			593		585		8			1.4	%
Large commercial & industrial			352		351		1			0.3	%
Public authorities & electric railroads			94		102		(8	)		(7.8	)%

	Total full service		1,858		1,807		51			2.8	%

PPO (ComEd only)(b)
Small commercial & industrial			60		59		1			1.7	%
Large commercial & industrial			51		72		(21	)		(29.2	)%
Public authorities & electric railroads			31		28		3			10.7	%

			142		159		(17	)		(10.7	)%

Delivery only(c)
Residential			38		14		24			171.4	%
Small commercial & industrial			58		49		9			18.4	%
Large commercial & industrial			48		48		—			—
Public authorities & electric railroads			9		8		1			12.5	%

			153		119		34			28.6	%

	Total PPO and delivery only		295		278		17			6.1	%

Total electric retail revenues			2,153		2,085		68			3.3	%

	Wholesale and miscellaneous revenue(d)		163		127		36			28.3	%

Total electric revenue		$	2,316	$	2,212	$	104			4.7	%


(a)		Full service revenue reflects deliveries to customers taking electric service under tariffed rates, which include the cost of energy and the delivery cost of the transmission and the distribution of the energy. PECO’s tariffed rates also include a CTC.

(b)		Revenue from customers choosing ComEd’s PPO includes an energy charge at market rates, transmission and distribution charges and a CTC.

(c)		Delivery only revenue reflects revenue from customers receiving electric generation service from an AES. Revenue from customers choosing an AES includes a distribution charge and a CTC. Prior to ComEd’s full integration into PJM on May 1, 2004, ComEd’s transmission charges received from an AES were included in wholesale and miscellaneous revenue.

(d)		Wholesale and miscellaneous revenues include transmission revenue (including revenue from PJM), sales to municipalities and other wholesale energy sales.

Energy Delivery’s gas sales statistics and revenue detail were as follows:



	Three Months
	Ended June 30,

Deliveries to customers (in million cubic feet (mmcf))	2004		2003		Variance			% Change

Retail sales		8,162		9,222		(1,060	)		(11.5	)%
Transportation		6,410		5,779		631			10.9	%

Total		14,572		15,001		(429	)		(2.9	)%



	Three Months
	Ended June 30,

Revenue	2004		2003		Variance		% Change

Retail sales	$	102	$	99	$	3		3.0	%
Transportation		4		4		—		—
Resales and other		13		7		6		85.7	%

Total	$	119	$	110	$	9		8.2	%


	*Results of Operations — Generation*



	Three Months
	Ended June 30,

	2004		2003		Variance			% Change

Operating revenues	$	1,948	$	1,886	$	62			3.3	%
Purchased power and fuel expense		1,025		1,148		(123	)		(10.7	)%
Operating and maintenance expense		623		451		172			38.1	%
Operating income		183		201		(18	)		(9.0	)%
Income before income taxes and minority interest		266		233		33			14.2	%
Net income		178		142		36			25.4	%

Operating Revenues. The changes in Generation’s operating revenues for the three months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

Retail gas revenue	$	84
Wholesale and retail electric sales		(39	)
Electric revenue from affiliates		(31	)
Other		48

Increase in operating revenues	$	62

Retail Gas Revenue. Retail gas revenue increased $84 million as a result of the transfer of Exelon Energy Company to Generation as of January 1, 2004.

Wholesale and Retail Electric Sales. The changes in Generation’s wholesale and retail electric sales for the three months ended June 30, 2004 compared to the same period in 2003, consisted of the following:


	Variance

Effects of the adoption of EITF 03-11(a)	$	(238	)
Sale of Boston Generating		(43	)
Exelon Energy Company and AmerGen operations		104
Other operations		138

Decrease in wholesale and retail electric sales	$	(39	)


(a)		Does not include $1 million of EITF 03-11 adjustments related to fuel sales that are included in other revenues.

The adoption of EITF 03-11 on January 1, 2004 resulted in the netting of certain revenues and the associated purchase power and fuel expense in 2004. See Note 2 of the Combined Notes to Consolidated Financial Statements for further discussion of EITF 03-11. The sale of Boston Generating in May 2004 resulted in less revenues from this entity compared to the same period in the prior year. The acquisition of Exelon Energy and AmerGen resulted in increased wholesale and retail electric sales of approximately $104 million compared to the same period in the prior year.

The other increase in wholesale and retail electric sales was primarily due to higher demand in the forward wholesale market and higher prices in the spot wholesale market. Market prices in the Midwest region were primarily driven by higher coal prices, and in the Mid-Atlantic region market prices were driven primarily by higher oil and gas prices.

Electric Revenue from Affiliates. Revenue from sales to affiliates decreased primarily as a result of the transfer of Exelon Energy Company to Generation effective January 1, 2004 as a result of which sales to Exelon Energy Company are no longer reported as affiliate revenue by Generation. Revenue from sales to Exelon Energy Company for the three months ended June 30, 2003 was $44 million.

The decrease in revenue from sales to affiliates was partially offset by $15 million in higher sales to Energy Delivery. The higher sales to Energy Delivery were primarily due to overall increased usage per customer and favorable weather conditions.

Other. Certain other revenues increased for the three months ended June 30, 2004 as compared to the same period in 2003, primarily due to the consolidation of Sithe’s operations beginning April 1, 2004.

Purchased Power and Fuel Expense. The changes in Generation’s purchased power and fuel expense for the three months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

Effects of the adoption of EITF 03-11	$	(239	)
Boston Generating		(33	)
Midwest Generation		(25	)
AmerGen and Exelon Energy Company		(11	)
Volume		92
Sithe Energies, Inc.		62
Price		49
Mark-to-market adjustments on hedging activity		11
Other		(29	)

Decrease in purchased power and fuel expense	$	(123	)

Adoption of EITF 03-11. The adoption of EITF 03-11 resulted in a decrease in purchased power of $238 million and fuel expense of $1 million.

Boston Generating. The decrease in fuel and purchased power expense for Boston Generating is due primarily to the sale of the business in May 2004. See Note 3 of the Combined Notes to Consolidated Financial Statements for additional information regarding Boston Generating.

Midwest Generation. The volume of purchased power acquired from Midwest Generation declined in 2004 as a result of Generation exercising its option to reduce the capacity purchased from Midwest Generation.

Due to the transfer of Exelon Energy Company to Generation effective January 1, 2004, fuel expense increased $86 million as fuel purchases made by Exelon Energy Company did not previously affect Generation’s results.

Volume. Generation experienced increases in purchased power and fuel expense due to increased market and retail electric sales throughout its various sales regions. The increase in purchased power is partially offset by decreased purchased power from Midwest Generation (see Midwest Generation above for further information).

Sithe Energies, Inc. Under the provisions of FIN No. 46-R, the operating results of Sithe were included in Generation’s results of operations beginning April 1, 2004. See Note 4 of the Combined Notes to Consolidated Financial Statements for further discussion of Sithe.

Price. The increase reflects higher market energy prices due to increased natural gas, oil and coal prices.

Hedging Activity. Mark-to-market gains on hedging activities were $21 million for the three months ended June 30, 2004 compared to gains of $32 million for the same period of 2003. Hedging activities in 2004 relating to Boston Generating accounted for a gain of $6 million and hedging activities relating to other Generation operations in 2004 accounted for a gain of $15 million.

Other. Other decreases in purchased power and fuel expense were primarily due to $21 million of lower transmission expense resulting from reduced inter-region transmission charges, primarily associated with ComEd’s integration into PJM during the second quarter of 2004 and $10 million of nuclear fuel amortization recorded in 2003 as a result of the replacement of underperforming fuel at the Quad Cities Station.

Operating and Maintenance Expense. The changes in operating and maintenance expense for the three months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

AmerGen and Exelon Energy Company	$	87
Sithe Energies, Inc.		22
Decommissioning accretion costs(a)		18
Boston Generating		13
Pension, payroll and benefit costs, primarily associated with The Exelon Way		(14	)
Other		46

Increase in operating and maintenance expense	$	172


(a)		Includes $10 million due to AmerGen asset retirement obligation accretion.

The increase in operating and maintenance expense is primarily due to the inclusion of AmerGen, Exelon Energy Company and Sithe in Generation’s consolidated financial results for 2004. The increase in operating and maintenance expenses attributable to Boston Generating was due to the Mystic 8 and 9 and Fore River facilities commencing commercial operation at the end of the second quarter of 2003 and in the third quarter of 2003, respectively, which more than offset the reduction in operating and maintenance expenses resulting

from their sale in May 2004. Decommissioning accretion costs increased primarily due to the inclusion of AmerGen for the three months ended June 30, 2004 as compared to the same period in the prior year. The reduction in payroll-related costs associated with the implementation of the programs associated with The Exelon Way partially offset the other increases to operating and maintenance expense.

Depreciation and Amortization. The increase in depreciation and amortization expense for the three months ended June 30, 2004 as compared to the same period in 2003 includes the impact of capital additions and the consolidation of Sithe, AmerGen and Exelon Energy. These increases were partially offset by a decrease in depreciation expense related to the Boston Generating facilities as the assets were classified as held for sale during the period.

Effective Income Tax Rate. The effective income tax rate was 38% for the three months ended June 30, 2004 compared to 39% for the same period in 2003. This decrease is primarily attributable to the impairment charges recorded in 2003 related to Generation’s investment in Sithe which resulted in a pre-tax loss. This impairment charge was taxed at a rate different than the overall generation effective income tax rate. See Note 12 of the Combined Notes to the Consolidated Financial Statements for further discussion of the change in the effective income tax rate.


	Generation Operating Statistics

Generation’s sales and the supply of these sales, excluding the trading portfolio, were as follows:



	Three Months
	Ended June 30,

Revenue	2004			2003			Variance			% Change

Sales to affiliates(a)	$	846		$	877		$	(31	)		(3.5	)%
Wholesale and retail electric sales(b)		858			897			(39	)		(4.3	)%

Total energy sales revenue		1,704			1,774			(70	)		(3.9	)%

Retail gas sales		84			—			84			n.m.
Trading portfolio		(2	)		(1	)		(1	)		100.0	%
Other revenue(c)		162			113			49			43.4	%

Total revenue	$	1,948		$	1,886		$	62			3.3	%


(a)		Includes sales to Exelon Energy Company during 2003. As of January 1, 2004, Exelon Energy Company became part of Generation and is presented as retail electric sales.

(b)		Includes retail electric sales of Exelon Energy Company in 2004.

(c)		Includes sales related to tolling agreements, including Sithe in 2004, and fossil fuel sales.

n.m. — not meaningful



	Three Months
	Ended June 30,

Sales (in GWhs)	2004(c)		2003		Variance			% Change

Sales to affiliates(a)		26,133		26,869		(736	)		(2.7	)%
Wholesale and retail electric sales(b)		24,976		27,449		(2,473	)		(9.0	)%

Total sales		51,109		54,318		(3,209	)		(5.9	)%


(a)		Includes sales to Exelon Energy Company during 2003. As of January 1, 2004, Exelon Energy Company became part of Generation and is presented as retail electric sales.

(b)		Includes retail electric sales of Exelon Energy Company in 2004.

(c)		Sales in 2004 do not include 6,185 GWhs, which were netted with purchased power GWhs as a result of the reclassification of certain hedging activities in accordance with EITF 03-11.



	Three Months
	Ended June 30,

Supply Source (in GWhs)	2004		2003		Variance			% Change

Nuclear generation(a)		34,254		29,619		4,635			15.6	%
Purchases — non-trading portfolio(b)		11,904		19,344		(7,440	)		(38.5	)%
Fossil and hydroelectric generation		4,951		5,355		(404	)		(7.5	)%

Total supply		51,109		54,318		(3,209	)		(5.9	)%


(a)		Excludes AmerGen in 2003. AmerGen generated 5,122 GWhs during the three months ended June 30, 2004.

(b)		Sales in 2004 do not include 6,185 GWhs that were netted with purchased power GWhs as a result of the reclassification of certain hedging activities in accordance with EITF 03-11. Includes PPAs with AmerGen, which represented 3,731 GWhs in 2003.

Trading volumes of 5,324 GWhs and 7,919 GWhs for the three months ended June 30, 2004 and 2003, respectively, are not included in the table above. The decrease in trading volume is a result of reduced proprietary trading activity.

Generation’s supply mix changed primarily as a result of the sale of Boston Generating in May 2004.

Generation’s average margin and other operating data for the three months ended June 30, 2004 and 2003 were as follows:



		Three Months
		Ended June 30,

($/MWh)		2004		2003		% Change

Average revenue
	Electric sales to affiliates(a)	$	32.37	$	32.64		(0.8	)%
	Market and retail electric sales(b)		34.35		32.68		5.1	%
	Total — excluding the trading portfolio		33.34		32.66		2.1	%
Average supply cost(c) — excluding the trading portfolio		$	20.06	$	21.13		(5.1	)%
Average margin — excluding the trading portfolio		$	13.28	$	11.53		15.2	%


(a)		Includes sales to Exelon Energy Company during 2003. As of January 1, 2004, Exelon Energy Company became part of Generation and is presented as retail sales.

(b)		Includes retail electric sales of Exelon Energy Company in 2004.

(c)		Average supply cost includes purchased power, fuel costs and PPAs with AmerGen in 2003.

Generation’s average margin, excluding the trading portfolio, increased primarily due to decreased average supply cost as a result of forward hedging of fuel at lower costs during the three months ended June 30, 2004 as compared to the same period in the prior year. Also, Generation experienced a decrease in purchased power due to reducing the capacity purchased from Midwest Generation and the affect of acquiring the remaining 50% of AmerGen in 2003. The increase in nuclear generation during the quarter, which is

generally less expensive than purchased power, along with the effect of the adoption of EITF 03-11, also contributed to the increase in average margin.



	Three Months
	Ended June 30,

	2004			2003

Nuclear fleet capacity factor(a)		96.1	%		94.0	%
Nuclear fleet production cost per MWh(a)	$	10.88		$	12.08
Average purchased power cost for wholesale operations per MWh(b)	$	47.13		$	41.36


(a)		Includes AmerGen and excludes Salem, which is operated by Public Service Enterprise Group Incorporated (PSE&G).

(b)		Includes PPAs with AmerGen in 2003.

Higher nuclear capacity factors and lower nuclear production costs were primarily due to nine fewer planned refueling outage days, resulting in a $14 million decrease in planned outage costs for the three months ended June 30, 2004 as compared to the same period in 2003. There was one planned refueling outage that began in late March 2004 and was completed during the three months ended June 30, 2004, while there was one refueling outage that began and was completed during the three months ended June 30, 2003. The three months ended June 30, 2004 included seven unplanned outages compared to nine unplanned outages during the same period in 2003.

In the three months ended June 30, 2004 as compared to the three months ended June 30, 2003, the Quad Cities units operated at pre-Extended Power Uprate (EPU) generation levels due to performance issues with their steam dryers. Generation plans additional expenditures to ensure safe and reliable operations at the EPU output levels by mid-2005.


	*Results of Operations — Enterprises*



	Three Months
	Ended June 30,

	2004			2003			Variance			% Change

Operating revenues	$	43		$	443		$	(400	)		(90.3	)%
Purchased power and fuel expense		—			166			(166	)		(100.0	)%
Operating and maintenance expense		65			322			(257	)		(79.8	)%
Depreciation and amortization expense		—			10			(10	)		(100.0	)%
Operating income (loss)		(23	)		(57	)		34			(59.6	)%
Other income and deductions		74			(38	)		112			n.m.
Loss before income taxes		51			(95	)		146			n.m.
Net income (loss)		27			(61	)		88			n.m.

Divestiture of Businesses and Investments. Exelon is continuing to execute its divestiture strategy for Enterprises. Enterprises’ results for the three months ended June 30, 2004 compared to the three months ended June 30, 2003 were significantly affected by the following transactions:

InfraSource, Inc. On September 24, 2003, Enterprises sold the electric construction and services, underground and telecom businesses of InfraSource.

Exelon Energy Company. Effective January 1, 2004, the operations and assets of Enterprises’ competitive retail sales business, Exelon Energy Company, were transferred to Generation. See Note 3 of the Combined Notes to Consolidated Financial Statements for further discussion of this transfer.

Exelon Services, Inc. During the three months ended June 30, 2004, Enterprises disposed of certain businesses of Services, including Exelon Solutions and certain businesses of the Mechanical and Integrated Technology Group. Total expected proceeds and the net gain on sale recorded during the three months ended June 30, 2004 related to the disposition of these Services businesses were $16 million and $12 million,

respectively. The gain was recorded in other income and deductions on Exelon’s Consolidated Statements of Income and Comprehensive Income. As of June 30, 2004, Services had assets and liabilities of $58 million and $90 million, respectively, which primarily represented the corporate operations and the remaining businesses of the Mechanical and Integrated Technology Group.

In addition, during the three months ended June 30, 2004, Enterprises disposed of the following business and investment. These dispositions and the transactions described above will affect Enterprises future results of operations.

Exelon Thermal Holdings Inc. On June 30, 2004, Enterprises sold its Chicago business of Exelon Thermal for proceeds of $134 million, subject to working capital adjustments. Enterprises repaid $37 million of debt outstanding of the Chicago thermal operations prior to closing, which resulted in prepayment penalties of $9 million, which were recorded as interest expense. A pre-tax gain of $45 million was recorded in other income and deductions on Exelon’s Consolidated Statements of Income and Comprehensive Income.

PECO Telcove. On June 30, 2004, Enterprises sold its investment in PECO TelCove, a communications joint venture, along with certain telecommunications assets, for proceeds of $49 million. A pre-tax gain of $9 million was recorded in other income and deductions on Exelon’s Consolidated Statements of Income and Comprehensive Income. An impairment charge of $5 million (before income taxes) related to the telecommunications assets had been recorded in the fourth quarter of 2003.

Operating Revenues. The changes in Enterprises’ operating revenues for the three months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

Transfer of Exelon Energy Company to Generation	$	(174	)
Sale of InfraSource businesses		(145	)
Services(a)		(61	)
F&M Holdings, LLC(b)		(28	)
Other		8

Decrease in operating revenues	$	(400	)


(a)		Primarily due to the sale of certain businesses.

(b)		For the remaining businesses of F & M Holdings, LLC, operating revenues decreased as a result of the sale of certain businesses and the reduction of new business as a result of wind-down efforts.

Purchased Power and Fuel Expense. Purchased power and fuel expense decreased as a result of the transfer of Exelon Energy Company to Generation effective January 1, 2004.

Operating and Maintenance Expense. The changes in Enterprises’ operating and maintenance expense for the three months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

Sale of InfraSource businesses	$	(135	)
Services(a)		(52	)
Goodwill impairment charge(b)		(47	)
F & M Holdings, LLC(c)		(22	)
Other		(1	)

Decrease in operating and maintenance expense	$	(257	)


(a)		Primarily due to the sale of certain businesses.

(b)		Enterprises recorded a goodwill impairment charge of $47 million during the second quarter of 2003 related to the goodwill recorded within the InfraSource reporting unit.


(c)		For the remaining businesses of F & M Holdings, LLC, operating and maintenance expense decreased $29 million as a result of wind-down efforts for these businesses. These decreases were partially offset by increased expense of $7 million due to margin deterioration on various construction projects.

Depreciation and Amortization. Depreciation and amortization expense decreased primarily as a result of the sale of the majority of the InfraSource businesses in the third quarter of 2003 and property, plant and equipment classified as held for sale.

Other Income and Deductions. The increase in other income and deductions was primarily due to 2004 gains on the sales of Exelon Thermal, the Services businesses and Enterprises’ investment in PECO Telcove of an aggregate of $66 million (before income taxes and debt prepayment penalties) and income of $18 million recorded during the second quarter of 2004 related to the collection of a note receivable prior to its maturity. Other income and deductions in 2003 included impairment charges of energy-related and communications investments of $35 million.

Effective Income Tax Rate. The effective income tax rate was 47% for the three months ended June 30, 2004 compared to 36% for the same period in 2003. The increase in the effective tax rate was primarily attributable to state tax impact on the Thermal divestiture and tax adjustments resulting from various income tax related items.


	*Results of Operations — Exelon Corporation*


	Six Months Ended June 30, 2004 Compared To Six Months Ended June 30, 2003


	2004			2003			Variance			% Change

Operating revenues	$	7,272		$	7,795		$	(523	)		(6.7	)%
Purchased power and fuel expense		2,608			3,119			(511	)		(16.4	)%
Operating and maintenance expense		2,165			2,212			(47	)		(2.1	)%
Operating income		1,505			1,557			(52	)		(3.3	)%
Other income and deductions		(239	)		(563	)		324			(57.5	)%
Income before income taxes, minority interest and cumulative effect of changes in accounting principles		1,266			994			272			27.4	%
Income before cumulative effect of changes in accounting principles		901			621			280			45.1	%
Cumulative effect of changes in accounting principles		32			112			(80	)		(71.4	)%
Net income		933			733			200			27.3	%
Diluted earnings per share		1.40			1.12			0.28			25.0	%

Operating Revenues. Operating revenues decreased for the six months ended June 30, 2004 as compared to the same period in 2003 primarily due to decreased revenues at Enterprises due to the sale of the majority of the businesses of InfraSource during the third quarter of 2003 and Generation’s adoption of EITF 03-11 in the first quarter of 2004 which changed the presentation of certain power transactions and decreased operating revenues by $452 million. The adoption of EITF 03-11 had no impact on net income. See further discussion of operating revenues by segment below.

Purchased Power and Fuel Expense. Purchased power and fuel expense decreased during the six months ended June 30, 2004 as compared to the same period in 2003 primarily due to Generation’s adoption of EITF 03-11 during 2004 which resulted in a decrease in purchased power expense and fuel expense of $452 million. In addition, purchased power decreased due to Generation’s acquisition of the remaining 50% of AmerGen in December 2003, which was only partially offset by an increase in fuel expense, and the consolidation of Sithe. Purchased power represented 23% of Generation’s total supply for the six months ended June 30, 2004 compared to 36% for the same period in 2003. See further discussion of purchased power and fuel expense by segment below.

Operating and Maintenance Expense. Operating and maintenance expense decreased slightly for the six months ended June 30, 2004 as compared to the same period in 2003 primarily due to decreased expenses at Enterprises due to the sale of the majority of the businesses of InfraSource during the third quarter of 2003 and decreased expenses at Energy Delivery due to a charge recorded in 2003 related to an agreement with various Illinois retail market participants and other interested parties, partially offset by increased expenses at Generation due to the acquisition of the remaining 50% of AmerGen and generating assets placed in service after the first quarter of 2003. Operating and maintenance expense increased $48 million due to investments made in the fourth quarter of 2003 in synthetic fuel-producing facilities. See further discussion of operating and maintenance expenses by segment below.

Operating Income. The slight decrease in operating income, exclusive of the changes in operating revenues, purchased power and fuel expense and operating and maintenance expense discussed above, was primarily due to an increase of $67 million in depreciation expense and increased taxes other than income at Energy Delivery. The increase in depreciation and amortization expense was primarily related to assets placed in service after the second quarter of 2003 and investments made in the fourth quarter of 2003 in synthetic fuel-producing facilities.

Other Income and Deductions. Other income and deductions changed primarily due to an impairment charge of $200 million (before income taxes) recorded during the first quarter of 2003 related to Generation’s investment in Sithe, an $85 million gain (before income taxes) on the sale of Boston Generating and a $36 million gain on the sale of Exelon Thermal (before income taxes and net of debt prepayment penalties). Equity in earnings of unconsolidated affiliates decreased by $88 million due to the acquisition of the remaining 50% of AmerGen in December 2003, the deconsolidation of certain financing trusts during 2003 and investments made in the fourth quarter of 2003 in synthetic fuel-producing facilities. Interest expense and distributions on preferred securities of subsidiaries collectively increased $6 million, primarily due to increased interest expense at Generation, partially offset by lower outstanding debt and refinancings at lower rates at Energy Delivery.

Effective Income Tax Rate. Exelon’s effective income tax rate decreased from 37% for the six months ended June 30, 2003 to 30% for the same period in 2004, primarily due to investments made in synthetic fuel-producing facilities during the fourth quarter of 2003. See Note 12 of the Combined Notes to the Consolidated Financial Statements for further discussion of the change in the effective income tax rate.

Cumulative Effect of Changes in Accounting Principles. Net income for the six months ended June 30, 2004 reflects income of $32 million, net of income taxes, related to the consolidation of Sithe pursuant to FIN No. 46-R which resulted from the reversal of certain guarantees on behalf of Sithe that had been recorded at Generation prior to December 31, 2003, while net income for the six months ended June 30, 2003 reflects income of $112 million, net of income taxes, for the adoption of SFAS No. 143. See Note 2 of the Combined Notes to Consolidated Financial Statements for further information regarding the adoptions of FIN No. 46-R and SFAS No. 143.


	*Results of Operations by Business Segment*

The comparisons of operating results and other statistical information for the six months ended June 30, 2004 and 2003 set forth below reflect intercompany transactions, which are eliminated in Exelon’s consolidated financial statements.


	Income (Loss) Before Cumulative Effect of Change in Accounting Principle by Business Segment



	Six Months
	Ended June 30,

	2004		2003			Variance		% Change

Energy Delivery	$	619	$	616		$	3		0.5	%
Generation		248		89			159		178.7	%
Enterprises		11		(78	)		89		n.m.
Corporate		23		(6	)		29		n.m.

Total	$	901	$	621		$	280		45.1	%

n.m. — not meaningful


	Net Income (Loss) by Business Segment



	Six Months
	Ended June 30,

	2004		2003			Variance			% Change

Energy Delivery	$	619	$	621		$	(2	)		(0.3	)%
Generation		280		197			83			42.1	%
Enterprises		11		(79	)		90			n.m.
Corporate		23		(6	)		29			n.m.

Total	$	933	$	733		$	200			27.3	%

n.m. — not meaningful

Effective January 1, 2004, Enterprises’ competitive retail sales business, Exelon Energy Company, became part of Generation. The information for the six months ended June 30, 2003 related to the Enterprises and Generation segments discussed below has not been adjusted to reflect the transfer of Exelon Energy Company from the Enterprises segment to the Generation segment. Exelon Energy Company’s results for the six months ended June 30, 2003 were as follows:


Total revenues	$	504
Intersegment revenues		9
Loss before income taxes		(16	)
Income tax benefit		(6	)
Net loss		(10	)


	*Results of Operations — Energy Delivery*



	Six Months
	Ended June 30,

	2004		2003		Variance			% Change

Operating revenues	$	5,010	$	4,964	$	46			0.9	%
Purchased power and fuel expense		2,239		2,175		64			2.9	%
Operating and maintenance expense		704		744		(40	)		(5.4	)%
Depreciation and amortization expense		455		427		28			6.6	%
Operating income		1,343		1,360		(17	)		(1.3	)%
Interest expense		355		383		(28	)		(7.3	)%
Income before income taxes and cumulative effect of a change in accounting principle		986		998		(12	)		(1.2	)%
Income before cumulative effect of a change in accounting principle		619		616		3			0.5	%
Net income		619		621		(2	)		(0.3	)%

Operating Revenues. The changes in Energy Delivery’s operating revenues for the six months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


							Total
	Electric			Gas			Variance

Volume	$	158		$	(4	)	$	154
ComEd’s integration in PJM		43			—			43
Rate changes and mix		(68	)		82			14
Customer choice		(149	)		—			(149	)
Weather		13			(19	)		(6	)
Other effects		(16	)		6			(10	)

(Decrease) increase in operating revenues	$	(19	)	$	65		$	46

ComEd’s Integration into PJM. Energy Delivery’s transmission revenues and purchased power expense each increased by $43 million in the six months ended June 30, 2004 relative to 2003 due to ComEd’s May 1, 2004 entry into PJM.

Rate Changes and Mix. Starting in the June 2003 billing cycle, the increased wholesale market price of electricity and other adjustments to the energy component decreased the collection of CTCs as compared to the respective prior year period. As a result, ComEd’s CTC revenues decreased by $120 million for the six months ended June 30, 2004 as compared to the same period in 2003. This decrease was partially offset by increased wholesale market prices which increased energy revenue received under ComEd’s PPO by $47 million.

Customer Choice. For the six months ended June 30, 2004 and 2003, 28% and 24%, respectively, of energy delivered to Energy Delivery’s retail customers was provided by an AES or under the ComEd PPO. The decrease in electric retail revenues attributable to customer choice included a decrease in revenues of $107 million from customers in Illinois electing to purchase energy from an AES or ComEd’s PPO and a decrease in revenues of $42 million from customers in Pennsylvania being assigned to or selecting an AES.

For the six months ended June 30, 2004 and June 30, 2003, ComEd collected approximately $87 million and $207 million, respectively, of CTC revenue. As a result of increasing mitigation factors, changes in energy

prices and the ability of certain customers to establish fixed, multi-year CTC rates beginning in 2003, and increases in ComEd’s open access transmission tariff rates (OATT) effective May 1, 2004, ComEd anticipates that this revenue source will decline to approximately $180 million for 2004 and range from $100 million to $180 million annually in 2005 and 2006. Under the current restructuring statute, no CTCs will be collected after 2006.

Electric revenues increased $2 million at PECO as a result of $9 million related to a scheduled phase-out of merger-related rate reductions, largely offset by a $7 million decrease reflecting a change in rate mix due to changes in monthly usage patterns in all customer classes during 2004 as compared to 2003. In connection with the PUC’s approval of the merger of PECO, Unicom Corporation, and Exelon in 2000, PECO entered into a settlement agreement with the PUC and agreed to $200 million in aggregate rate reductions for all customers over the period January 1, 2002 through 2005. Rates were reduced by $60 million per year in 2002 and 2003 and will be reduced by $40 million per year in 2004 and 2005

Energy Delivery’s gas revenues increased due to increases in rates through PUC approved changes to the purchased gas adjustment clause that became effective March 1, 2003, June 1, 2003, December 1, 2003 and March 1, 2004. The average purchased gas cost rate per million cubic feet for the six months ended June 30, 2004 was 39% higher than the rate for the same period in 2003.

Weather. Energy Delivery’s electric revenues were affected by favorable weather conditions. Cooling degree-days in the ComEd and PECO service territories were 68% higher and 66% higher, respectively, for the six months ended June 30, 2004 as compared to the same period in 2003. Heating degree-days were 8% lower in both the ComEd and PECO service territories for the six months ended June 30, 2004 as compared to the same period in 2003.

Energy Delivery’s gas revenues were affected by unfavorable weather conditions.

Purchased Power and Fuel Expense. The changes in Energy Delivery’s purchased power and fuel expense for the six months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Electric			Gas			Total Variance

Prices	$	—		$	82		$	82
Volume		81			(4	)		77
ComEd’s integration into PJM		43			—			43
Customer choice		(134	)		—			(134	)
Weather		5			(16	)		(11	)
Other		(6	)		13			7

(Decrease) increase in purchased power and fuel expense	$	(11	)	$	75		$	64

Prices. Energy Delivery’s purchased power expense remained constant. Fuel expense for gas increased due to higher gas prices. See “Operating Revenues” above.

Volume. ComEd’s purchased power and fuel expense increased due to increases, exclusive of the effect of weather and customer choice, in the number of customers and average usage per customer, primarily residential and large commercial and industrial customers at ComEd. PECO’s electric purchased power and fuel expense increased as a result of higher delivery volume, exclusive of the effect of weather and customer choice, due to increased customer growth and usage per customer across all customer classes.

ComEd’s PPO and PECO’s residential and small commercial and industrial customers selecting or being assigned to purchase energy from an AES.

Weather. Energy Delivery’s purchased power and fuel expense were affected by unfavorable weather conditions.

Operating and Maintenance Expense. The changes in operating and maintenance expense for the six months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

Charge recorded at ComEd in 2003(a)	$	(41	)
Decreased payroll expense due to fewer employees(b)		(21	)
Contractors		(9	)
Allowance for uncollectible accounts expense		(6	)
Environmental charges		(5	)
Employee fringe benefits(b, d)		(3	)
Higher corporate allocations(c)		42
Severance, pension and postretirement benefit costs associated with The Exelon Way		19
Tax Consultant fees(e)		5
Other		(21	)

Decrease in operating and maintenance expense	$	(40	)


(a)		In 2003, ComEd reached an agreement with various Illinois retail market participants and other interested parties.

(b)		Energy Delivery has fewer employees as a result of The Exelon Way terminations.

(c)		Higher corporate allocations primarily result from a higher percentage allocation to Energy Delivery due to the sale of certain Enterprises businesses.

(d)		During the second quarter of 2004, ComEd and PECO adopted the provisions of FSP FAS 106-2. Employee fringe benefits include a $5 million reduction in net periodic postretirement benefit cost due to the adoption of FSP FAS 106-2.

(e)		ComEd recorded a $5 million charge for contingent fees paid to a tax consultant (see Note 15 to the Combined Notes to Consolidated Financial Statements for more information).

Depreciation and Amortization Expense. The increase in depreciation and amortization expense was primarily due to increased competitive transition charge amortization of $14 million at PECO and increased depreciation of $10 million due to capital additions across Energy Delivery.

Interest Expense. The reduction in interest expense was primarily due to scheduled principal payments and refinancings at lower rates.


	*Energy Delivery Operating Statistics and Revenue Detail*

Energy Delivery’s electric sales statistics and revenue detail were as follows:



		Six Months
		Ended June 30,

Retail Deliveries — (in GWhs)		2004		2003		Variance			% Change

Full service(a)
Residential			17,821		17,438		383			2.2	%
Small commercial & industrial			13,294		14,053		(759	)		(5.4	)%
Large commercial & industrial			10,091		10,344		(253	)		(2.4	)%
Public authorities & electric railroads			2,893		3,224		(331	)		(10.3	)%

	Total full service		44,099		45,059		(960	)		(2.1	)%

PPO (ComEd only)
Small commercial & industrial			1,600		1,662		(62	)		(3.7	)%
Large commercial & industrial			1,624		2,750		(1,126	)		(40.9	)%
Public authorities & electric railroads			1,012		1,069		(57	)		(5.3	)%

			4,236		5,481		(1,245	)		(22.7	)%

Delivery only(b)
Residential			1,070		450		620			137.8	%
Small commercial & industrial			4,389		3,131		1,258			40.2	%
Large commercial & industrial			6,371		4,362		2,009			46.1	%
Public authorities & electric railroads			894		529		365			69.0	%

			12,724		8,472		4,252			50.2	%

	Total PPO and delivery only		16,960		13,953		3,007			21.6	%

Total retail deliveries			61,059		59,012		2,047			3.5	%


(a)		Full service reflects deliveries to customers taking electric generation service under tariffed rates.

(b)		Delivery only service reflects customers receiving electric generation service from an AES.



		Six Months Ended
		June 30,

Electric Revenue		2004		2003		Variance			% Change

Full service(a)
Residential		$	1,691	$	1,673	$	18			1.1	%
Small commercial & industrial			1,143		1,177		(34	)		(2.9	)%
Large commercial & industrial			682		692		(10	)		(1.4	)%
Public authorities & electric railroads			188		207		(19	)		(9.2	)%

	Total full service		3,704		3,749		(45	)		(1.2	)%

PPO (ComEd only)(b)
Small commercial & industrial			108		109		(1	)		(0.9	)%
Large commercial & industrial			92		144		(52	)		(36.1	)%
Public authorities & electric railroads			53		55		(2	)		(3.6	)%

			253		308		(55	)		(17.9	)%

Delivery only(c)
Residential			80		31		49			158.1	%
Small commercial & industrial			110		99		11			11.1	%
Large commercial & industrial			93		103		(10	)		(9.7	)%
Public authorities & electric railroads			18		17		1			5.9	%

			301		250		51			20.4	%

	Total PPO and delivery only		554		558		(4	)		(0.7	)%

Total electric retail revenues			4,258		4,307		(49	)		(1.1	)%
	Wholesale and miscellaneous revenue(d)		288		258		30			11.6	%

Total electric revenue		$	4,546	$	4,565	$	(19	)		(0.4	)%


(a)		Full service revenue reflects deliveries to customers taking electric service under tariffed rates, which include the cost of energy and the delivery cost of the transmission and the distribution of the energy. PECO’s tariffed rates also include a CTC.

(b)		Revenue from customers choosing ComEd’s PPO includes an energy charge at market rates, transmission and distribution charges and a CTC.

(c)		Delivery only reflects revenue from customers receiving electric generation service from an AES. Revenue from customers choosing an AES includes a distribution charge and a CTC. Prior to ComEd’s full integration into PJM on May 1, 2004, ComEd’s transmission charges received from an AES were included in wholesale and miscellaneous revenue.

(d)		Wholesale and miscellaneous revenues include transmission revenue (including revenue from PJM), sales to municipalities and other wholesale energy sales.

Energy Delivery’s gas sales statistics and revenue detail were as follows:



	Six Months
	Ended June 30,

Deliveries to customers (in mmcf)	2004		2003		Variance			% Change

Retail sales		37,965		40,685		(2,720	)		(6.7	)%
Transportation		13,542		13,942		(400	)		(2.9	)%

Total		51,507		54,627		(3,120	)		(5.7	)%



	Six Months
	Ended June 30,

Revenue	2004		2003		Variance		% Change

Retail sales	$	431	$	372	$	59		15.9	%
Transportation		9		9		—		—
Resales and other		24		18		6		33.3	%

Total	$	464	$	399	$	65		16.3	%


	*Results of Operations — Generation*



	Six Months
	Ended June 30,

	2004		2003		Variance			% Change

Operating revenues	$	3,900	$	3,765	$	135			3.6	%
Purchased power and fuel expense		2,129		2,348		(219	)		(9.3	)%
Operating and maintenance expense		1,273		943		330			35.0	%
Operating income		279		295		(16	)		(5.4	)%
Income before income taxes, minority interest and cumulative effect of changes in accounting principles		383		162		221			136.4	%
Income before cumulative effect of changes in accounting principles		248		89		159			178.7	%
Cumulative effect of changes in accounting principles		32		108		(76	)		(70.4	)%
Net income		280		197		83			42.1	%

Operating Revenues. The changes in Generation’s operating revenues for the six months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

Retail gas revenue	$	260
Electric sales to affiliates		(136	)
Wholesale and retail electric sales		(12	)
Other		23

Increase in operating revenues	$	135

Retail Gas Revenue. Retail gas revenue increased as a result of the transfer of Exelon Energy Company to Generation as of January 1, 2004.

Electric Sales to Affiliates. Revenue from sales to affiliates decreased primarily as a result of the transfer of Exelon Energy Company’s assets and operations to Generation effective January 1, 2004. Sales to Exelon Energy Company are no longer reported as affiliate revenue by Generation. Revenue from sales to Exelon Energy Company for the six months ended June 30, 2003 was $108 million.

The decrease in revenue from affiliates included $40 million in lower sales to Energy Delivery. The lower sales to Energy Delivery were primarily due to customers purchasing energy from alternative electric suppliers and unfavorable weather conditions in the ComEd and PECO service territories compared to the prior year.

Wholesale and Retail Electric Sales. The changes in Generation’s wholesale and retail electric sales for the six months ended June 30, 2004 compared to the same period in 2003, consisted of the following:


	Variance

Effects of the adoption of EITF 03-11(a)	$	(444	)
Boston Generating		74
Exelon Energy Company and AmerGen operations		182
Other operations		176

Decrease in wholesale and retail electric sales	$	(12	)


(a)		Does not include $8 million of EITF 03-11 adjustments related to fuel sales that are included in other revenues.

The adoption of EITF 03-11 on January 1, 2004 resulted in the netting of certain revenues and the associated purchase power and fuel expense in 2004.

Other. Certain other revenues increased for the six months ended June 30, 2004 as compared to the same period in 2003, primarily due to the consolidation of Sithe’s results of operations beginning April 1, 2004.

Purchased Power and Fuel Expense. The changes in Generation’s purchased power and fuel expense for the six months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

Effects of the adoption of EITF 03-11	$	(452	)
Midwest Generation		(48	)
Price		(47	)
Volume		129
AmerGen and Exelon Energy Company		101
Sithe Energies, Inc.		62
Boston Generating		75
Mark-to-market adjustments on hedging activity		19
Other		(58	)

Decrease in purchased power and fuel expense	$	(219	)

Effects of the Adoption of EITF 03-11. The adoption of EITF 03-11 resulted in a decrease in purchased power expense of $444 and fuel expense of $8 million.

Price. The decrease primarily reflects lower average fossil fuel costs of $47 million during the six months ended June 30, 2004 as compared to the same period in 2003.

Volume. Generation experienced increased purchased power and fuel expense due to increased market and retail electric sales throughout its various sales regions. The increase in purchased power is partially offset by decreased purchased power from Midwest Generation (see Midwest Generation above for further information).

AmerGen and Exelon Energy Company. As result of Generation’s acquisition of the remaining 50% interest in AmerGen in December 2003, purchased power decreased $160 million. In prior periods,

Generation reported energy purchased from AmerGen as purchased power expense. Due to the transfer of Exelon Energy Company to Generation effective January 1, 2004, fuel expense increased $261 million as fuel purchases made by Exelon Energy Company were not previously included in Generation’s results.

Boston Generating. The decrease in fuel and purchased power expense for Boston Generating is due primarily to the sale of the business in May of 2004. The Mystic 8 and 9 generating facilities began commercial operations at the end of the second quarter of 2003, and the Fore River generating facilities began commercial operations during the third quarter of 2003.

Hedging Activity. Mark-to-market losses on hedging activities were $18 million for the six months ended June 30, 2004 compared to gains of $1 million for the same period in 2003. Hedging activities in 2004 related to Boston Generating operations accounted for a gain of $4 million and hedging activities for other Generation operations in 2004 accounted for a loss of $22 million.

Other. Other decreases in purchased power and fuel were primarily due to $46 million in lower transmission expense resulting from reduced inter-region transmission as a result of ComEd’s integration into PJM in the second quarter of 2004, offset by $16 million of nuclear fuel amortization recorded in 2003 as a result of the replacement of underperforming fuel at the Quad Cities Station.

Operating and Maintenance Expense. The changes in operating and maintenance expense for the six months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

AmerGen and Exelon Energy Company(a)	$	197
Refueling outage costs		38
Boston Generating		33
Decommissioning accretion costs(b)		25
Sithe Energies, Inc.		22
Pension, payroll and benefit costs associated with The Exelon Way		(23	)
Other		38

Increase in operating and maintenance expense	$	330


(a)		Includes refueling outage expense of $24 million at AmerGen.

(b)		Includes $20 million due to AmerGen asset retirement obligation accretion.

Depreciation and Amortization. The increase in depreciation and amortization expense for the six months ended June 30, 2004 as compared to the same period in 2003 was primarily attributable to the impact of capital additions and the consolidation of Sithe Energies, AmerGen, and Exelon Energy. These increases were partially offset by a decrease in depreciation expense related to the Boston Generating facilities as the assets were classified as held for sale during the period.

Effective Income Tax Rate. The effective income tax rate was 38% for the six months ended June 30, 2004 compared to 44% for the same period in 2003. The decrease was primarily attributable to the impairment charge recorded in 2003 related to Generation’s investment in Sithe that resulted in a pre-tax loss. The impairment charge was taxed at a rate different than the overall Generation effective tax rate. See Note 12 of the Combined Notes to the Consolidated Financial Statements for further discussion of the change in the effective income tax rate.

Cumulative Effect of Changes in Accounting Principles. The cumulative effect of changes in accounting principles recorded during the six months ended June 30, 2004 and 2003 included $32 million, net of income taxes, recorded in 2004 related to the consolidation of Sithe pursuant to FIN No. 46-R which resulted from

the reversal of certain guarantees on behalf of Sithe that had been recorded at Generation prior to December 31, 2003, and income of $108 million, net of income taxes, recorded in 2003 related to the adoption of SFAS No. 143. See Note 2 of the Combined Notes to Consolidated Financial Statements for further discussion of these effects.


	Generation Operating Statistics

Generation’s sales and the supply of these sales, excluding the trading portfolio, were as follows:



	Six Months
	Ended June 30,

Revenue	2004			2003			Variance			% Change

Sales to affiliates(a)	$	1,706		$	1,842		$	(136	)		(7.4	)%
Wholesale and retail electric sales(b)		1,742			1,754			(12	)		(0.7	)%

Total energy sales revenue		3,448			3,596			(148	)		(4.1	)%

Retail gas sales		260			—			260			n.m.
Trading portfolio		(2	)		(2	)		—			n.m.
Other revenue		194			171			23			13.5	%

Total revenue	$	3,900		$	3,765		$	135			3.6	%


(a)		Includes sales to Exelon Energy Company during 2003. As of January 1, 2004, Exelon Energy Company became part of Generation and is presented as retail electric sales.

(b)		Includes retail electric sales of Exelon Energy Company in 2004.

(c)		Includes sales related to tolling agreements, including Sithe in 2004, and fossil fuel sales.

n.m. — not meaningful



	Six Months Ended
	June 30,

Sales (in GWhs)	2004		2003		Variance			% Change

Sale to affiliates(a)		53,597		57,463		(3,866	)		(6.7	)%
Wholesale and retail electric sales(b)		48,959		51,264		(2,305	)		(4.5	)%

Total sales		102,556		108,727		(6,171	)		(5.7	)%


(a)		Includes sales to Exelon Energy Company during 2003. As of January 1, 2004, Exelon Energy Company became part of Generation and is presented as retail electric sales.

(b)		Sales in 2004 do not include 11,638 GWhs, which were netted with purchased power GWhs as a result of the reclassification of certain hedging activities in accordance with EITF 03-11. Includes retail electric sales of Exelon Energy Company in 2004.



	Six Months Ended
	June 30,

Supply Source (in GWhs)	2004		2003		Variance			% Change

Nuclear generation(a)		67,665		58,949		8,716			14.8	%
Purchases — non-trading portfolio(b)		23,595		39,373		(15,778	)		(40.1	)%
Fossil and hydroelectric generation		11,296		10,405		891			8.6	%

Total supply		102,556		108,727		(6,171	)		(5.7	)%


(a)		Excludes AmerGen in 2003. AmerGen generated 9,761 GWhs during the six months ended June 30, 2004.

(b)		Sales in 2004 do not include 11,638 GWhs, which were netted with purchased power GWhs as a result of the reclassification of certain hedging activities in accordance with EITF 03-11. Includes PPAs with AmerGen, which represented 6,219 GWhs in 2003.

Trading volumes of 10,437 GWhs and 17,446 GWhs for the six months ended June 30, 2004 and 2003, respectively, are not included in the table above. The decrease in trading volume is a result of reduced proprietary trading activity.

Generation’s supply mix changed as a result of increased fossil generation due to Boston Generating’s Mystic units 8 and 9 and Fore River generating facilities becoming operational in the second and third quarter of 2003, which in total account for an increase of 2,688 GWhs.

Generation’s average margin and other operating data for the six months ended June 30, 2004 and 2003 were as follows:



		Six Months Ended
		June 30,

($/MWh)		2004		2003		% Change

Average revenue
	Energy Delivery and Exelon Energy Company(a)	$	31.83	$	32.06		(0.7	)%
	Market and retail electric sales(b)		35.58		34.22		4.0	%
	Total — excluding the trading portfolio		33.62		33.07		1.7	%
Average supply cost(c) — excluding the trading portfolio		$	20.77	$	21.60		(3.8	)%
Average margin — excluding the trading portfolio		$	12.85	$	11.47		12.0	%


(a)		Includes sales to Exelon Energy Company during 2003. As of January 1, 2004, Exelon Energy Company became part of Generation and is presented as retail sales.

(b)		Includes retail electric sales of Exelon Energy Company in 2004.

(c)		Average supply cost includes purchased power, fuel costs and PPAs with AmerGen in 2003.

Generation’s average margin, excluding the trading portfolio, increased primarily due to decreased average supply cost as a result of forward hedging of fuel at lower costs than prior periods. Also, Generation experienced a decrease in purchased power due to reducing the capacity purchased from Midwest Generation and the impact of consolidating AmerGen in 2003. The increase in nuclear generation during the period, which is generally less expensive than purchased power, along with the effect of the adoption of EITF 03-11, contributed to the increase in average margin. The increase in nuclear generation is due primarily to the consolidation of AmerGen.



	Six Months
	Ended June 30,

	2004			2003

Nuclear fleet capacity factor(a)		93.3	%		94.2	%
Nuclear fleet production cost per MWh(a)	$	12.54		$	12.40
Average purchased power cost for wholesale operations per MWh(b)	$	45.81		$	41.68


(a)		Includes AmerGen and excludes Salem, which is operated by Public Service Enterprise Group Incorporated (PSE&G).

(b)		Includes PPAs with AmerGen in 2003.

Lower nuclear capacity factors and increased nuclear production costs were primarily due to 55 additional planned refueling outage days, resulting in a $46 million increase in planned outage costs in the six months ended June 30, 2004 as compared to the same period in 2003. There were five planned outages during the six months ended June 30, 2004, compared to three planned outages during the same period in 2003. The six months ended June 30, 2004 included twelve unplanned outages compared to eleven unplanned outages during the same period in 2003. Nuclear capacity factors were also affected by Quad Cities operating at lower than anticipated capacity levels.

The Quad Cities units have intermittently been operating at pre-EPU generation levels due to performance issues with their steam dryers. Generation plans additional expenditures to ensure safe and reliable operations at the EPU output levels by mid-2005.

100


	*Results of Operations — Enterprises*



	Six Months
	Ended June 30,

	2004			2003			Variance			% Change

Operating revenues	$	133		$	1,022		$	(889	)		(87.0	)%
Purchased power and fuel expense		—			505			(505	)		(100.0	)%
Operating and maintenance expense		170			575			(405	)		(70.4	)%
Depreciation and amortization expense		—			20			(20	)		(100.0	)%
Operating income (loss)		(42	)		(84	)		42			(50.0	)%
Other income and deductions		68			(41	)		109			n.m.
Loss before income taxes and cumulative effect of change in accounting principle		26			(125	)		151			n.m.
Loss before cumulative effect of change in accounting principle		11			(78	)		89			n.m.
Net income (loss)		11			(79	)		90			n.m.

Divestiture of Businesses and Investments. Exelon is continuing to execute its divestiture strategy for Enterprises. Enterprises’ result for the six months ended June 30, 2004 compared to the six months ended June 30, 2003 were significantly affected by the following transactions:

InfraSource, Inc. On September 24, 2003, Enterprises sold the electric construction and services, underground and telecom businesses of InfraSource.

Exelon Services, Inc. During the six months ended June 30, 2004, Enterprises disposed of certain businesses of Services, including Exelon Solutions and certain businesses of the Mechanical and Integrated Technology Group. Total expected proceeds and the net gain on sale recorded during the six months ended June 30, 2004 related to the disposition of these Services businesses were $34 million and $9 million, respectively. The gain was recorded in other income and deductions on Exelon’s Consolidated Statements of Income and Comprehensive Income. As of June 30, 2004, Services had assets and liabilities of $58 million and $90 million, respectively, which primarily represented the corporate operations and the remaining businesses of the Mechanical and Integrated Technology Group.

In addition, during the six months ended June 30, 2004, Enterprises disposed of the following business and investment. These dispositions and the transactions described above will affect Enterprises future results of operations.

Exelon Thermal Holdings Inc. On June 30, 2004, Enterprises sold its Chicago business of Thermal for proceeds of $134 million, subject to working capital adjustments. Enterprises repaid $37 million of debt outstanding of the Chicago thermal operations prior to closing, which resulted in prepayment penalties of $9 million, which were recorded in interest expense. A pre-tax gain of $45 million was recorded in other income and deductions on Exelon’s Consolidated Statements of Income and Comprehensive Income.

101

Operating Revenues. The changes in Enterprises’ operating revenues for the six months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

Transfer of Exelon Energy Company to Generation	$	(504	)
Sale of InfraSource businesses		(262	)
Services(a)		(72	)
F & M Holdings, LLC(b)		(60	)
Other		9

Decrease in operating revenues	$	(889	)


(a)		Primarily due to the sale of certain businesses.

(b)		Operating revenues decreased $60 million as a result of the sale of certain businesses and the reduction of new business as a result of wind-down efforts.

Purchased Power and Fuel Expense. Purchased power and fuel expense decreased as a result of the transfer of Exelon Energy Company to Generation effective January 1, 2004.

Operating and Maintenance Expense. The changes in Enterprises’ operating and maintenance expense for the six months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

Sale of InfraSource businesses	$	(246	)
Services(a)		(56	)
Goodwill impairment charge(b)		(47	)
F & M Holdings, LLC(c)		(43	)
Other		(13	)

Decrease in operating and maintenance expense	$	(405	)


(a)		Primarily due to the sale of certain businesses.

(b)		Enterprises recorded a goodwill impairment charge of $47 million during the second quarter of 2003 related to the goodwill recorded within the InfraSource reporting unit.

(c)		Operating and maintenance expense decreased $62 million as a result of wind-down efforts for these businesses. These decreases were partially offset by increased expense of $19 million due to margin deterioration on various construction projects.

Other Income and Deductions. The increase in other income and deductions was primarily due to 2004 gains on the sale of Exelon Thermal and Enterprises’ investment in PECO Telcove of $54 million (before income taxes and net of debt prepayment penalties) and income of $18 million recorded during the second quarter of 2004 related to the collection of a note receivable prior to its maturity. Other income and deductions in 2003 included impairment charges of energy, software and communications investments of $40 million.

Effective Income Tax Rate. The effective income tax rate was 58% for the six months ended June 30, 2004 compared to 38% for the same period in 2003. The increase in the effective tax rate was primarily attributable to state tax impact on the Thermal divestiture and a 16.4% increase of tax expense resulting from various income tax related items.

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Liquidity and Capital Resources

Exelon’s businesses are capital intensive and require considerable capital resources. These capital resources are primarily provided by internally generated cash flows from Energy Delivery’s and Generation’s operations. When necessary, Exelon obtains funds from external sources in the capital markets and through bank borrowings. Exelon’s access to external financing at reasonable terms depends on Exelon and its subsidiaries’ credit ratings and general business conditions, as well as that of the utility industry in general. If these conditions deteriorate to where Exelon no longer has access to the capital markets at reasonable terms, Exelon has access to revolving credit facilities with aggregate bank commitments of $1.5 billion that it currently utilizes to support its commercial paper programs. See the “Credit Issues” section of “Liquidity and Capital Resources” for further discussion. Exelon primarily uses its capital resources to fund capital requirements, including construction, to repay maturing debt, to pay common stock dividends, to fund its pension obligations and to invest in new and existing ventures. Future acquisitions that Exelon may undertake may require external financing, which might include issuing Exelon common stock.


	*Cash Flows from Operating Activities*

Energy Delivery’s cash flows from operating activities primarily result from sales of electricity and gas to a stable and diverse base of retail customers at fixed prices and are weighted toward the third quarter. Energy Delivery’s future cash flows will be affected by its ability to achieve cost savings in operations and the impact of the economy, weather, customer choice and future regulatory proceedings on its revenues. Generation’s cash flows from operating activities primarily result from the sale of electric energy to wholesale customers, including Energy Delivery. Generation’s future cash flows from operating activities will be affected by future demand and market prices for energy and its ability to continue to produce and supply power at competitive costs.

Cash flows from operations have been and are expected to continue to provide a reliable, steady source of cash flow sufficient to meet operating and capital expenditures requirements for the foreseeable future. Operating cash flows after 2006 could be negatively affected by changes in the rate regulatory environments of ComEd and PECO, although any effects are not expected to hinder Exelon’s ability to fund its business requirements.

Cash flows from operations for the six months ended June 30, 2004 and 2003 were $1,907 million and $1,292 million, respectively. Changes in Exelon’s cash flows from operations are generally consistent with changes in its results of operations, and further adjusted by changes in working capital in the normal course of business.

In addition to the items mentioned in “Results of Operations,” the following items affected Exelon’s operating cash flows for the six months ended June 30, 2004 and 2003:

• During the six months ended June 30, 2004, Exelon’s federal income tax position changed from a net federal income tax payable to a net federal income tax receivable. The large increase in cash from the changes in receivables is due primarily to the current year federal income tax provision of approximately $200 million and the receipt of a $150 million federal income tax refund in the first quarter of 2004, partially offset by a $58 million increase in customer accounts receivable and the payment of $67 million for federal income taxes.

• Natural gas inventories and deferred natural gas costs decreased $24 million and $56 million, respectively, during the six months ended June 30, 2004 resulting in an $80 million increase to operating cash flows. During 2003, an increase in natural gas inventories of $1 million and an increase in deferred natural gas costs of $24 million resulted in a $25 million decrease to operating cash flow. PECO’s gas cost rates are subject to periodic adjustments by the PUC and are designed to recover from or refund to customers the difference between the actual cost of purchased gas and the amount included in rates. During 2004, PECO was recovering fuel revenues from customers in excess of gas costs being incurred. During 2003, PECO was incurring gas costs in excess of fuel revenues being recovered from customers.

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• An increase in required deposits for energy trading activity of $136 million resulted from Generation exceeding its negotiated credit positions with counterparties during the six months ended June 30, 2003. During 2004, required deposits for trading activity resulted in a $2 million net cash inflow.

• Discretionary tax-deductible pension plan payments were $288 million for the six months ended June 30, 2004 compared to $246 million for the same period in 2003. Additionally, $42 million and $30 million were contributed to the postretirement welfare benefit plans for the six months ended June 30, 2004 and 2003, respectively.

Exelon expects to contribute up to approximately $419 million to its pension plans in 2004. These contributions exclude benefit payments expected to be made directly from corporate assets. Of the $419 million expected to be contributed to the pension plans during 2004, $11 million is estimated to be needed to satisfy Internal Revenue Service (IRS) minimum funding requirements.

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, 2004, deferred tax liabilities related to the fossil plant sale are reflected in Exelon’s Consolidated Balance Sheets with the majority allocated to the Consolidated Balance Sheets of ComEd and the remainder to the Consolidated Balance Sheets of Generation. The 1999 income tax liability deferred as a result of these transactions was approximately $1.1 billion. Changes in IRS interpretations of existing primary tax authority or challenges to ComEd’s positions could have the impact of accelerating future income tax payments and increasing interest expense related to the deferred tax gain that becomes current. Any required payments could be significant to the cash flows of Exelon. Exelon’s management believes Exelon’s reserve for interest, which has been established in the event that such positions are not sustained, has been appropriately recorded in accordance with SFAS No. 5, “Accounting for Contingencies” (SFAS No. 5). However, the ultimate outcome of such matters could result in additional unfavorable or favorable adjustments to the results of operations, and such adjustments could be material. Federal tax returns covering the period of the 1999 sale are currently under IRS audit. Final resolution of this matter is not anticipated for several years.


	*Cash Flows from Investing Activities*

Cash flows used in investing activities for the six months ended June 30, 2004 and 2003 were $669 million and $1,016 million, respectively. The $347 million reduction of cash used in investing activities in 2004 versus 2003 is primarily attributable to the following:

• Cash proceeds of $210 million received during the six months ended June 30, 2004 from the sales of Exelon Thermal, certain businesses of Exelon Services and Enterprises’ investments in PECO TelCove and other equity method investments.

• Cash proceeds of $42 million received from the sale of three gas turbines at Generation that were classified as assets held for sale at December 31, 2003.

• A decrease in capital expenditures of $89 million net of liquidating damages received in 2003.

• An increase in investments in nuclear decommissioning trust funds of $30 million.

• On March 31, 2004, Exelon consolidated the assets and liabilities of Sithe under the provisions of FIN No. 46-R, which resulted in an increase in cash of $19 million. See Note 2 and Note 4 of the Combined Notes to Consolidated Financial Statements for further information regarding the FIN No. 46-R consolidation of Sithe.

• Early settlement on an acquisition note receivable from the 2003 disposition of InfraSource resulted in cash proceeds of $30 million during the six months ended June 30, 2004.

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Capital expenditures by business segment for the six months ended June 30, 2004 and 2003 were as follows:



	Six Months
	Ended June 30,

	2004		2003

Energy Delivery	$	474	$	487
Generation		366		424
Enterprises		—		11
Corporate and other		4		11

Total capital expenditures, net of liquidating damages received	$	844	$	933

Energy Delivery’s capital expenditures for the six months ended June 30, 2004 reflect continuing efforts to improve the reliability of its transmission and distribution systems and capital additions to support new business and customer growth. ComEd estimates that it will spend up to approximately $715 million in total capital expenditures for 2004. This represents an increase of approximately $100 million more than had been previously planned, primarily as a result of expansion of the ComEd distribution system to support new business and customer growth. However, Exelon is continuing to evaluate its total capital spending requirements and potential mitigating opportunities across the company. Exelon anticipates that Energy Delivery’s capital expenditures will be funded by internally generated funds, borrowings and the issuance of debt or preferred securities or capital contributions from Exelon.

Generation’s capital expenditures for the six months ended June 30, 2004 reflect additions and upgrades to existing facilities (including nuclear refueling outages), nuclear fuel and increases in capacity at existing plants. Generation’s capital expenditures for the six months ended June 30, 2003 reflected the construction of the Mystic 8 and 9 and Fore River Boston Generating facilities. During 2003, Boston Generating received $86 million of liquidated damages from Raytheon Company (Raytheon) as a result of Raytheon not meeting the expected completion date and certain contractual performance criteria in connection with Raytheon’s construction of these generating facilities. Exelon anticipates that Generation’s capital expenditures will be funded by internally generated funds, Generation’s borrowings or capital contributions from Exelon.


	*Cash Flows from Financing Activities*

Cash flows used in financing activities for the six months ended June 30, 2004 were $937 million compared to $255 million for the same period in 2003. The increase in cash used in financing activities is primarily attributable to the net retirement of $582 million of long-term debt during the six months ended June 30, 2004 versus the net issuance of long-term debt of $334 million during the six months ended June 30, 2003. See Note 9 of the Combined Notes to Consolidated Financial Statements for further information regarding debt issuances and retirements during the six months ended June 30, 2004. During the six months ended June 30, 2004, Exelon repaid $65 million of commercial paper and received cash proceeds of $31 million from the settlement of interest-rate swaps. During the six months ended June 30, 2003, Exelon repaid $100 million of commercial paper and paid $51 million to settle an interest-rate swap. Additionally, Exelon purchased treasury shares totaling $75 million during the second quarter of 2004 and received proceeds from employee stock plans of $140 million and $91 million for the six months ended June 30, 2004 and 2003, respectively.

The cash dividend payments on common stock for the six months ended June 30, 2004 increased $79 million over the six months ended June 30, 2003, reflecting a 9% increase in the common stock dividend in the third quarter of 2003 and a 10% increase in the first quarter of 2004. Payment of future dividends is subject to approval and declaration by the Board.

From time to time and as market conditions warrant, Exelon may engage in long-term debt repurchases via tender offers, open market acquisitions or other viable options to preserve the integrity of Exelon’s balance sheet.

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	*Credit Issues*

Exelon Credit Facility. Exelon meets its short-term liquidity requirements primarily through the issuance of commercial paper by Exelon corporate holding company (Exelon Corporate) and by ComEd, PECO and Generation. At June 30, 2004, Exelon Corporate, along with ComEd, PECO and Generation, participated in a $750 million 364-day unsecured revolving credit agreement and a $750 million three-year unsecured revolving credit agreement with a group of banks. On July 16, 2004, the $750 million 364-day facility was replaced with a $1 billion five-year facility, and the $750 million three-year facility was reduced to $500 million. Both revolving credit agreements are used principally to support the commercial paper programs at Exelon Corporate, ComEd, PECO and Generation and to issue letters of credit. At June 30, 2004, Exelon Corporate, ComEd, PECO and Generation had the following sublimits and available capacity under the credit agreements and the indicated amounts of outstanding commercial paper:


	Bank		Available		Outstanding
Borrower	Sublimit(a)		Capacity(b)		Commercial Paper

Exelon Corporate	$	550	$	531	$	50
ComEd		100		74		—
PECO		250		250		—
Generation		600		460		211


(a)		Sublimits under the credit agreements can change upon written notification to the bank group.

(b)		Available capacity represents primarily the bank sublimit net of outstanding letters of credit. The amount of commercial paper outstanding does not reduce the available capacity under the Exelon Credit Facility.

Interest rates on the advances under the credit facility are based on either the London Interbank Offering Rate (LIBOR) plus an adder based on the credit rating of the borrower as well as the total outstanding amounts under the agreement at the time of borrowing or prime. The maximum LIBOR adder would be 175 basis points. For the six months ended June 30, 2004, the average interest rate on notes payable was approximately 1.05%.

The credit agreements require Exelon Corporate, ComEd, PECO and Generation to maintain a minimum cash from operations to interest expense ratio for the twelve-month period ended on the last day of any quarter. The ratios exclude revenues and interest expenses attributable to securitization debt, certain changes in working capital, distributions on preferred securities of subsidiaries and, in the case of Exelon Corporate and Generation, revenues from Exelon New England Holding Company, LLC (Exelon New England) and Sithe and interest on the debt of their project subsidiaries. Exelon Corporate is measured at the Exelon consolidated level. The following table summarizes the minimum thresholds reflected in the credit agreements for the twelve-month period ended June 30, 2004:

Exelon Corporate

ComEd

PECO

Generation

Credit agreement threshold

2.65 to 1

2.25 to 1

3.25 to 1

At June 30, 2004, each of Exelon Corporate, ComEd, PECO and Generation were in compliance with the foregoing thresholds.

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Capital Structure. At June 30, 2004, Exelon’s, ComEd’s, PECO’s and Generation’s capital structure consisted of the following:


	Exelon
	Consolidated			ComEd(a)			PECO(a)			Generation

Long-term debt		37	%		33	%		21	%		42	%
Long-term debt to affiliates		24	(b)		15	(b)		61	(b)		—
Common equity		38			52			17			—
Member’s equity		—			—			—			50
Preferred securities		—			—			1			—
Notes payable		1			—			—			7
Minority interest		—			—			—			1


(a)		At June 30, 2004, ComEd’s capital structure, excluding the deduction from shareholders’ equity of the $188 million receivable from Exelon (which amount is deducted for GAAP purposes, as reflected in the table, but is excluded from the percentages in this footnote) to reflect amounts expected to be received by ComEd from Exelon to pay future taxes, consisted of 33% long-term debt, 14% long-term debt to affiliates and 53% common equity. Likewise, PECO’s capital structure, excluding the deduction from shareholder’s equity of the $1.6 billion receivable from Exelon, consisted of 33% common equity, 1% preferred securities and 66% long-term debt, including long-term debt to unconsolidated affiliates.

(b)		Includes $6 billion, $2 billion and $4 billion owed to unconsolidated affiliates of Exelon, ComEd and PECO, respectively, that qualify as special purpose entities under FIN No. 46-R. These special purpose entities were created for the sole purpose of issuing debt obligations to securitize intangible transition property and CTCs of Energy Delivery or mandatorily redeemable preferred securities. See Note 2 of the Combined Notes to Consolidated Financial Statements for further information regarding FIN No. 46-R.

Boston Generating Project Debt. Boston Generating had a $1.25 billion credit facility (Boston Generating Credit Facility), which was entered into primarily to finance the development and construction of the Mystic 8 and 9 and Fore River generating facilities. On May 25, 2004, Exelon and Generation completed the sale, transfer and assignment of ownership of Boston Generating to a special purpose entity owned by the lenders under the Boston Generating Credit Facility. Accordingly, the Boston Generating Credit Facility was eliminated from the consolidated financial statements of Exelon and Generation during the second quarter of 2004.

See Note 3 of the Combined Notes to Consolidated Financial Statements for information regarding the sale of Generation’s ownership interest in Boston Generating to the lenders under the Boston Generating Credit Facility.

Intercompany Money Pool. To provide an additional short-term borrowing option that will generally be more favorable to the borrowing participants than the cost of external financing, Exelon operates an intercompany money pool. Participation in the money pool is subject to authorization by Exelon’s corporate treasurer. ComEd and its subsidiary, Commonwealth Edison of Indiana, Inc. (ComEd of Indiana), PECO, Generation and BSC may participate in the money pool as lenders and borrowers, and Exelon Corporate and Unicom Investment, Inc., a wholly owned subsidiary of Exelon, may participate as lenders. Funding of, and borrowings from, the money pool are predicated on whether the contributions and borrowings result in economic benefits. Interest on borrowings is based on short-term market rates of interest, or, if from an external source, specific borrowing rates. During 2004, ComEd, ComEd of Indiana and PECO had various

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contributions to the money pool, and Generation and BSC had various loans from the money pool as described in the following table:


					June 30, 2004
	Maximum		Maximum		Contributed
	Invested		Borrowed		(Borrowed)

ComEd	$	487	$	—	$	198
ComEd of Indiana		21		—		21	(a)
PECO		162		—		35
Generation		—		407		(198	)
BSC		—		197		(35	)


(a)		The activity at ComEd of Indiana at June 30, 2004 was eliminated in the consolidation of ComEd.

Sithe Long-Term Debt. At June 30, 2004, $852 million of Sithe’s long-term debt, including current maturities, was included in Exelon and Generation’s Consolidated Balance Sheets. See Note 2 and Note 4 of the Combined Notes to Consolidated Financial Statements for information regarding the consolidation of Sithe and see Note 9 of the Combined Notes to Consolidated Financial Statements for information regarding Sithe’s long-term debt and the annual maturities.

Security Ratings. Exelon’s access to the capital markets, including the commercial paper market, and its financing costs in those markets depend on the securities ratings of the entity that is accessing the capital markets. On July 22, 2004, Standard & Poor’s Ratings Services lowered the ratings on PECO’s First Mortgage Bonds from A to A-. None of the other securities ratings of Exelon, PECO or Exelon subsidiaries has changed. None of Exelon’s borrowings is subject to default or prepayment as a result of a downgrading of securities although such a downgrading could increase fees and interest charges under Exelon’s credit facilities.

Shelf Registration. As of June 30, 2004, Exelon, ComEd and PECO have current shelf registration statements for the sale of $2.0 billion, $555 million and $550 million, respectively, of securities that are effective with the SEC. Exelon’s ability to sell securities off its shelf registration statement or to access the private placement markets will depend on a number of factors at the time of the proposed sale, including other required regulatory approvals, the current financial condition of the company, its securities ratings and market conditions.

PUHCA Restrictions. On April 1, 2004, Exelon obtained a new order from the SEC under the Public Utilities Holding Company Act of 1935 (PUHCA) authorizing, through April 15, 2007, financing transactions, including the issuance of common stock, preferred securities, equity-linked securities, long-term debt and short-term debt in an aggregate amount not to exceed $8.0 billion above the amount outstanding for Exelon Corporate and Generation at December 31, 2003 with no separate sublimit for short-term debt. The new financing order replaced a prior SEC order that expired on March 31, 2004 that had authorized up to $4.0 billion of financing. No securities have been issued under the above described limit. The prior order also authorized Exelon to issue guarantees of up to $4.5 billion outstanding at any one time. The new order gives Exelon an additional $1.5 billion of guaranty authority. At June 30, 2004, Exelon had provided $1.9 billion of guarantees under the SEC order. See “Contractual Obligations and Off-Balance Sheet Arrangements” in this section for further discussion of guarantees. The SEC order requires Exelon to maintain a ratio of common equity to total capitalization (including securitization debt) of not less than 30%. At June 30, 2004, Exelon’s common equity ratio was 38%. Exelon expects that it will maintain a common equity ratio of at least 30%.

Exelon is also limited by order of the SEC under PUHCA to an aggregate investment of $4.0 billion in exempt wholesale generators (EWGs) and foreign utility companies (FUCOs). At June 30, 2004, Exelon had invested $1.9 billion in EWGs, leaving $2.1 billion of investment authority under the order. In its April 1, 2004 financing order, the SEC authorized Exelon to invest $4 billion in EWGs and reserved jurisdiction over an additional $3.0 billion in investments in EWGs.

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Under applicable law, Exelon, ComEd, PECO and Generation can pay dividends only from retained, undistributed or current earnings. A significant loss recorded at ComEd, PECO or Generation may limit the dividends that these companies can distribute to Exelon. At June 30, 2004, Exelon had retained earnings of $2.9 billion, including ComEd’s retained earnings of $1,064 million (all of which had been appropriated for future dividend payments), PECO’s retained earnings of $597 million and Generation’s undistributed earnings of $773 million.


	*Contractual Obligations, Commercial Commitments and Off-Balance Sheet Obligations*

Contractual obligations represent cash obligations that are considered to be firm commitments and commercial commitments represent commitments triggered by future events. Exelon’s, ComEd’s, PECO’s and Generation’s contractual obligations and commercial commitments as of June 30, 2004 were materially unchanged, other than in the normal course of business, from the amounts set forth in the 2003 Form 10-K except for the following:

• Generation acquired a $50 million letter of credit that supports the contractual obligations of Sithe and its subsidiaries.

• See Note 9 and Note 19 to the Combined Notes to Consolidated Financial Statements for discussion of material changes in the registrants’ respective debt from the amounts set forth in the 2003 Form 10-K.

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COMMONWEALTH EDISON COMPANY

General

ComEd operates in a single business segment and its operations consist of the regulated sale of electricity and distribution and transmission services in northern Illinois.

Executive Overview

Financial Results. ComEd’s net income was consistent for the three months ended June 30, 2004 as compared to the same period in 2003.

ComEd experienced an overall decline in net income of 3% during the six months ended June 30, 2004. This decline primarily reflects lower collections of CTCs, partially offset by lower operating and maintenance expense compared to the corresponding period in 2003 in which ComEd recorded charges associated with an agreement with various Illinois retail market participants and other interested parties.

The Exelon Way. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — ComEd — Executive Summary” in the 2003 Form 10-K for a discussion of ComEd’s implementation of The Exelon Way.

Financing Activities. During the six months ended June 30, 2004, ComEd repaid $178 million of long-term debt and made a $179 million payment on long-term debt to ComEd Transitional Funding Trust. ComEd met all of its capital resource commitments with internally generated cash and expects to do so in the foreseeable future, absent new acquisitions.

Regulatory Developments — PJM Integration. On April 1, 2003, ComEd received approval from the FERC to transfer control of its transmission assets to PJM. The FERC also accepted for filing the amended PJM Tariff to reflect the inclusion of the transmission assets of ComEd and other new members, subject to a compliance filing and hearing on certain issues. On June 2, 2003, ComEd began receiving electric transmission reservation services from PJM and transferred control of ComEd’s Open Access Same Time Information System to PJM. On March 18, 2004, the FERC approved ComEd’s plan to complete its integration into PJM, subject to the North American Electric Reliability Council (NERC) approval of the PJM and Midwest ISO reliability plans to assure no adverse effects. The NERC granted the required approval on April 2, 2004. On April 27, 2004, the FERC issued its order approving ComEd’s application, subject to certain stipulations, including a provision to hold certain other utilities harmless from the impacts of ComEd joining PJM. ComEd agreed to these stipulations and fully integrated into PJM on May 1, 2004.

PECO and ComEd’s membership in PJM supports Exelon’s commitment to competitive wholesale electric markets and will provide Exelon the benefits of more transparent, liquid and competitive markets for the sale and purchase of electric energy and capacity. Upon joining PJM, ComEd began incurring administrative fees, which are expected to approximate $30 million annually. ComEd believes such costs will ultimately be partially offset by the benefits of full access to a wholesale competitive marketplace, particularly after ComEd’s regulatory transition period ends in 2006; however, changes in market dynamics could affect the ultimate financial impact on ComEd.

Through and Out Rates. ComEd currently earns approximately $66 million annually from T&O rates for energy flowing across ComEd’s transmission system. On March 19, 2004, the FERC issued an order to eliminate these rates effective May 1, 2004, which was subsequently deferred until December 1, 2004. The T&O rates are to be replaced by a new long-term transmission pricing structure that will eliminate seams in the PJM and Midwest ISO regions. Transmission owners in PJM and Midwest ISO and other parties must file one or more pricing proposals with the FERC on or before October 1, 2004, with an effective date of December 1, 2004. While Exelon and ComEd cannot predict the outcome of the FERC’s final determination of a new long-term transmission pricing structure, such pricing structure could adversely impact Exelon’s and ComEd’s after-tax results of operations.

Delivery Services Rates. On March 3, 2003, ComEd entered into, and the ICC subsequently entered orders, which are now final, that effectuated an agreement (Agreement) with various Illinois retail market

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participants and other interested parties that settled, among other things, delivery service rates and the market value index proceeding and facilitates competitive service declarations for large-load customers and an extension of the PPA with Generation.

Open Access Transmission Tariff. On November 10, 2003, the FERC issued an order allowing ComEd to put into effect, subject to refund and rehearing, new transmission rates designed to reflect nearly $500 million of infrastructure investments made since 1998. However, because of the Illinois retail rate freeze and the method for calculating CTCs, the increase is not expected to have a significant effect on operating revenues until after December 31, 2006. ComEd began charging the new rates May 1, 2004. ComEd’s management believes an adequate reserve for any required refunds has been established in the event that the new rates are adjusted based on rehearing or settlement negotiations.

Outlook for the Remainder of 2004 and Beyond. ComEd’s outlook for the remainder of 2004 is consistent with the discussion within “Management’s Discussion and Analysis of Financial Condition and Results of Operations — ComEd — Executive Summary” in the 2003 Form 10-K.

Results of Operations


	Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003



			Three Months
			Ended June 30,

			2004			2003			Variance			% Change

Operating revenues			$	1,403		$	1,361		$	42			3.1	%
Operating expenses
	Purchased power			574			533			41			7.7	%
	Operating and maintenance			223			221			2			0.9	%
	Depreciation and amortization			103			96			7			7.3	%
	Taxes other than income			72			68			4			5.9	%

		Total operating expense		972			918			54			5.9	%

Operating income				431			443			(12	)		(2.7	)%

Other income and deductions
	Interest expense			(96	)		(106	)		10			(9.4	)%
	Distributions on mandatorily redeemable preferred securities			—			(6	)		6			(100.0	)%
	Equity in earnings (losses) of unconsolidated affiliates			(6	)		—			(6	)		n.m.
	Other, net			7			12			(5	)		(41.7	)%

		Total other income and deductions		(95	)		(100	)		5			(5.0	)%

Income before income taxes				336			343			(7	)		(2.0	)%
Income taxes				132			138			(6	)		(4.3	)%

Net income			$	204		$	205		$	(1	)		(0.5	)%

n.m. — not meaningful

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	*Operating Revenues*

ComEd’s electric sales statistics were as follows:



		Three Months
		Ended June 30,

Retail Deliveries — (in GWhs)		2004		2003		Variance			% Change

Full service(a)
Residential			5,793		5,163		630			12.2	%
Small commercial & industrial			4,791		5,114		(323	)		(6.3	)%
Large commercial & industrial			1,426		1,683		(257	)		(15.3	)%
Public authorities & electric railroads			1,200		1,333		(133	)		(10.0	)%

	Total full service		13,210		13,293		(83	)		(0.6	)%

PPO
Small commercial & industrial			870		869		1			0.1	%
Large commercial & industrial			877		1,318		(441	)		(33.5	)%
Public authorities & electric railroads			577		531		46			8.7	%

			2,324		2,718		(394	)		(14.5	)%

Delivery only(b)
Small commercial & industrial			1,761		1,257		504			40.1	%
Large commercial & industrial			3,090		2,128		962			45.2	%
Public authorities & electric railroads			406		247		159			64.4	%

			5,257		3,632		1,625			44.7	%

	Total PPO and delivery only		7,581		6,350		1,231			19.4	%

Total retail deliveries			20,791		19,643		1,148			5.8	%


(a)		Full service reflects deliveries to customers taking electric service under tariffed rates.

(b)		Delivery only service reflects customers receiving electric generation service from an AES.

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		Three Months
		Ended June 30,

Electric Revenue		2004		2003		Variance			% Change

Full service(a)
Residential		$	521	$	472	$	49			10.4	%
Small commercial & industrial			396		405		(9	)		(2.2	)%
Large commercial & industrial			71		84		(13	)		(15.5	)%
Public authorities & electric railroads			74		81		(7	)		(8.6	)%

	Total full service		1,062		1,042		20			1.9	%

PPO(b)
Small commercial & industrial			60		59		1			1.7	%
Large commercial & industrial			51		72		(21	)		(29.2	)%
Public authorities & electric railroads			31		28		3			10.7	%

			142		159		(17	)		(10.7	)%

Delivery only(c)
Small commercial & industrial			35		32		3			9.4	%
Large commercial & industrial			43		43		—			—
Public authorities & electric railroads			9		8		1			12.5	%

			87		83		4			4.8	%

Total PPO and delivery only			229		242		(13	)		(5.4	)%

Total electric retail revenues			1,291		1,284		7			0.5	%
Wholesale and miscellaneous revenue(d)			112		77		35			45.5	%

Total electric revenue		$	1,403	$	1,361	$	42			3.1	%


(a)		Full service revenue reflects deliveries to customers taking electric service under tariffed rates, which include the cost of energy and the delivery cost of the transmission and the distribution of the energy.

(b)		Revenue from customers choosing ComEd’s PPO includes an energy charge at market rates, transmission and distribution charges and a CTC charge.

(c)		Delivery only revenue from customers choosing an AES includes a distribution charge and a CTC charge. Prior to ComEd’s full integration into PJM on May 1, 2004, ComEd’s transmission charges received from AES were included in wholesale and miscellaneous revenue.

(d)		Wholesale and miscellaneous revenues include transmission revenue (including revenue from PJM), sales to municipalities and other wholesale energy sales.

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The changes in electric retail revenues for the three months ended June 30, 2004, as compared to the same period in 2003, are attributable to the following:


		Variance

Volume		$	61
Weather			29
Customer choice			(51	)
Rate changes			(28	)
Other			(4	)

	Electric retail revenue		7

ComEd’s integration into PJM			43
Other			(8	)

	Wholesale and miscellaneous revenue		35

	Total electric retail revenue	$	42

Volume. Revenues from higher delivery volume, exclusive of weather, increased $61 million due to increased residential customer growth and an increased usage per customer, primarily residential and large commercial and industrial.

Weather. The demand for electricity is affected by weather conditions. Very warm weather in summer months and very cold weather in other months are referred to as “favorable weather conditions” because these weather conditions result in increased sales of electricity. Conversely, mild weather reduces demand. The weather conditions for the three months ended June 30, 2004 were favorable compared to the same period in 2003. Cooling degree-days increased 68% for the three months ended June 30, 2004 compared to the same period in 2003, and were 14% lower than normal. Heating degree-days decreased 18% for the three months ended June 30, 2004 compared to the same period in 2003, and were 13% lower than normal.

Customer Choice. All ComEd customers have the choice to purchase energy from an AES. This choice generally does not impact the volume of deliveries, but affects revenue collected from customers related to energy supplied by ComEd. As of June 30, 2004, no AES has sought approval from the ICC, and no electric utilities have chosen to enter the ComEd residential market for the supply of electricity. ComEd competes with AESs in the commercial market.

For the three months ended June 30, 2004, the energy provided by AESs was 5,257 GWhs, or 25%, as compared to 3,632 GWhs, or 18%, for the same period in 2003.

The decrease in revenues reflects customers in Illinois electing to purchase energy from an AES or the PPO. As of June 30, 2004, the number of retail customers that had elected to purchase energy from an AES or the ComEd PPO was approximately 21,400 as compared to 22,000 as of the same period in 2003, representing less than 1% of total customers in each period. MWhs delivered to such customers increased from approximately 6.3 million for the three months ended June 30, 2003 to 7.6 million for three months ended June 30, 2004, or from 32% to 36% of total quarterly retail deliveries.

Rate Changes. ComEd’s CTC is reset in the second quarter of each year to reflect market price adjustments. Starting in the June 2003 billing cycle, the increased wholesale market price of electricity and other adjustments to the energy component, decreased the collection of CTCs as compared to the respective prior year period. ComEd’s CTC revenues decreased $44 million for the three months ended June 30, 2004 as compared to the same period in 2003. This decrease was partially offset by increased wholesale market prices which increased energy revenue received under ComEd’s PPO by $28 million.

Decreased average rates paid by residential customers resulted in a $10 million decrease. Although residential rates are frozen through 2006, average residential rates fluctuate due to the usage patterns of customers.

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ComEd’s Integration into PJM. ComEd’s transmission revenues and purchased power expense each increased by $43 million in the three months ended June 30, 2004 relative to 2003 due to ComEd’s May 1, 2004 entry into PJM. The increase relates to the change in control of the transmission assets from ComEd to PJM whereby ComEd receives revenues for its proportionate share of the transmission revenues generated by PJM, but also pays PJM for the use of its transmission assets. For 2004, ComEd’s operating revenues are estimated to increase by approximately $180 million, offset by a corresponding and equal increase in purchased power expense. Starting in 2005, on an annual basis, ComEd’s operating revenues and purchased power expense are estimated to increase between $200 to $250 million; however, there is no expected impact on revenues net of purchased power expense.


	*Purchased Power*

The increase in purchased power expense was primarily attributable to an increase of $28 million due to higher volume and a $10 million increase due to favorable weather conditions offset by a $40 million decrease as a result of non-residential customers choosing to purchase energy from an AES. ComEd’s operating revenues and purchased power expense each increased by $43 million in the three months ended June 30, 2004 relative to 2003 due to ComEd’s May 1, 2004 entry into PJM. See “Operating Revenues” above.


	*Operating and Maintenance*

The changes in operating and maintenance expense for the three months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

Higher corporate allocations(a)	$	17
Severance, pension and postretirement benefit costs associated with The Exelon Way		8
Tax consultant fees(b)		5
Employee fringe benefits(c)		(10	)
Contractors		(11	)
Environmental charges		(4	)
Other		(3	)

Increase in operating and maintenance expense	$	2


(a)		Higher corporate allocations primarily result from higher corporate governance allocations and employee fringe benefits. Corporate governance allocations increased as a result of the 2004 sale of certain Enterprise companies resulting in ComEd comprising a greater percentage of Exelon.

(b)		ComEd recorded a $5 million charge for contingent fees paid to a tax consultant (see Note 15 of the Combined Notes to Consolidated Financial Statements for more information).

(c)		During the second quarter of 2004, ComEd adopted the provisions of FSP FAS 106-2. Employee fringe benefits include a $1 million reduction in net periodic postretirement benefit cost due to the adoption of FSP FAS 106-2.


	*Depreciation and Amortization*



	Three Months
	Ended June 30,

	2004		2003		Variance		% Change

Depreciation expense	$	81	$	76	$	5		6.6	%
Recoverable transition costs amortization		12		12		—		—
Other amortization expense		10		8		2		25.0	%

Total depreciation and amortization	$	103	$	96	$	7		7.3	%

The increase in depreciation expense is primarily due to capital additions.

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Recoverable transition costs amortization remained constant in the three months ended June 30, 2004 compared to the same period in 2003. ComEd expects to fully recover its remaining recoverable transition costs regulatory asset balance of $109 million by 2006. Consistent with the provision of the Illinois legislation, regulatory assets may be recovered at amounts that provide ComEd an earned return on common equity within the Illinois legislation earnings threshold.


	*Taxes Other Than Income*

Taxes other than income increased for three months ended June 30, 2004 as compared to the same period in 2003 as a result of a 2003 refund of $5 million for Illinois Electricity Distribution Taxes.


	*Interest Expense and Distributions on Mandatorily Redeemable Preferred Securities*

The aggregate of interest expense and distributions on mandatorily redeemable preferred securities decreased as a result of scheduled principal payments and refinancings at lower rates. Effective December 31, 2003, upon the adoption of FIN No. 46-R, ComEd deconsolidated its financing trusts (see Note 2 of the Combined Notes to Consolidated Financial Statements). ComEd no longer records distributions on mandatorily redeemable preferred securities but records interest expense to affiliates related to ComEd’s obligations to the financing trusts.


	*Equity in Earnings (Losses) of Unconsolidated Affiliates*

In 2004, ComEd has $6 million of equity in net losses of subsidiaries as a result of deconsolidating its financing trusts.


	*Other, Net*

The change in Other, net is primarily related to the 2003 $2 million gain on sale of non-utility property and $1 million decrease in interest income on the long-term receivable from Unicom Investments, Inc. as a result of a lower principal balance.


	*Income Taxes*

The effective income tax rate was 39% for the three months ended June 30, 2004, compared to 40% for the three months ended June 30, 2003. The decrease in the effective tax rate was primarily attributable to the adoption of FSP FAS 106-2 and other items. See Note 12 of the Combined Notes to the Consolidated Financial Statements for further discussion of the change in the effective income tax rate.

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	Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003



			Six Months
			Ended June 30,

			2004			2003			Variance			% Change

Operating revenues			$	2,739		$	2,785		$	(46	)		(1.7	)%
Operating expenses
	Purchased power			1,108			1,110			(2	)		(0.2	)%
	Operating and maintenance			438			483			(45	)		(9.3	)%
	Depreciation and amortization			205			190			15			7.9	%
	Taxes other than income			151			148			3			2.0	%

		Total operating expense		1,902			1,931			(29	)		(1.5	)%

Operating income				837			854			(17	)		(2.0	)%

Other income and deductions
	Interest expense			(202	)		(215	)		13			(6.0	)%
	Distributions on mandatorily redeemable preferred securities			—			(14	)		14			(100.0	)%
	Equity in earnings (losses) of unconsolidated affiliates			(9	)		—			(9	)		n.m.
	Other, net			17			34			(17	)		(50.0	)%

		Total other income and deductions		(194	)		(195	)		1			(0.5	)%

Income before income taxes and cumulative effect of a change in accounting principle				643			659			(16	)		(2.4	)%
Income taxes				255			263			(8	)		(3.0	)%

Net income before cumulative effect of a change in accounting principle				388			396			(8	)		(2.0	)%
Cumulative effect of a change in accounting principle				—			5			(5	)		(100.0	)%

Net income			$	388		$	401		$	(13	)		(3.2	)%

n.m. — not meaningful

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	*Operating Revenues*

ComEd’s electric sales statistics were as follows:



		Six Months
		Ended June 30,

Retail Deliveries — (in GWhs)		2004		2003		Variance			% Change

Full service(a)
Residential			12,805		12,049		756			6.3	%
Small commercial & industrial			9,924		10,741		(817	)		(7.6	)%
Large commercial & industrial			2,771		3,167		(396	)		(12.5	)%
Public authorities & electric railroads			2,440		2,749		(309	)		(11.2	)%

	Total full service		27,940		28,706		(766	)		(2.7	)%

PPO
Small commercial & industrial			1,600		1,662		(62	)		(3.7	)%
Large commercial & industrial			1,624		2,750		(1,126	)		(40.9	)%
Public authorities & electric railroads			1,012		1,069		(57	)		(5.3	)%

			4,236		5,481		(1,245	)		(22.7	)%

Delivery only(b)
Small commercial & industrial			3,532		2,606		926			35.5	%
Large commercial & industrial			6,031		3,960		2,071			52.3	%
Public authorities & electric railroads			894		529		365			69.0	%

			10,457		7,095		3,362			47.4	%

	Total PPO and delivery only		14,693		12,576		2,117			16.8	%

Total retail deliveries			42,633		41,282		1,351			3.3	%


(a)		Full service reflects deliveries to customers taking electric service under tariffed rates.

(b)		Delivery only service reflects customers receiving electric generation service from an AES.

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		Six Months
		Ended June 30,

Electric Revenue		2004		2003		Variance			% Change

Full service(a)
Residential		$	1,080	$	1,018	$	62			6.1	%
Small commercial & industrial			769		802		(33	)		(4.1	)%
Large commercial & industrial			131		158		(27	)		(17.1	)%
Public authorities & electric railroads			148		165		(17	)		(10.3	)%

	Total full service		2,128		2,143		(15	)		(0.7	)%

PPO(b)
Small commercial & industrial			108		109		(1	)		(0.9	)%
Large commercial & industrial			92		144		(52	)		(36.1	)%
Public authorities & electric railroads			53		55		(2	)		(3.6	)%

			253		308		(55	)		(17.9	)%

Delivery only(c)
Small commercial & industrial			67		73		(6	)		(8.2	)%
Large commercial & industrial			84		91		(7	)		(7.7	)%
Public authorities & electric railroads			18		17		1			5.9	%

			169		181		(12	)		(6.6	)%

Total PPO and delivery only			422		489		(67	)		(13.7	)%

Total electric retail revenues			2,550		2,632		(82	)		(3.1	)%
Wholesale and miscellaneous revenue(d)			189		153		36			23.5	%

Total electric revenue		$	2,739	$	2,785	$	(46	)		(1.7	)%


(a)		Full service revenue reflects deliveries to customers taking electric service under tariffed rates, which include the cost of energy and the delivery cost of the transmission and the distribution of the energy.

(b)		Revenue from customers choosing ComEd’s PPO includes an energy charge at market rates, transmission and distribution charges and a CTC charge.

(c)		Delivery only revenue from customers choosing an AES includes a distribution charge and a CTC charge. Prior to ComEd’s full integration into PJM on May 1, 2004, ComEd’s transmission charges received from AES were included in wholesale and miscellaneous revenue.

(d)		Wholesale and miscellaneous revenues include transmission revenue (including revenue form PJM), sales to municipalities and other wholesale energy sales.

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The changes in electric retail revenues for the six months ended June 30, 2004, as compared to the same period in 2003, are attributable to the following:


		Variance

Customer choice		$	(107	)
Rate changes			(70	)
Volume			92
Weather			6
Other			(3	)

	Electric retail revenue	$	(82	)

ComEd’s integration into PJM			43
Other			(7	)

	Wholesale and miscellaneous revenue		36

	Electric retail revenue	$	(46	)

Customer Choice. As noted, all ComEd customers have the choice to purchase energy from an AES. This choice generally does not impact the volume of deliveries, but affects revenue collected from customers related to energy supplied by ComEd.

For the six months ended June 30, 2004, the energy provided by AESs was 10,457 GWhs, or 25%, as compared to 7,095 GWhs, or 17%, for the same period in 2003.

The decrease in revenues reflects customers in Illinois electing to purchase energy from an AES or the PPO. As of June 30, 2004, the number of retail customers that had elected to purchase energy from an AES or the ComEd PPO was approximately 21,400 as compared to 22,000 as of June 30, 2003, representing less than 1% of total customers in each period. MWhs delivered to such customers increased from approximately 12.6 million for the six months ended June 30, 2003 to approximately 14.7 million for six months ended June 30, 2004, or from 30% to 34% of total quarterly retail deliveries.

Rate Changes. Starting in the June 2003 billing cycle, the increased wholesale market price of electricity and other adjustments to the energy component, decreases the collection of CTCs as compared to the respective prior year period. ComEd’s CTC revenues decreased by $120 million for the six months ended June 30, 2004 as compared to the same period in 2003. This decrease was partially offset by increased wholesale market prices which increased energy revenue received under ComEd’s PPO by $47 million. For the six months ended June 30, 2004 and June 30, 2003, ComEd collected approximately $87 million and $207 million, respectively, of CTC revenue. As a result of increasing mitigation factors, changes in energy prices and the ability of certain customers to establish fixed, multi-year CTC rates beginning in 2003, and increases in ComEd’s OATT effective May 1, 2004, ComEd anticipates that this revenue source will decline to approximately $180 million for 2004 and range from $100 million to $180 million annually in 2005 and 2006. Under the current restructuring statute, no CTCs will be collected after 2006.

Volume. ComEd’s electric revenues increased as a result of higher delivery volume, exclusive of the effect of weather and customer choice, due to an increased number of customers and increased usage per customer, primarily residential and large commercial and industrial.

Weather. The weather conditions for the six months ended June 30, 2004 were favorable compared to the same period in 2003. Cooling degree-days increased 68% for the six months ended June 30, 2004 compared to the same period in 2003 and were 14% lower than normal. Heating degree-days decreased 8% for the six months ended June 30, 2004 compared to the same period in 2003, and were 4% lower than normal.

ComEd’s Integration into PJM. ComEd’s transmission revenues and purchased power expense each increased by $43 million in the six months ended June 30, 2004 relative to 2003 due to ComEd’s May 1, 2004 entry into PJM.

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	*Purchased Power*

The decrease in purchased power expense was primarily attributable to a $92 million decrease as a result of customers choosing to purchase energy from an AES and an $8 million decrease due to the mix of average pricing related to ComEd’s PPA with Generation partially offset by an increase of $50 million due to higher volume. ComEd’s transmission revenues and purchased power expense each increased by $43 million in the six months ended June 30, 2004 relative to 2003 due to ComEd’s May 1, 2004 entry into PJM. See “Operating Revenues” above.


	*Operating and Maintenance*

The changes in operating and maintenance expense for the six months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

Charge recorded at ComEd in 2003(a)	$	(41	)
Contractors		(13	)
Decreased payroll expense due to fewer employees(b)		(10	)
Environmental charges		(5	)
Allowance for uncollectible accounts expense		(4	)
Higher corporate allocations(c)		23
Severance, pension and postretirement benefit costs associated with The Exelon Way		9
Tax consultant fees(d)		5
Employee fringe benefits(e)		1
Other		(10	)

Decrease in operating and maintenance expense	$	(45	)


(a)		In 2003, ComEd reached an agreement with various Illinois retail market participants and other interested parties.

(b)		ComEd has fewer employees as a result of The Exelon Way terminations.

(c)		Higher corporate allocations primarily result from higher corporate governance allocations and employee fringe benefits. Corporate governance allocations increased as a result of the 2004 sale of certain Enterprise companies resulting in ComEd comprising a greater percentage of Exelon.

(d)		ComEd recorded a $5 million charge for contingent fees paid to a tax consultant (see Note 15 to the Combined Notes to Consolidated Financial Statements for more information).

(e)		During the second quarter of 2004, ComEd adopted the provisions of FSP FAS 106-2. Employee fringe benefits include a $3 million reduction in net periodic postretirement benefit cost due to the adoption of FSP FAS 106-2.


	*Depreciation and Amortization*



	Six Months
	Ended June 30,

	2004		2003		Variance		% Change

Depreciation expense	$	163	$	152	$	11		7.2	%
Recoverable transition costs amortization		23		23		—		—
Other amortization expense		19		15		4		26.7	%

Total depreciation and amortization	$	205	$	190	$	15		7.9	%

The increase in depreciation expense is primarily due to capital additions.

Recoverable transition costs amortization remained constant in the six months ended June 30, 2004 compared to the same period in 2003. ComEd expects to fully recover its remaining recoverable transition costs regulatory asset balance of $109 million by 2006. Consistent with the provision of the Illinois legislation,

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regulatory assets may be recovered at amounts that provide ComEd an earned return on common equity within the Illinois legislation earnings threshold.


	*Taxes Other Than Income*

Taxes other than income increased for six months ended June 30, 2004 as compared to the same period in 2003 as a result of a 2003 refund of $5 million for Illinois Electricity Distribution taxes.


	*Interest Expense and Distributions on Mandatorily Redeemable Preferred Securities*

The aggregate of interest expense and distributions on mandatorily redeemable preferred securities decreased as a result of scheduled principal payments and refinancings at lower rates. Effective December 31, 2003, upon the adoption of FIN No. 46-R, ComEd deconsolidated its financing trusts (see Note 2 of the Combined Notes to Consolidated Financial Statements). ComEd no longer records distributions on mandatorily redeemable preferred securities, but records interest expense to affiliates related to ComEd’s obligations to the financing trusts. This decrease was offset by $3 million of less allowance for funds used during construction (AFUDC) debt recorded during the six months ended June 30, 2004 as a result of lower construction work in process balances.


	*Equity in Earnings (Losses) of Unconsolidated Affiliates*

In 2004, ComEd has $9 million of equity in net losses of subsidiaries as a result of deconsolidating its financing trusts.


	*Other, Net*

The change in Other, net is primarily related to the reversal of a $12 million reserve for potential plant disallowance in 2003 as a result of the Agreement (see “Operating and Maintenance” above), a reduction in AFUDC equity of $4 million during 2004 as a result of lower construction work in process balances and a $3 million decrease in interest income on the long-term receivable from Unicom Investments, Inc. as a result of a lower principal balance.


	*Income Taxes*

The effective income tax rate was 40% for the six months ended June 30, 2004, compared to 40% for the six months ended June 30, 2003. The reduction in the effective tax rate is primarily attributable to the adoption of FSP FAS 106-2. See Note 12 of the Combined Notes to the Consolidated Financial Statements for further discussion of the change in the effective income tax rate.


	*Cumulative Effect of a Change in Accounting Principle*

On January 1, 2003, ComEd adopted SFAS No. 143, resulting in income of $5 million.

Liquidity and Capital Resources

ComEd’s business is capital intensive and requires considerable capital resources. ComEd’s capital resources are primarily provided by internally generated cash flows from operations and, to the extent necessary, external financing, including the issuance of commercial paper, participation in the intercompany money pool or capital contributions from Exelon. ComEd’s access to external financing at reasonable terms is dependent on its credit ratings and general business conditions, as well as that of the utility industry in general. If these conditions deteriorate to where ComEd no longer has access to the capital markets at reasonable terms, ComEd has access to a revolving credit facility that ComEd currently utilizes to support its commercial paper program. See the “Credit Issues” section of “Liquidity and Capital Resources” for further discussion. Capital resources are used primarily to fund ComEd’s capital requirements, including construction, repayments of maturing debt, the payment of dividends and contributions to Exelon’s pension plans.

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	*Cash Flows from Operating Activities*

ComEd’s cash flows from operating activities primarily results from sales of electricity to a stable and diverse base of retail customers at fixed prices. ComEd’s future cash flows will be affected by its ability to achieve operating cost reductions and the impact of the economy, weather and customer choice on its revenues. Cash flows from operations have been and are expected to continue to provide a reliable, steady source of cash flow sufficient to meet operating and capital expenditures requirements. Operating cash flows after 2006 could be negatively affected by changes in ComEd’s rate regulatory environment, although any effects are not expected to hinder ComEd’s ability to fund its business requirements.

Cash flows from operations for the six months ended June 30, 2004 and 2003 were $602 million and $369 million, respectively. Changes in ComEd’s cash flows from operations are generally consistent with changes in its results of operations, as further adjusted by changes in working capital in the normal course of business.

In addition to the items mentioned in “Results of Operations,” ComEd’s operating cash flows for the six months ended June 30, 2004 and 2003 were affected by the following items:

• During the first half of 2003, ComEd made additional payments to Generation for amounts owed under the PPA. At June 30, 2004 and December 31, 2003, ComEd had accrued payments due to Generation under the PPA of $182 million and $171 million, respectively. At June 30, 2003 and December 31, 2002, ComEd had accrued payments due to Generation under the PPA of $185 million and $339 million, respectively.

• Discretionary contributions by ComEd to Exelon’s defined benefit pension plans were $144 million for the six months ended June 30, 2004 compared to $117 million for the same period in 2003.

ComEd participates in Exelon’s defined benefit pension plans. Exelon expects to contribute up to approximately $419 million to its pension plans in 2004, including $11 million to satisfy IRS minimum funding requirements. Of the $419 million, $216 million is expected to be funded by ComEd.

ComEd 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, 2004, the majority of the deferred tax liabilities related to the fossil plant sale are reflected in ComEd’s Consolidated Balance Sheets with the remainder having been allocated to the Consolidated Balance Sheets of Generation in connection with Exelon’s 2001 corporate restructuring. The total 1999 income tax liability deferred as a result of these transactions was approximately $1.1 billion. Changes in IRS interpretations of existing primary tax authority or challenges to ComEd’s positions could have the impact of accelerating future income tax payments and increasing interest expense related to the deferred tax gain that becomes current. Any required payments could be significant to the cash flows of ComEd. ComEd’s management believes ComEd’s reserve for interest, which has been established in the event that such positions are not sustained, has been appropriately recorded in accordance with SFAS No. 5. However, the ultimate outcome of such matters could result in additional unfavorable or favorable adjustments to the results of operations, and such adjustments could be material. Federal tax returns covering the period of the 1999 sale are currently under IRS audit. Final resolution of this matter is not anticipated for several years.


	*Cash Flows from Investing Activities*

Cash flows used in investing activities were $133 million for the six months ended June 30, 2004 compared to cash flows used in investing activities of $524 million for the same period in 2003. The change in cash flows from investing activities was primarily attributable to $372 million of net proceeds from an investment in the Exelon intercompany money pool and $36 million of net changes in restricted cash. ComEd’s investing activities for the six months ended June 30, 2004 were funded primarily through operating activities.

ComEd’s capital expenditures for the six months ended June 30, 2004 and 2003 were $369 million and $355 million, respectively. ComEd estimates that it will spend up to approximately $715 million in total

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capital expenditures for 2004. This represents an increase of approximately $100 million more than had been previously planned, primarily as a result of expansion of the ComEd distribution system to support new business and customer growth. Although not anticipated, ComEd believes it could obtain any needed financing through borrowings, the issuance of debt or preferred securities, or capital contributions from Exelon. ComEd’s proposed capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors.


	*Cash Flows from Financing Activities*

Cash flows used in financing activities for the six months ended June 30, 2004 were $476 million as compared to cash flows from financing activities of $173 million in 2003. The decrease in cash flows from financing activities is primarily attributable to the retirement of long-term debt of $357 million during the six months ended June 30, 2004 versus the net proceeds from the issuance of long-term debt of $473 million during the same period in 2003. During the six months ended June 30, 2003, ComEd also repaid $71 million of commercial paper and paid $51 million to settle interest-rate swaps. During the six months ended June 30, 2004, ComEd received $26 million from the settlement of interest-rate swaps. Additionally, ComEd paid $207 million in dividends to Exelon during the six months ended June 30, 2004 compared to $211 million in dividends during the same period in 2003.

From time to time and as market conditions warrant, ComEd may engage in long-term debt repurchases via tender offers, open market acquisitions or other viable options to preserve the integrity of ComEd’s balance sheet.


	*Credit Issues*

Exelon Credit Facility. ComEd meets its short-term liquidity requirements primarily through the issuance of commercial paper and borrowings from Exelon’s intercompany money pool. ComEd, along with Exelon Corporate, PECO and Generation, participated in a $750 million 364-day unsecured revolving credit agreement and a $750 million three-year unsecured revolving credit agreement with a group of banks. On July 16, 2004, the $750 million 364-day facility was replaced with a $1 billion five-year facility and the $750 million three-year facility was reduced to $500 million. These credit agreements, and ComEd’s participation therein, are described above under “Credit Issues — Exelon Credit Facility” in “Exelon Corporation — Liquidity and Capital Resources.”

Capital Structure. ComEd’s capital structure at June 30, 2004 is described above under “Credit Issues — Capital Structure” in “Exelon Corporation — Liquidity and Capital Resources.”

Intercompany Money Pool. A description of the intercompany money pool, and ComEd’s participation therein, is set forth above under “Credit Issues — Intercompany Money Pool” in “Exelon Corporation — Liquidity and Capital Resources.” During the six months ended June 30, 2004, ComEd earned $2 million in interest on its investments in the intercompany money pool.

Security Ratings. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” in the 2003 Form 10-K for a discussion of ComEd’s security ratings.

Shelf Registration. As of June 30, 2004, ComEd has a current shelf registration statement for the sale of $555 million of securities that is effective with the SEC. ComEd’s ability to sell securities off its shelf registration statement or to access the private placement markets will depend on a number of factors at the time of the proposed sale, including other required regulatory approvals, ComEd’s current financial condition, its securities ratings and market conditions.

Fund Transfer Restrictions. At June 30, 2004, ComEd had retained earnings of $1,064 million, which had been appropriated for future dividend payments. See “Liquidity and Capital Resources — Credit Issues — Fund Transfer Restrictions” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — ComEd” in the 2003 Form 10-K for information regarding restrictions under

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federal and Illinois law and under the agreements governing ComEd Financing II and III regarding dividend payments by ComEd. ComEd is precluded from lending or extending credit or indemnity to Exelon.


	*Contractual Obligations, Commercial Commitments and Off-Balance Sheet Obligations*

Contractual obligations represent cash obligations that are considered to be firm commitments and commercial commitments represent commitments triggered by future events. ComEd’s contractual obligations and commercial commitments as of June 30, 2004 were materially unchanged, other than in the normal course of business, from the amounts set forth in the 2003 Form 10-K except for the following:

• See Note 9 and Note 19 to the Combined Notes to Consolidated Financial Statements for discussion of material changes in ComEd’s debt from the amounts set forth in the 2003 Form 10-K.

125


	PECO ENERGY COMPANY

General

PECO operates in a single business segment, and its operations consist of the regulated sale of electricity and distribution and transmission services in southeastern Pennsylvania and the sale of natural gas and distribution services in the Pennsylvania counties surrounding the City of Philadelphia.

Executive Overview

Financial Results. PECO’s net income increased 14% for the three months ended June 30, 2004 as compared to the same period in 2003. This increase reflects higher electric revenues, partially offset by higher operating expenses.

PECO’s net income increased 4% for the six months ended June 30, 2004 as compared to the same period in 2003 and is generally comparable between periods.

The Exelon Way. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — PECO — Executive Summary” in the 2003 Form 10-K for a discussion of PECO’s implementation of The Exelon Way.

Financing Activities. During the six months ended June 30, 2004, PECO refinanced $75 million of First and Refunding Mortgage Bonds and repaid $166 million of long-term debt to PECO Energy Transition Trust. PECO met all of its capital resource commitments with internally generated cash and expects to do so in the foreseeable future, absent new acquisitions.

Outlook for the Remainder of 2004 and Beyond. PECO’s outlook for the remainder of 2004 is consistent with the discussion within “Management’s Discussion and Analysis of Financial Condition and Results of Operations — PECO — Executive Summary” in the 2003 Form 10-K.

126

Results of Operations


	Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003



			Three Months
			Ended June 30,

			2004			2003			Variance			% Change

Operating revenues			$	1,032		$	961		$	71			7.4	%
Operating expenses
	Purchased power			402			386			16			4.1	%
	Fuel			83			67			16			23.9	%
	Operating and maintenance			132			121			11			9.1	%
	Depreciation and amortization			125			116			9			7.8	%
	Taxes other than income			60			47			13			27.7	%

		Total operating expenses		802			737			65			8.8	%

Operating income				230			224			6			2.7	%

Other income and deductions
	Interest expense			(76	)		(83	)		7			(8.4	)%
	Distributions on mandatorily redeemable preferred securities			—			(2	)		2			(100.0	)%
	Equity in losses of unconsolidated affiliates			(7	)		—			(7	)		n.m.
	Other, net			3			1			2			n.m.

		Total other income and deductions		(80	)		(84	)		4			(4.8	)%

Income before income taxes				150			140			10			7.1	%
Income taxes				50			52			(2	)		(3.8	)%

Net income				100			88			12			13.6	%
Preferred stock dividends				1			2			(1	)		(50.0	)%

Net income on common stock			$	99		$	86		$	13			15.1	%

n.m. — not meaningful

127


	*Operating Revenue*

PECO’s electric sales statistics were as follows:



		Three Months
		Ended June 30,

Retail Deliveries — (in GWhs)		2004		2003		Variance			% Change

Full service(a)
Residential			2,272		2,274		(2	)		(0.1	)%
Small commercial & industrial			1,686		1,532		154			10.1	%
Large commercial & industrial			3,703		3,695		8			0.2	%
Public authorities & electric railroads			224		222		2			0.9	%

	Total full service		7,885		7,723		162			2.1	%

Delivery only(b)
Residential			488		186		302			162.4	%
Small commercial & industrial			433		323		110			34.1	%
Large commercial & industrial			190		192		(2	)		(1.0	)%
Public authorities & electric railroads(c)			—		—		—			—

	Total delivery only		1,111		701		410			58.5	%

Total retail deliveries			8,996		8,424		572			6.8	%


(a)		Full service reflects deliveries to customers taking electric service under tariffed rates.

(b)		Delivery only service reflects customers receiving electric generation service from an AES.

(c)		PECO’s delivery only sales to Public Authorities and Electric Railroads were less than one GWh per quarter.



		Three Months
		Ended June 30,

Electric Revenue		2004		2003		Variance			% Change

Full service(a)
Residential		$	298	$	297	$	1			0.3	%
Small commercial & industrial			197		180		17			9.4	%
Large commercial & industrial			281		267		14			5.2	%
Public authorities & electric railroads			20		21		(1	)		(4.8	)%

	Total full service		796		765		31			4.1	%

Delivery only(b)
Residential			38		14		24			171.4	%
Small commercial & industrial			23		17		6			35.3	%
Large commercial & industrial			5		5		—			—
Public authorities & electric railroads(c)			—		—		—			—

	Total delivery only		66		36		30			83.3	%

Total electric retail revenues			862		801		61			7.6	%
Wholesale and miscellaneous revenue(d)			51		50		1			2.0	%

Total electric revenue		$	913	$	851	$	62			7.3	%


(a)		Full service revenue reflects revenue from customers taking electric service under tariffed rates, which includes the cost of energy, the delivery cost of the transmission and the distribution of the energy and a CTC charge.

128


(b)		Delivery only revenue reflects revenue from customers receiving generation from an AES, which includes a distribution charge and a CTC charge.

(c)		PECO’s delivery only sales to Public Authorities and Electric Railroads were less than $1 million per quarter.

(d)		Wholesale and miscellaneous revenues include transmission revenue from PJM and other wholesale energy sales.

The changes in electric retail revenues for the three months ended June 30, 2004, as compared to the same period in 2003, were as follows:


	Variance

Volume	$	46
Weather		14
Rate mix		12
Rate change		5
Customer choice		(16	)

Retail revenue	$	61

Volume. Exclusive of the effect of weather conditions and customer choice, higher delivery volume related primarily to increased customer growth and increased usage by all customer classes.

Rate Mix. The increase in revenues from rate mix was due to changes in monthly usage patterns in all customer classes.

Rate change. Revenues increased $5 million due to a scheduled phase-out of merger-related rate reductions. In connection with the PUC’s approval of the merger of PECO, Unicom Corporation, and Exelon in 2000, PECO entered into a settlement agreement with the PUC and agreed to $200 million in aggregate rate reductions for all customers over the period January 1, 2002 through 2005. Rates were reduced by $60 million per year in 2002 and 2003 and will be reduced by $40 million per year in 2004 and 2005.

Customer Choice. All PECO customers may choose to purchase energy from an AES. This choice does not affect kWh deliveries, but reduces revenue collected from customers because they are not obtaining generation supply from PECO.

For the three months ended June 30, 2004, the energy provided by AESs was 1,111 GWhs, or 12%, as compared to 701 GWhs, or 8%, for the three months ended June 30, 2003. As of June 30, 2004, the number of customers served by AESs was 292,100, or 19%, as compared to 125,000, or 8%, as of June 30, 2003. The increases in both the energy provided by AESs and the number of customers served by AESs were due to the assignment of small commercial and industrial customers and residential customers to AESs in May and December 2003, respectively, as required by the PUC and PECO’s final electric restructuring order.

Electric wholesale and miscellaneous revenue includes PECO’s proportionate share of the transmission revenues generated by PJM’s control of the PJM network transmission assets, including PECO’s. Additionally, PECO pays PJM for its use of these transmission assets, and this expense is recorded in purchased power.

129

PECO’s gas sales statistics for the three months ended June 30, 2004 as compared to the same period in 2003 were as follows:



	Three Months
	Ended June 30,

Deliveries to customers (in mmcf)	2004		2003		Variance			% Change

Retail sales		8,162		9,222		(1,060	)		(11.5	)%
Transportation		6,410		5,779		631			10.9	%

Total		14,572		15,001		(429	)		(2.9	)%



	Three Months
	Ended June 30,

Revenue	2004		2003		Variance		% Change

Retail sales	$	102	$	99	$	3		3.0	%
Transportation		4		4		—		—
Resales and other		13		7		6		85.7	%

Total	$	119	$	110	$	9		8.2	%

The changes in gas retail revenue for the three months ended June 30, 2004 as compared to the same period in 2003, were as follows:


	Variance

Rate changes	$	13
Volume		4
Weather		(14	)

Total gas retail revenues	$	3

Rate Changes. The favorable variance in rates was attributable to increases in rates through PUC-approved changes to the purchased gas adjustment clause that became effective June 1, 2003 and March 1, 2004. The average rate per mmcf for the three months ended June 30, 2004 was 30% higher than the rate for the same period in 2003. PECO’s gas cost rates are subject to periodic adjustments by the PUC and are designed to recover from or refund to customers the difference between the actual cost of purchased gas and the amount included in rates. PECO has asked the PUC for a decrease in its rates through the purchased gas adjustment clause effective December 1, 2004 as a result of lower current gas costs. This proposed decrease would have no impact on PECO’s operating income.

Volume. Exclusive of the effect of weather conditions, revenues were higher due primarily to increased sales in the residential and small commercial and industrial classes.

Weather. The weather conditions were unfavorable compared to the prior year. Heating degree-days decreased 32%.

Resales and other revenue increased $6 million primarily due to increased off-system sales.


	*Purchased Power*

The increase in purchased power expense was attributable to $16 million of increased sales exclusive of the effect of weather conditions, $14 million of higher prices, and $6 million related to higher sales due to favorable weather conditions, offset by $16 million from customers in Pennsylvania assigned to or selecting an AES and $4 million of lower PJM transmission expense.

130


	*Fuel*

The increase in fuel expense was attributable to $13 million of higher gas costs, $10 million related to increased off-system sales, and $3 million related to increased sales exclusive of weather conditions, partially offset by a $10 million decrease associated with lower sales due to unfavorable weather conditions.


	*Operating and Maintenance*

The changes in operating and maintenance expense for the three months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

Higher corporate allocations(a)	$	12
Severance, pension and postretirement benefit costs associated with The Exelon Way		4
Decreased payroll expense due to fewer employees(b)		(4	)
Employee fringe benefits(c)		(5	)
Other		4

Increase in operating and maintenance expense	$	11


(a)		Higher corporate allocations primarily result from a higher percentage allocation to Energy Delivery due to the sales of certain Enterprises businesses.

(b)		PECO has fewer employees as a result of The Exelon Way.

(c)		During the second quarter of 2004, PECO adopted the provisions of FSP FAS 106-2. Employee fringe benefits include a $1 million reduction in net periodic postretirement benefit cost due to the adoption of FSP FAS 106-2.


	*Depreciation and Amortization*



	Three Months
	Ended June 30,

	2004		2003		Variance		% Change

Competitive transition charge amortization	$	86	$	79	$	7		8.9	%
Depreciation expense		33		33		—		—
Other amortization expense		6		4		2		50.0	%

Total depreciation and amortization	$	125	$	116	$	9		7.8	%

The additional amortization of the CTC is in accordance with PECO’s original settlement under the Pennsylvania Competition Act.


	*Taxes Other Than Income*

The increase in taxes other than income was primarily attributable to $12 million related to the reversal of a use tax accrual resulting from an audit settlement in 2003.


	*Interest Expense and Distributions on Mandatorily Redeemable Preferred Securities*

The aggregate of interest expense and distributions on mandatorily redeemable preferred securities decreased primarily due to lower outstanding debt and refinancings at lower rates. Effective December 31, 2003, with the adoption of FIN No. 46-R, PECO deconsolidated its financing trusts (see Note 2 of the Combined Notes to Consolidated Financial Statements). PECO no longer records distributions on mandatorily redeemable preferred securities of subsidiaries but records interest expense to affiliates related to PECO’s obligations to the financing trusts.

131


	*Equity in Earnings (Losses) of Unconsolidated Affiliates*

In 2004, PECO has $7 million of equity in net losses of subsidiaries as a result of deconsolidating its subsidiary financing trusts.


	*Other, Net*

The increase was attributable to a $2 million increase in interest income.


	*Income Taxes*

The effective tax rate was 33% for the three months ended June 30, 2004 as compared to 37% for the same period in 2003. The decrease in the effective tax rate was primarily attributable to plant-related differences. See Note 12 of the Combined Notes to the Consolidated Financial Statements for further discussion of the change in the effective income tax rate.

Results of Operations


	Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003



			Six Months
			Ended June 30,

			2004			2003			Variance			% Change

Operating revenues			$	2,271		$	2,178		$	93			4.3	%
Operating expenses
	Purchased power			799			808			(9	)		(1.1	)%
	Fuel			332			257			75			29.2	%
	Operating and maintenance			266			261			5			1.9	%
	Depreciation and amortization			250			236			14			5.9	%
	Taxes other than income			118			110			8			7.3	%

		Total operating expenses		1,765			1,672			93			5.6	%

Operating income				506			506			—			—

Other income and deductions
	Interest expense			(153	)		(168	)		15			(8.9	)%
	Distributions on mandatorily redeemable preferred securities			—			(5	)		5			(100.0	)%
	Equity in earnings (losses) of unconsolidated affiliates			(13	)		—			(13	)		n.m.
	Other, net			5			10			(5	)		(50.0	)%

		Total other income and deductions		(161	)		(163	)		2			(1.2	)%

Income before income taxes				345			343			2			0.6	%
Income taxes				112			119			(7	)		(5.9	)%

Net income				233			224			9			4.0	%
Preferred stock dividends				2			3			(1	)		(33.3	)%

Net income on common stock			$	231		$	221		$	10			4.5	%

n.m. — not meaningful

132


	*Operating Revenue*

PECO’s electric sales statistics were as follows:



		Six Months
		Ended June 30,

Retail Deliveries — (in GWhs)		2004		2003		Variance			% Change

Full service(a)
Residential			5,016		5,389		(373	)		(6.9	)%
Small commercial & industrial			3,370		3,312		58			1.8	%
Large commercial & industrial			7,320		7,177		143			2.0	%
Public authorities & electric railroads			453		475		(22	)		(4.6	)%

	Total full service		16,159		16,353		(194	)		(1.2	)%

Delivery only(b)
Residential			1,070		450		620			137.8	%
Small commercial & industrial			857		525		332			63.2	%
Large commercial & industrial			340		402		(62	)		(15.4	)%
Public authorities & electric railroads(c)			—		—		—			—

	Total delivery only		2,267		1,377		890			64.6	%

Total retail deliveries			18,426		17,730		696			3.9	%


(a)		Full service reflects deliveries to customers taking electric service under tariffed rates.

(b)		Delivery only service reflects customers receiving electric generation service from an AES.

(c)		PECO’s delivery only sales to Public Authorities and Electric Railroads were less than one GWh per quarter.



		Six Months
		Ended June 30,

Electric Revenue		2004		2003		Variance			% Change

Full service(a)
Residential		$	611	$	656	$	(45	)		(6.9	)%
Small commercial & industrial			374		374		—			—
Large commercial & industrial			551		534		17			3.2	%
Public authorities & electric railroads			40		42		(2	)		(4.8	)%

	Total full service		1,576		1,606		(30	)		(1.9	)%

Delivery only(b)
Residential			80		31		49			158.1	%
Small commercial & industrial			43		27		16			59.3	%
Large commercial & industrial			9		11		(2	)		(18.2	)%
Public authorities & electric railroads(c)			—		—		—			—

	Total delivery only		132		69		63			91.3	%

Total electric retail revenues			1,708		1,675		33			2.0	%
Wholesale and miscellaneous revenue(d)			99		104		(5	)		(4.8	)%

Total electric revenue		$	1,807	$	1,779	$	28			1.6	%


(a)		Full service revenue reflects revenue from customers taking electric service under tariffed rates, which includes the cost of energy, the delivery cost of the transmission and the distribution of the energy and a CTC charge.

133


(b)		Delivery only revenue reflects revenue from customers receiving generation from an AES, which includes a distribution charge and a CTC charge.

(c)		PECO’s delivery only sales to Public Authorities and Electric Railroads were less than $1 million per quarter.

(d)		Wholesale and miscellaneous revenues include transmission revenue from PJM and other wholesale energy sales.

The changes in electric retail revenues for the six months ended June 30, 2004, as compared to the same period in 2003, were as follows:


	Variance

Volume	$	66
Rate change		9
Weather		7
Customer choice		(42	)
Rate mix		(7	)

Retail revenue	$	33

Volume. Exclusive of the effect of weather conditions and customer choice, higher delivery volume related primarily to increased customer growth and increased usage by all customer classes.

Rate change. Revenues increased $9 million due to a scheduled phase-out of merger-related rate reductions.

Weather. The weather impact was favorable compared to the prior year. Cooling degree-days increased 66% and heating degree-days decreased 8%.

Customer Choice. As noted, all PECO customers may choose to purchase energy from an AES. This choice does not affect kWh deliveries, but reduces revenue collected from customers because they are not obtaining generation supply from PECO.

For the six months ended June 30, 2004, the energy provided by AESs was 2,267 GWhs, or 12%, as compared to 1,377 GWhs, or 8%, for the six months ended June 30, 2003. As of June 30, 2004, the number of customers served by AESs was 292,100, or 19%, as compared to 125,000, or 8%, as of June 30, 2003. The increases in both the energy provided by AESs and the number of customers served by AESs were due to the assignment of small commercial and industrial customers and residential customers to AESs in May and December 2003, respectively, as required by the PUC and PECO’s final electric restructuring order.

Rate Mix. The decrease in revenues from rate mix was due to changes in monthly usage patterns in all customer classes during the six months ended June 30, 2004 as compared to the same period in 2003.

PECO’s gas sales statistics for the six months ended June 30, 2004 as compared to the same period in 2003 were as follows:



	Six Months
	Ended June 30,

Deliveries to customers (in mmcf)	2004		2003		Variance			% Change

Retail sales		37,965		40,685		(2,720	)		(6.7	)%
Transportation		13,542		13,942		(400	)		(2.9	)%

Total		51,507		54,627		(3,120	)		(5.7	)%

134



		Six Months
		Ended June 30,

Revenue		2004		2003		Variance		% Change

Retail sales		$	431	$	372	$	59		15.9	%
Transportation			9		9		—		—
Resales and other			24		18		6		33.3	%

	Total	$	464	$	399	$	65		16.3	%

The changes in gas retail revenue for the six months ended June 30, 2004 as compared to the same period in 2003, were as follows:


	Variance

Rate changes	$	82
Weather		(19	)
Volume		(4	)

Total gas retail revenues	$	59

Weather. The weather conditions were unfavorable compared to the prior year. Heating degree-days decreased 8% compared to the same period in 2003.

Volume. Exclusive of the effect of weather conditions, revenues were lower in the six months ended June 30, 2004 compared to the same period in 2003 due primarily to decreased sales in the residential and small commercial and industrial classes.

Resales and other revenue increased $6 million primarily due to increased off-system sales.


	*Purchased Power*

The decrease in purchased power expense was attributable to $42 million from customers in Pennsylvania assigned to or selecting an AES and a $9 million decrease in PJM transmission expense, partially offset by an increase of $31 million related to increased sales exclusive of weather conditions, $8 million of higher prices, and a $3 million increase associated with higher sales due to favorable weather conditions.


	*Fuel*

The increase in fuel expense was attributable to $82 million of higher gas costs and $13 million related to increased off-system sales, partially offset by a $16 million decrease associated with lower sales due to unfavorable weather conditions and a decrease of $4 million related to decreased sales exclusive of the effect of weather conditions.

135


	*Operating and Maintenance*

The changes in operating and maintenance expense for the six months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

Higher corporate allocations(a)	$	19
Severance, pension and postretirement benefit costs associated with The Exelon Way		10
Decreased payroll expense due to fewer employees(b)		(11	)
Employee fringe benefits(c)		(4	)
Allowance for uncollectible accounts expense		(2	)
Other		(7	)

Increase in operating and maintenance expense	$	5


(a)		Higher corporate allocations primarily result from a higher percentage allocation to Energy Delivery due to the sales of certain Enterprises businesses.

(b)		PECO has fewer employees as a result of The Exelon Way terminations.

(c)		During the second quarter of 2004, PECO adopted the provisions of FSP FAS 106-2. Employee fringe benefits include a $2 million reduction in net periodic postretirement benefit cost due to the adoption of FSP FAS 106-2.


	*Depreciation and Amortization*



	Six Months
	Ended June 30,

	2004		2003		Variance		% Change

Competitive transition charge amortization	$	174	$	161	$	13		8.1	%
Depreciation expense		66		66		—		—
Other amortization expense		10		9		1		11.1	%

Total depreciation and amortization	$	250	$	236	$	14		5.9	%

The additional amortization of the CTC is in accordance with PECO’s original settlement under the Pennsylvania Competition Act.


	*Taxes Other Than Income*

The increase in taxes other than income was primarily attributable to $12 million related to the reversal of a use tax accrual in 2003 resulting from an audit settlement, partially offset by $6 million of lower capital stock tax.


	*Interest Expense and Distributions on Mandatorily Redeemable Preferred Securities*


	*Equity in Earnings (Losses) of Unconsolidated Affiliates*

In 2004, PECO recorded $13 million of equity in net losses of subsidiaries as a result of deconsolidating its subsidiary financing trusts.

136


	*Other, Net*

The decrease was attributable to a $2 million decrease in interest income and a $4 million favorable settlement of a customer contract in 2003.


	*Income Taxes*

The effective tax rate was 33% for the six months ended June 30, 2004 as compared to 35% for the same period in 2003. The decrease in the effective tax rate was primarily attributable to plant-related differences. See Note 12 of the Combined Notes to the Consolidated Financial Statements for further discussion of the change in the effective income tax rate.

Liquidity and Capital Resources

PECO’s business is capital intensive and requires considerable capital resources. PECO’s capital resources are primarily provided by internally generated cash flows from operations and, to the extent necessary, external financing, including the issuance of commercial paper, participation in the intercompany money pool or capital contributions from Exelon. PECO’s access to external financing at reasonable terms is dependent on its credit ratings and general business conditions, as well as that of the utility industry in general. If these conditions deteriorate to where PECO no longer has access to the capital markets at reasonable terms, PECO has access to a revolving credit facility that PECO currently utilizes to support its commercial paper program. See the “Credit Issues” section of “Liquidity and Capital Resources” for further discussion. Capital resources are used primarily to fund PECO’s capital requirements, including construction, repayments of maturing debt, the payment of dividends and contributions to Exelon’s pension plans.


	*Cash Flows from Operating Activities*

PECO’s cash flows from operating activities primarily result from sales of electricity and gas to a stable and diverse base of retail customers at fixed prices. PECO’s future cash flows will be affected by its ability to achieve operating cost reductions and the impact of the economy and weather on its revenues. Cash flows from operations have been and are expected to continue to provide a reliable, steady source of cash flow sufficient to meet operating and capital expenditures requirements for the foreseeable future.

Cash flows from operations for the six months ended June 30, 2004 and 2003 were $509 million and $425 million, respectively. Changes in PECO’s cash flows from operations are generally consistent with changes in its results of operations, as further adjusted by changes in working capital in the normal course of business.

In addition to the items mentioned in “Results of Operations,” PECO’s operating cash flows for the six months ended June 30, 2004 and 2003 were affected by the following items:

• Deferred natural gas costs decreased $56 million during the six months ended June 30, 2004 resulting in an increase to operating cash flows. During 2003, an increase in deferred natural gas costs of $24 million resulted in a decrease to operating cash flows. PECO’s gas cost rates are subject to periodic adjustments by the PUC and are designed to recover from or refund to customers the difference between the actual cost of purchased gas and the amount included in rates. During 2004, PECO was recovering fuel revenues from customers in excess of gas costs being incurred. During 2003, PECO was incurring gas costs in excess of fuel revenues being recovered from customers.

• Discretionary contributions by PECO to Exelon’s defined benefit pension plans were $5 million during the six months ended June 30, 2004 compared to $12 million for the same period in 2003.

PECO participates in Exelon’s defined benefit pension plans. Exelon expects to contribute up to approximately $419 million to its pension plans in 2004, including $11 million to satisfy IRS minimum funding requirements. Of the $419 million, $8 million is expected to be funded by PECO.

137


	*Cash Flows from Investing Activities*

Cash flows used in investing activities for the six months ended June 30, 2004 and 2003 were $137 million and $98 million, respectively. The $39 million increase in cash used in investing activities was primarily attributable to a $35 million investment in the Exelon intercompany money pool in 2004 and a change in restricted cash which provided cash flows of $28 million in 2003, partially offset by lower construction expenditures of $27 million in 2004. PECO’s investing activities during the six months ended June 30, 2004 were funded by operating activities.

PECO’s projected capital expenditures for 2004 are $233 million. Approximately 60% of the budgeted 2004 expenditures are for additions to or upgrades of existing facilities, including reliability improvements. The remainder of the capital expenditures support customer and load growth. PECO anticipates that it will obtain financing, when necessary, through borrowings, the issuance of preferred securities, or capital contributions from Exelon. PECO’s proposed capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors.


	*Cash Flows from Financing Activities*

Cash flows used in financing activities for the six months ended June 30, 2004 were $317 million compared to $329 million for the same period in 2003. The decrease in cash flows used in financing activities is primarily due to a decrease in the retirement of preferred securities of $100 million and an increase in contributions received from Exelon of $54 million, partially offset by an increase in net retirements of long-term debt of $124 million. Additionally, PECO paid dividends of $182 million and $168 during the six months ended June 30, 2004 and 2003, respectively, of which $180 million and $165 million, respectively, were common dividends paid to Exelon.

From time to time and as market conditions warrant, PECO may engage in long-term debt repurchases via tender offers, open market acquisitions or other viable options to preserve the integrity of PECO’s balance sheet.


	*Credit Issues*

Exelon Credit Facility. PECO meets its short-term liquidity requirements primarily through the issuance of commercial paper and borrowings from Exelon’s intercompany money pool. PECO participates, along with Exelon Corporate, ComEd and Generation, in a $750 million 364-day unsecured revolving credit agreement and a $750 million three-year unsecured revolving credit agreement with a group of banks. On July 16, 2004, the $750 million 364-day facility was replaced with a $1 billion five-year facility and the $750 million three-year facility was reduced to $500 million. These credit agreements, and PECO’s participation therein, are described above under “Credit Issues — Exelon Credit Facility” in “Exelon Corporation — Liquidity and Capital Resources.”

Capital Structure. PECO’s capital structure at June 30, 2004 is described above under “Credit Issues — Capital Structure” in “Exelon Corporation — Liquidity and Capital Resources.”

Intercompany Money Pool. A description of the intercompany money pool, and PECO’s participation therein, is set forth above under “Credit Issues — Intercompany Money Pool” in “Exelon Corporation — Liquidity and Capital Resources.” During the six months ended June 30, 2004, PECO earned less than $1 million in interest from its investments in the intercompany money pool.

Security Ratings. PECO’s access to the capital markets, including the commercial paper market, and its financing costs in those markets depend on the securities ratings of the entity that is accessing the capital markets. On July 22, 2004, Standard & Poor’s Ratings Services lowered the ratings on PECO’s First Mortgage Bonds from A to A-. None of PECO’s other securities ratings has changed. None of PECO’s borrowings is subject to default or prepayment as a result of a downgrading of securities although such a downgrading could increase fees and interest charges under Exelon’s credit facilities.

138

Shelf Registration. As of June 30, 2004, PECO has a current shelf registration statement for the sale of $550 million of securities that is effective with the SEC. PECO’s ability to sell securities off its shelf registration statement or to access the private placement markets will depend on a number of factors at the time of the proposed sale, including other required regulatory approvals, PECO’s current financial condition, its securities ratings and market conditions.

Fund Transfer Restrictions. At June 30, 2004, PECO had retained earnings of $597 million. See “Liquidity and Capital Resources — Credit Issues — Fund Transfer Restrictions” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — PECO” in the 2003 Form 10-K for information regarding fund transfer restrictions.


	*Contractual Obligations, Commercial Commitments and Off-Balance Sheet Obligations*

Contractual obligations represent cash obligations that are considered to be firm commitments and commercial commitments represent commitments triggered by future events. PECO’s contractual obligations and commercial commitments as of June 30, 2004 were materially unchanged, other than in the normal course of business, from the amounts set forth in the 2003 Form 10-K except for the following:

• See Note 9 and 19 to the Combined Notes to Consolidated Financial Statements for discussion of material changes in PECO’s debt from the amounts set forth in the 2003 Form 10-K.

139

EXELON GENERATION COMPANY, LLC

General

Generation operates as a single segment and consists of electric generating facilities, energy marketing operations, a 50% interest in Sithe and, effective January 1, 2004, the competitive retail sales business of Exelon Energy Company.

Effective January 1, 2004, Enterprises’ competitive retail sales business, Exelon Energy Company, became part of Generation. Generation’s results of operations have not been adjusted to reflect Exelon Energy Company as a part of Generation for 2003. Exelon Energy Company’s results for the three and six months ended June 30, 2003 were as follows:


	Three Months		Six Months
	Ended June 30,		Ended June 30,
	2003		2003

Total revenues	$	174	$	504
Intersegment revenues		2		9
Income (loss) before income taxes		1		(16	)
Income taxes (benefit)		1		(6	)
Net income (loss)		—		(10	)

Executive Overview

Financial Results. Generation reported an overall increase in net income of $36 million for the quarter ended June 30, 2004 as compared to the prior year, due primarily to the gain of $52 million, net of income taxes, recorded on the sale of Boston Generating, partially offset by operating net losses of $10 million for Boston Generating, incurred during the second quarter of 2004. Generation reported an overall increase in net income of $83 million for the six months ended June 30, 2004 as compared to the same period in 2003. This increase was primarily attributable to a gain of $52 million, net of income taxes, recorded on the sale of Boston Generating, partially offset by operating net losses of $28 million for Boston Generating incurred during the first five months of 2004, $43 million attributable to the incremental results of AmerGen, Exelon Energy and Sithe and $32 million of net income for the cumulative effect of a change in accounting principle. Generation also experienced improved results due to increased realized margins as a result of its successful forward hedging strategy and increased market prices. Generation’s results of operations for the six months ended June 30, 2003 included the pre-tax impairment charge on Generation’s investment in Sithe of $200 million and a $108 million net gain resulting from the cumulative effect of a change in accounting principle for the adoption of SFAS 143.

The Exelon Way. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Generation — Executive Summary” in the 2003 Form 10-K for a discussion of Generation’s implementation of The Exelon Way.

Divestiture Activities. During the second quarter, Generation completed the sale and transfer of the assets of Boston Generating to a special purpose entity formed by the lenders of the Boston Generating credit facility.

In connection with the consolidation of Sithe, Generation recorded assets held for sale related to Sithe’s investments in certain hydroelectric facilities. At June 30, 2004, Generation’s consolidated balance sheets reflect $9 million of assets, and $3 million of liabilities held for sale related to these investments. Generation continues to explore various transactional strategies related to its investment in Sithe.

Financing Activities. On June 30, 2004, Generation had $211 million of commercial paper outstanding and $198 million in outstanding money pool loans to fund operations. Also, Generation increased its distributions to Exelon by approximately $64 million during the first six months of 2004 compared to the same period in the prior year. Generation continues to meet its capital resource commitments with internally generated cash and expects to do so in the foreseeable future, absent new acquisitions.

140

Operations. Generation’s nuclear fleet achieved a 93.3% capacity factor during the six months ended June 30, 2004 compared to 94.2% during the same period in 2003, primarily as a result of an increased number of planned outages in 2004 as compared to 2003. Generation anticipates transferring plant operations and power marketing activities of Boston Generating to a special purpose entity designated by the lenders of the Boston Generating credit facility during the third quarter of 2004.

Outlook for the Remainder of 2004 and Beyond. Generation’s outlook for the remainder of 2004 is consistent with the discussion within “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Generation — Executive Summary” in the 2003 Form 10-K.

Results of Operations


	Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003



			Three Months
			Ended June 30,

			2004			2003			Variance			% Change

Operating revenues			$	1,948		$	1,886		$	62			3.3	%
Operating expenses
	Purchased power			563			800			(237	)		(29.6	)%
	Fuel			462			348			114			32.8	%
	Operating and maintenance			623			451			172			38.1	%
	Depreciation and amortization			69			46			23			50.0	%
	Taxes other than income			48			40			8			20.0	%

		Total operating expenses		1,765			1,685			80			4.7	%

Operating income				183			201			(18	)		(9.0	)%

Other income and deductions
	Interest expense			(51	)		(20	)		(31	)		155.0	%
	Equity in earnings of unconsolidated affiliates			—			18			(18	)		(100.0	)%
	Other, net			134			34			100			n.m.

		Total other income and deductions		83			32			51			159.4	%

Income before income taxes and minority interest				266			233			33			14.2	%
Income taxes				100			91			9			9.9	%

Income before minority interest				166			142			24			16.9	%
Minority interest				12			—			12			n.m.

Net income			$	178		$	142		$	36			25.4	%

n.m. — not meaningful

141


	*Operating Revenues*

For the three months ended June 30, 2004 and 2003, Generation’s sales were as follows:



	Three Months
	Ended June 30,

Revenue	2004			2003			Variance			% Change

Electric sales to affiliates(a)	$	846		$	877		$	(31	)		(3.5	)%
Wholesale and retail electric sales(b)		858			897			(39	)		(4.3	)%

Total electric energy sales revenue		1,704			1,774			(70	)		(3.9	)%

Retail gas sales		84			—			84			n.m.
Trading portfolio		(2	)		(1	)		(1	)		100.0	%
Other revenue(c)		162			113			49			43.4	%

Total revenue	$	1,948		$	1,886		$	62			3.3	%


(a)		Includes sales to Exelon Energy Company during 2003. As of January 1, 2004, Exelon Energy Company became part of Generation and is presented as retail electric sales.

(b)		Includes retail electric sales of Exelon Energy Company in 2004.

(c)		Includes sales related to tolling agreements, including Sithe in 2004, and fossil fuel sales.

n.m. — not meaningful



	Three Months
	Ended June 30,

Sales (in GWhs)	2004(c)		2003		Variance			% Change

Sales to affiliates(a)		26,133		26,869		(736	)		(2.7	)%
Wholesale and retail electric sales(b)		24,976		27,449		(2,473	)		(9.0	)%

Total sales		51,109		54,318		(3,209	)		(5.9	)%


(a)		Includes sales to Exelon Energy Company during 2003. As of January 1, 2004, Exelon Energy Company became part of Generation and is presented as retail electric sales.

(b)		Includes retail electric sales of Exelon Energy Company in 2004.

(c)		Sales in 2004 do not include 6,185 GWhs, which were netted with purchased power GWhs as a result of the reclassification of certain hedging activities in accordance with EITF 03-11.

142

Generation’s average margin and other operating data for the three months ended June 30, 2004 and 2003 are as follows:



		Three Months
		Ended June 30,

($/MWh)		2004		2003		% Change

Average revenue
	Electric sales to affiliates(a)	$	32.37	$	32.64		(0.8	)%
	Wholesale and retail electric sales(b)		34.35		32.68		5.1	%
	Total — excluding the trading portfolio		33.34		32.66		2.1	%
Average supply cost(c) — excluding the trading portfolio		$	20.06	$	21.13		(5.1	)%
Average margin — excluding the trading portfolio		$	13.28	$	11.53		15.2	%


(a)		Includes sales to Exelon Energy Company during 2003. As of January 1, 2004, Exelon Energy Company became part of Generation and is presented as retail sales.

(b)		Includes retail electric sales of Exelon Energy Company in 2004.

(c)		Average supply cost includes purchased power, fuel costs, and PPAs with AmerGen in 2003.

The changes in Generation’s operating revenues for the three months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

Retail gas revenue	$	84
Wholesale and retail electric sales		(39	)
Electric revenue from affiliates		(31	)
Other		48

Increase in operating revenues	$	62

Retail Gas Revenue. Retail gas revenue increased $84 million as a result of the transfer of Exelon Energy Company to Generation as of January 1, 2004.


	Variance

Effects of EITF 03-11 adoption(a)	$	(238	)
Boston Generating		(43	)
Exelon Energy Company and AmerGen operations		104
Other operations		138

Decrease in wholesale and retail electric sales	$	(39	)


(a)		Does not include $1 million of EITF 03-11 adjustments related to fuel sales that are included in other revenues.

As previously described, the adoption of EITF 03-11 on January 1, 2004 resulted in the netting of certain revenues and the associated purchase power and fuel expense in 2004. The sale of Boston Generating in May 2004 resulted in less revenues from this entity compared to the same period in the prior year. The acquisition of Exelon Energy and AmerGen resulted in increased market and retail electric sales of approximately $104 million compared to the same period in the prior year.

143

Electric Sales to Affiliates. Revenue from sales to affiliates decreased primarily as a result of the transfer of Exelon Energy Company to Generation effective January 1, 2004. Sales to Exelon Energy Company are no longer reported as affiliate revenue by Generation. Revenue from sales to Exelon Energy Company for the three months ended June 30, 2003 was $44 million.

The decrease in revenue from sales to affiliates was partially offset by $15 million in higher sales to Energy Delivery. The higher sales to Energy Delivery were primarily due to an overall increased usage per customer and favorable weather conditions.

Other. Certain other revenues increased for the three months ended June 30, 2004 as compared to the same period in 2003, primarily due to the consolidation of Sithe’s results of operations beginning April 1, 2004.


	*Purchased Power and Fuel*

Generation’s supply source is summarized below:



	Three Months
	Ended June 30,

Supply Source (in GWhs)	2004		2003		Variance			% Change

Nuclear generation(a)		34,254		29,619		4,635			15.6	%
Purchases — non-trading portfolio(b)		11,904		19,344		(7,440	)		(38.5	)%
Fossil and hydro generation		4,951		5,355		(404	)		(7.5	)%

Total supply		51,109		54,318		(3,209	)		(5.9	)%


(a)		Excludes AmerGen for 2003. AmerGen generated 5,122 GWhs during the three months ended June 30, 2004.

(b)		Sales in 2004 do not include 6,185 GWhs that were netted with purchased power GWhs as a result of the reclassification of certain hedging activities in accordance with EITF 03-11. Includes PPAs with AmerGen, which represented 3,731 GWhs in 2003.

Generation’s supply mix changed as a result of the sale of Boston Generating in May 2004.


	Variance

Effects of the adoption of EITF 03-11	$	(239	)
Volume		92
Price		49
Boston Generating		(33	)
Midwest Generation		(25	)
AmerGen and Exelon Energy Company		(11	)
Sithe Energies, Inc.		62
Mark-to-market adjustments on hedging activity		11
Other		(29	)

Decrease in purchased power and fuel expense	$	(123	)

Adoption of EITF 03-11. The adoption of EITF 03-11 resulted in a decrease in purchased power of $238 million and fuel expense of $1 million.

Price. The increase reflects higher market energy prices due to increased natural gas, oil and coal prices.

144

Boston Generating. The decrease in fuel and purchased power expense for Boston Generating is due primarily to the sale of the business in May 2004.

AmerGen and Exelon Energy Company. As result of Generation’s acquisition of the remaining 50% interest in AmerGen in December 2003, purchased power decreased $97 million. In prior periods, Generation reported energy purchased from AmerGen as purchased power expense. Due to the transfer of Exelon Energy Company to Generation effective January 1, 2004, fuel expense increased $86 million as fuel purchases made by Exelon Energy Company did not previously affect Generation’s results.

Hedging Activity. Mark-to-market gains on hedging activities were $21 million for the three months ended June 30, 2004 compared to gains of $32 million for the same period of 2003. Hedging activities in 2004 relating to Boston Generating operations accounted for a gain of $6 million and hedging activities relating to other Generation operations in 2004 accounted for a gain of $15 million.


	*Operating and Maintenance*

The changes in operating and maintenance expense for the three months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

AmerGen and Exelon Energy Company	$	87
Sithe Energies, Inc.		22
Decommissioning accretion costs(a)		18
Boston Generating		13
Pension, payroll and benefit costs, primarily associated with The Exelon Way		(14	)
Other		46

Increase in operating and maintenance expense	$	172


(a)		Includes $10 million due to AmerGen asset retirement obligation accretion.

The increase in operating and maintenance expense is primarily due to the inclusion of AmerGen, Exelon Energy Company and Sithe in Generation’s consolidated results for 2004. The increase in operating and maintenance expenses attributable to Boston Generating was due to Mystic 8 and 9 and Fore River commencing commercial operation at the end of the second quarter of 2003 and in the third quarter of 2003, respectively, which more than offset the reduction in operating and maintenance expenses resulting from their sale in May 2004. Decommissioning accretion costs increased primarily due to the inclusion of AmerGen in this period compared to the prior year. The reduction in payroll-related costs associated with the implementation of the programs associated with The Exelon Way partially offset the other increases to operating and maintenance expense.

145

Nuclear fleet operating data and purchased power costs data for the three months ended June 30, 2004 and 2003 were as follows:



	Three Months
	Ended June 30,

	2004			2003

Nuclear fleet capacity factor(a)		96.1	%		94.0	%
Nuclear fleet production cost per MWh(a)	$	10.88		$	12.08
Average purchased power cost for wholesale operations per MWh(b)	$	47.13		$	41.36


(a)		Includes AmerGen and excludes Salem, which is operated by Public Service Enterprise Group Incorporated (PSE&G).

(b)		Includes PPAs with AmerGen in 2003.

In the three months ended June 30, 2004 as compared to the three months ended June 30, 2003, the Quad Cities units operated at pre-EPU generation levels due to performance issues with their steam dryers. Generation plans additional expenditures to ensure safe and reliable operations at the EPU output levels by mid-2005.


	*Depreciation and Amortization*

The increase in depreciation and amortization expense for the three months ended June 30, 2004 as compared to the same period in 2003 includes the impact of capital additions and the consolidation of Sithe, AmerGen and Exelon Energy. These increases were partially offset by a decrease in depreciation expense related to the Boston Generating facilities as the assets were classified as held for sale during the period.


	*Interest Expense*

The increase in interest expense was primarily due to the issuance of $500 million of Senior Notes in December 2003 and interest expense related to Sithe long-term debt.


	*Equity in Earnings (Losses) of Unconsolidated Affiliates*

The decrease in equity in earnings of unconsolidated affiliates was primarily due to a $20 million decrease resulting from Generation’s consolidation of AmerGen in 2004 following the purchase of British Energy’s 50% interest in AmerGen in December 2003. See Note 3 of the Combined Notes to Consolidated Financial Statements for further discussion of Generation’s purchase of British Energy’s 50% interest in AmerGen.

146


	*Other, Net*

The components of other, net for the three months ended June 30, 2004 as compared to the same period in the prior year, are as follows:



	Three Months
	Ended June 30,

Other, Net	2004		2003		Variance			% Change

Gain on sale of Boston Generating(a)		85		—		85			n.m.
Decommissioning trust funds(b)		29		32		(3	)		(9.4	)%
Decommissioning trust funds — AmerGen(b)		9		—		9			n.m.
Other income from Sithe		9		—		9			n.m.
Other		2		2		—			—

Total		134		34		100			n.m.

(a) See Note 3 of the Combined Notes to the Consolidated Financial Statements for further discussion of Generation’s sale of Boston Generating.

(b) Includes investment income and realized gains/(losses).

n.m. — not meaningful


	*Effective Income Tax Rate*

The effective income tax rate was 38% for the three months ended June 30, 2004 compared to 39% for the same period in 2003. This decrease was primarily attributable to the impairment charges recorded in 2003 related to Generation’s investment in Sithe that resulted in a pre-tax loss. In addition, the rate increased due to the additional nuclear decommissioning investment income associated with AmerGen and its related taxes. See Note 12 of the Combined Notes to the Consolidated Financial Statements for further discussion of the change in the effective income tax rate.

147

Results of Operations


	Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003



			Six Months Ended
			June 30,

			2004			2003			Variance			% Change

Operating revenues			$	3,900		$	3,765		$	135			3.6	%
Operating expenses
	Purchased power			1,081			1,642			(561	)		(34.2	)%
	Fuel			1,048			706			342			48.4	%
	Operating and maintenance			1,273			943			330			35.0	%
	Depreciation and amortization			124			91			33			36.3	%
	Taxes other than income			95			88			7			8.0	%

		Total operating expenses		3,621			3,470			151			4.4	%

Operating income				279			295			(16	)		(5.4	)%

Other income and deductions
	Interest expense			(77	)		(38	)		(39	)		(102.6	)%
	Equity in earnings (losses) of unconsolidated affiliates			(2	)		37			(39	)		(105.4	)%
	Other, net			183			(132	)		315			n.m.

		Total other income and deductions		104			(133	)		237			178.2	%

Income before income taxes, minority interest and cumulative effect of changes in accounting principles				383			162			221			136.4	%
Income taxes				146			71			75			105.6	%

Income before minority interest and cumulative effect of changes in accounting principles				237			91			146			160.4	%
Minority interest				11			(2	)		13			n.m.

Income before cumulative effect of changes in accounting principles				248			89			159			178.7	%
Cumulative effect of changes in accounting principles, net of income taxes				32			108			(76	)		(70.4	)%

Net income			$	280		$	197		$	83			42.1	%

n.m. — not meaningful

148


	*Operating Revenues*

For the six months ended June 30, 2004 and 2003, Generation’s sales were as follows:



	Six Months Ended
	June 30,

Revenue	2004			2003			Variance			% Change

Electric sales to affiliates(a)	$	1,706		$	1,842		$	(136	)		(7.4	)%
Wholesale and retail electric sales(b)		1,742			1,754			(12	)		(0.7	)%

Total electric energy sales revenue		3,448			3,596			(148	)		(4.1	)%

Retail gas sales		260			—			260			n.m.
Trading portfolio		(2	)		(2	)		—			—
Other revenue(c)		194			171			23			13.5	%

Total revenue	$	3,900		$	3,765		$	135			3.6	%


(a)		Includes sales to Exelon Energy Company during 2003. As of January 1, 2004, Exelon Energy Company became part of Generation and is presented as retail electric sales.

(b)		Includes retail electric sales of Exelon Energy Company in 2004.

(c)		Includes sales related to tolling agreements, including Sithe in 2004, and fossil fuel sales.

n.m. — not meaningful



	Six Months Ended
	June 30,

Sales (in GWhs)	2004		2003		Variance			% Change

Electric sales to affiliates(a)		53,597		57,463		(3,866	)		(6.7	)%
Wholesale and retail electric sales(b)		48,959		51,264		(2,305	)		(4.5	)%

Total sales		102,556		108,727		(6,171	)		(5.7	)%


(a)		Includes sales to Exelon Energy Company during 2003. As of January 1, 2004, Exelon Energy Company became part of Generation and is presented as retail electric sales.

(b)		Sales in 2004 do not include 11,638 GWhs which were netted with purchased power GWhs as a result of the reclassification of certain hedging activities in accordance with EITF 03-11. Includes retail electric sales of Exelon Energy Company in 2004.

149

Generation’s average margin and other operating data for the six months ended June 30, 2004 and 2003 are as follows:



		Six Months Ended
		June 30,

($/MWh)		2004		2003		% Change

Average revenue
	Electric sales to affiliates(a)	$	31.83	$	32.06		(0.7	)%
	Wholesale and retail electric sales(b)		35.58		34.22		4.0	%
	Total — excluding the trading portfolio		33.62		33.07		1.7	%
Average supply cost(c) — excluding the trading portfolio		$	20.77	$	21.60		(3.8	)%
Average margin — excluding the trading portfolio		$	12.85	$	11.47		12.0	%


(a)		Includes sales to Exelon Energy Company during 2003. As of January 1, 2004, Exelon Energy Company became part of Generation and is presented as retail sales.

(b)		Includes retail electric sales of Exelon Energy Company in 2004.

(c)		Average supply cost includes purchased power, fuel costs, and PPAs with AmerGen in 2003.

The changes in Generation’s operating revenues for the six months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

Retail gas revenue	$	260
Electric sales to affiliates		(136	)
Wholesale and retail electric sales		(12	)
Other		23

Increase in operating revenues	$	135

Retail Gas Revenue. Retail gas revenue increased as a result of the transfer of Exelon Energy Company to Generation as of January 1, 2004.


	Variance

Effects of EITF 03-11 adoption(a)	$	(444	)
Boston Generating		74
Exelon Energy Company and AmerGen operations		182
Other operations		176

Decrease in wholesale and retail electric sales	$	(12	)


(a)		Does not include $8 million of EITF 03-11 adjustments related to fuel sales that are included in other revenues.

As previously described, the adoption of EITF 03-11 on January 1, 2004 resulted in the netting of certain revenues and the associated purchase power and fuel expense in 2004. The acquisition of Exelon Energy and AmerGen resulted in increased market and retail electric sales of approximately $182 million compared to the same period in the prior year.

The other increase in wholesale and retail electric sales was primarily due to higher demand in the forward wholesale market and higher prices in the spot wholesale market. Market prices in the Midwest region were primarily driven by higher coal prices, while the Mid-Atlantic region market prices were driven primarily by higher oil and gas prices.

150

Electric Sales to Affiliates. Revenue from sales to affiliates decreased primarily as a result of Exelon Energy Company’s assets and operations being transferred to Generation effective January 1, 2004. Sales to Exelon Energy Company are no longer reported as affiliate revenue by Generation. Revenue from sales to Exelon Energy Company for the six months ended June 30, 2003 was $108 million.

The decrease in revenue from sales to affiliates included $40 million in lower sales to Energy Delivery. The lower sales to Energy Delivery was primarily due to customers purchasing energy from alternative electric suppliers and unfavorable weather conditions in the ComEd and PECO service territories compared to the prior year.


	*Purchased Power and Fuel*

Generation’s supply source is summarized below:



	Six Months Ended
	June 30,

Supply Source (in GWhs)	2004(c)		2003		Variance			% Change

Nuclear generation(a)		67,665		58,949		8,716			14.8	%
Purchases — non-trading portfolio(b)		23,595		39,373		(15,778	)		(40.1	)%
Fossil and hydroelectric generation		11,296		10,405		891			8.6	%

Total supply		102,556		108,727		(6,171	)		(5.7	)%


(a)		Excludes AmerGen for 2003. AmerGen generated 9,761 GWhs during the six months ended June 30, 2004.

(b)		Sales in 2004 do not include 11,638 GWhs, which were netted with purchased power GWhs as a result of the reclassification of certain hedging activities in accordance with EITF 03-11. Includes PPAs with AmerGen, which represented 6,219 GWhs in 2003.

The changes in Generation’s purchased power and fuel expense for the six months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

Effects of the adoption of EITF 03-11	$	(452	)
Volume		129
Price		(47	)
Midwest Generation		(48	)
AmerGen and Exelon Energy Company		101
Sithe Energies, Inc.		62
Boston Generating		75
Mark-to-market adjustments on hedging activity		19
Other		(58	)

Decrease in purchased power and fuel expense	$	(219	)

Adoption of EITF 03-11. The adoption of EITF 03-11 resulted in a decrease in purchased power of $444 million and fuel expense of $8 million.

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Price. The decrease primarily reflects lower average fossil fuel costs of $47 million during the six months ended June 30, 2004 as compared to the same period in 2003. Natural gas, oil and coal prices all decreased during this period.

AmerGen and Exelon Energy Company. As result of Generation’s acquisition of the remaining 50% interest in AmerGen in December 2003, purchased power decreased $160 million. In prior periods, Generation reported energy purchased from AmerGen as purchased power expense. Due to the transfer of Exelon Energy Company to Generation effective January 1, 2004, fuel expense increased $261 million as fuel purchases made by Exelon Energy Company did not previously impact Generation’s results.

Boston Generating. The increase in fuel and purchased power expense for Boston Generating is due primarily to the Mystic 8 and 9 generating facilities which began commercial operations at the end of the second quarter of 2003, and the Fore River generating facilities which began commercial operations during the third quarter of 2003. See Note 3 of the Combined Notes to Consolidated Financial Statements for additional information regarding Boston Generating. The increase was offset by a decrease of $13 million related to the effects of adopting EITF 03-11.

Hedging Activity. Mark-to-market losses on hedging activities were $18 million for the six months ended June 30, 2004 compared to gains of $1 million for the same period of 2003. Hedging activities in 2004 relating to Boston Generating operations accounted for a gain of $4 million and hedging activities for other Generation operations in 2004 accounted for a loss of $22 million.

Other. Other decreases in purchased power and fuel were primarily due to $46 million in lower transmission expense resulting from reduced inter-region transmission as a result of ComEd’s integration into PJM in the second quarter of 2004, offset by $16 million of additional nuclear fuel amortization recorded in 2003 as a result of the replacement of underperforming fuel at the Quad Cities Station.


	*Operating and Maintenance*

The changes in operating and maintenance expense for the six months ended June 30, 2004 compared to the same period in 2003 consisted of the following:


	Variance

AmerGen and Exelon Energy Company(a)	$	197
Refueling outage costs		38
Boston Generating		33
Decommissioning accretion costs(b)		25
Sithe Energies, Inc.		22
Pension, payroll and benefit costs associated with The Exelon Way		(23	)
Other		38

Increase in operating and maintenance expense	$	330

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(a)		Includes refueling outage expense of $24 million at AmerGen.

(b)		Includes $20 million due to AmerGen asset retirement obligation accretion.

The increase in operating and maintenance expense is due primarily to the inclusion of AmerGen, Exelon Energy Company and Sithe in 2004. Also, operating and maintenance expenses increased at Boston Generating due to Mystic 8 and 9 and Fore River commencing commercial operations in the second and third quarters of 2003. Decommissioning accretion costs also increased primarily due to the inclusion of AmerGen in this period as compared to the prior year. A reduction in payroll-related costs associated with the implementation of the programs associated with The Exelon Way partially offset the other increases to operating and maintenance expense.

Nuclear fleet operating data and purchased power costs data for the six months ended June 30, 2004 and 2003 were as follows:



	Six Months Ended
	June 30,

	2004			2003

Nuclear fleet capacity factor(a)		93.3	%		94.2	%
Nuclear fleet production cost per MWh(a)	$	12.54		$	12.40
Average purchased power cost for wholesale operations per MWh(b)	$	45.81		$	41.68


(a)		Includes AmerGen and excludes Salem, which is operated by PSE&G.

(b)		Includes PPAs with AmerGen in 2003.


	*Depreciation and Amortization*

The increase in depreciation and amortization expense for the six months ended June 30, 2004 as compared to the same period in 2003 was primarily attributable to the impact of capital additions and the consolidation of Sithe, AmerGen and Exelon Energy. These increases were partially offset by a decrease in depreciation expense related to the Boston Generating facilities as the assets were classified as held for sale during the period.


	*Interest Expense*

The increase in interest expense was primarily due to the issuance of $500 million of Senior Notes in December 2003 and interest expense related to Sithe long-term debt.


	*Equity in Earnings (Losses) of Unconsolidated Affiliates*

The decrease in equity in earnings of unconsolidated affiliates was primarily due to a $37 million decrease resulting from Generation’s consolidation of AmerGen in 2004 following the purchase of British Energy’s 50% interest in AmerGen in December 2003. See Note 3 of the Combined Notes to Consolidated Financial Statements for further discussion of Generation’s purchase of British Energy’s 50% interest in AmerGen.

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	*Other, Net*

The components of other, net for the six months ended June 30, 2004 as compared to the same period in the prior year, are as follows:



	Six Months
	Ended June 30,

Other, Net	2004		2003			Variance			% Change

Gain on sale of Boston Generating(a)		85		—			85			n.m.
Decommissioning trust funds(b)		60		63			(3	)		(4.8	)%
Decommissioning trust funds — AmerGen(b)		20		—			20			n.m.
Other income from Sithe		9		—			9			n.m.
Impairment of Investment in Sithe		—		(200	)		200			(100.0	)%
Other		9		5			4			80.0	%

Total		183		(132	)		315			n.m.


(a)		See Note 3 of the Combined Notes to the Consolidated Financial Statements for further discussion of Generation’s sale of Boston Generating.

(b)		Includes investment income and realized gains/(losses)

n.m. — not meaningful


	*Effective Income Tax Rate*

The effective income tax rate was 38% for the six months ended June 30, 2004 compared to 44% for the same period in 2003. This decrease was primarily attributable to the impairment charges recorded in 2003 related to Generation’s investment in Sithe that resulted in a pre-tax loss. In addition, the rate decreased due to the additional nuclear decommissioning investment income associated with AmerGen and its related taxes. See Note 12 of the Combined Notes to the Consolidated Financial Statements for further discussion of the change in the effective income tax rate.


	*Cumulative Effect of Changes in Accounting Principles*

Net income for the six months ended June 30, 2004 reflects income of $32 million, net of income taxes, related to the consolidation of Sithe pursuant to FIN No. 46-R which resulted from the reversal of certain guarantees on behalf of Sithe that had been recorded at Generation prior to December 31, 2003, while net income for the six months ended June 30, 2003 reflects income of $108 million, net of income taxes, for the adoption of SFAS No. 143. See Note 2 of the Combined Notes to Consolidated Financial Statements for further information regarding the adoptions of FIN No. 46-R and SFAS No. 143.

Liquidity and Capital Resources

Generation’s business is capital intensive and requires considerable capital resources. Generation’s capital resources are primarily provided by internally generated cash flows from operations and, to the extent necessary, external financing, including the issuance of commercial paper, participation in the intercompany money pool or capital contributions from Exelon. Generation’s access to external financing at reasonable terms is dependent on its credit ratings and general business conditions, as well as that of the utility industry in general. If these conditions deteriorate to where Generation no longer has access to the capital markets at reasonable terms, Generation has access to a revolving credit facility. See the “Credit Issues” section of “Liquidity and Capital Resources” for further discussion. Capital resources are used primarily to fund Generation’s capital requirements, including construction, repayments of maturing debt, the payment of distributions to Exelon, contributions to Exelon’s pension plans and investments in new and existing ventures. Future acquisitions could require external financing or borrowings or capital contributions from Exelon.

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	*Cash Flows from Operating Activities*

Generation’s cash flows from operating activities primarily result from the sale of electric energy to wholesale customers, including Generation’s affiliated companies. Generation’s future cash flows from operating activities will be affected by future demand and market prices for energy and its ability to continue to produce and supply power at competitive costs. Cash flows from operations have been and are expected to continue to provide a reliable, steady source of cash flows, sufficient to meet operating and capital expenditures requirements for the foreseeable future.

Cash flows from operations for the six months ended June 30, 2004 and 2003 were $616 million and $539 million, respectively. Changes in Generation’s cash flows from operations are generally consistent with changes in its results of operations, as further adjusted by changes in working capital in the normal course of business and non-cash charges.

In addition to the items mentioned in “Results of Operations,” Generation’s operating cash flows for the six months ended June 30, 2004 and 2003 were affected by the following items:

• Receivables from Exelon Delivery under the PPA increased $31 million for the six months ended June 30, 2004, compared to a decrease of $157 million during the same period in 2003.

• Net cash received for collateral for the six months ended June 30, 2004 was $2 million, compared to $136 million paid during the same period in 2003.

• Discretionary contributions to Exelon’s defined benefit pension plans were $121 million for the six months ended June 30, 2004 compared to $98 million for the same period in 2003.

Generation participates in Exelon’s defined benefit pension plans. Exelon expects to contribute up to approximately $419 million to its pension plans in 2004, including $11 million to satisfy IRS minimum funding requirements. Of the $419 million, $170 million is expected to be funded by Generation during 2004.


	*Cash Flows from Investing Activities*

Cash flows used in investing activities were $438 million and $534 million for the six months ended June 30, 2004 and 2003, respectively. Generation’s capital expenditures for the six months ended June 30, 2004 and 2003 were $366 million and $424 million, respectively. Generation’s capital expenditures represent additions to nuclear fuel and additions and upgrades to existing facilities. Capital expenditures for the six months ended June 30, 2003 are stated net of proceeds from liquidated damages of $86 million. Generation estimates that it will spend approximately $972 million in total capital expenditures in 2004. Generation anticipates that nuclear refueling outages will increase from eight in 2003 to nine in 2004. Generation’s capital expenditures are expected to be funded by internally generated funds.


	*Cash Flows from Financing Activities*

Cash flows used in financing activities were $141 million for the six months ended June 30, 2004, compared to cash flows provided by financing activities of $11 million for the same period in 2003. The increase in cash flows used in financing activities was primarily a result of a net repayment of intercompany borrowings of $218 million during the six months ended June 30, 2004, compared to a $58 million net increase in intercompany borrowings during the same period in 2003 and a $64 million increase in distributions to Exelon during the six months ended June 30, 2004 as compared to the same period in 2003. This use of cash was partially offset by the issuance of $211 million of commercial paper during the six months ended June 30, 2004 and the partial repayment of the acquisition note payable to Sithe of $27 million during the six months ended June 30, 2004, compared a $210 million payment during the same period in 2003.

From time to time and as market conditions warrant, Generation may engage in long-term debt repurchases via tender offers, open market acquisitions or other viable options to preserve the integrity of Generation’s balance sheet.

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	*Credit Issues*

Exelon Credit Facility. Generation meets its short-term liquidity requirements primarily through the issuance of commercial paper and intercompany borrowings from Exelon’s intercompany money pool. Generation participates, along with Exelon Corporate, ComEd and PECO, in a $750 million 364-day unsecured revolving credit agreement and a $750 million three-year unsecured revolving credit agreement with a group of banks. On July 16, 2004, the $750 million 364-day facility was replaced with a $1 billion five-year facility and the $750 million three-year facility was reduced to $500 million. These credit agreements, and Generation’s participation therein, are described above under “Credit Issues — Exelon Credit Facility” in “Exelon Corporation — Liquidity and Capital Resources.”

Capital Structure. Generation’s capital structure at June 30, 2004 is described above under “Credit Issues — Capital Structure” in “Exelon Corporation — Liquidity and Capital Resources.”

Intercompany Money Pool. A description of the intercompany money pool, and Generation’s participation therein, is set forth above under “Credit Issues — Intercompany Money Pool” in “Exelon Corporation — Liquidity and Capital Resources.” For the six months ended June 30, 2004, Generation paid $1.5 million in interest to the money pool.

Sithe Long-Term Debt. A description of the Sithe long-term debt consolidated as a result of the adoption of FIN No. 46-R is set forth above under “Credit Issues — Sithe Long-Term Debt” in “Exelon Corporation — Liquidity and Capital Resources.”

Fund Transfer Restrictions. At June 30, 2004, Generation had undistributed earnings of $773 million. See “Liquidity and Capital Resources — Credit Issues — Fund Transfer Restrictions” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Generation” in the 2003 Form 10-K for information regarding fund transfer restrictions.


	*Contractual Obligations, Commercial Commitments and Off-Balance Sheet Obligations*

Contractual obligations represent cash obligations that are considered to be firm commitments and commercial commitments represent commitments triggered by future events. Generation’s contractual obligations and commercial commitments as of June 30, 2004 were materially unchanged, other than in the normal course of business, from the amounts set forth in the 2003 Form 10-K except for the following:

• In connection with the transfer of Exelon Energy Company to Generation effective January 1, 2004, Generation acquired $162 million in energy marketing contract guarantees.

• Generation acquired a $50 million letter of credit to support the contractual obligations of Sithe and its subsidiaries.

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Item 3.	Quantitative and Qualitative Disclosure About Market Risk

Exelon is exposed to market risks associated with commodity prices, credit, interest rates and equity prices. The inherent risk in market-sensitive instruments and positions is the potential loss arising from adverse changes in commodity prices, counterparty credit, interest rates and equity security prices. Exelon’s Risk Management Committee (RMC) sets forth risk management policy and objectives and establishes procedures for risk assessment, control and valuation, counterparty credit approval, and the monitoring and reporting of derivative activity and risk exposures. The RMC is chaired by the chief risk officer and includes the chief financial officer, general counsel, treasurer, vice president of corporate planning, vice president of strategy, vice president of audit services and officers from each of the business units. The RMC reports to the Exelon Board of Directors on the scope of Exelon’s derivative and risk management activities.

Commodity Price Risk


	*Generation*

Commodity price risk is associated with market price movements resulting from excess or insufficient generation, changes in fuel costs, market liquidity and other factors. Trading activities and non-trading marketing activities include the purchase and sale of electric capacity, energy and fossil fuels, including oil, gas, coal, and emission allowances. The availability and prices of energy and energy-related commodities are subject to fluctuations due to factors such as weather, governmental environmental policies, changes in supply and demand, state and federal regulatory policies and other events.


	Normal Operations and Hedging Activities

Electricity available from Generation’s owned or contracted generation supply in excess of its obligations to customers, including Energy Delivery’s retail load, is sold into the wholesale markets. To reduce price risk caused by market fluctuations, Generation enters into physical contracts as well as derivative contracts, including forwards, futures, swaps, and options, with approved counterparties to hedge its anticipated exposures. Generation has an estimated 90% hedge ratio in 2004 for its energy marketing portfolio. This hedge ratio represents the percentage of Generation’s forecasted aggregate annual generation supply that is committed to firm sales, including sales to Energy Delivery’s retail load. Energy Delivery’s retail load assumptions are based on forecasted average demand. The hedge ratio is not fixed and will vary from time to time depending upon market conditions, demand, energy market option volatility and actual loads. During peak periods the amount hedged declines to meet Generation’s commitment to Energy Delivery. Market price risk exposure is the risk of a change in the value of unhedged positions. Absent any opportunistic efforts to mitigate market price exposure, the estimated market price exposure for Generation’s non-trading portfolio associated with a 10% reduction in the annual average around-the-clock market price of electricity is approximately a $19 million decrease in net income. This sensitivity assumes a 90% hedge ratio and that price changes occur evenly throughout the year and across all markets. The sensitivity also assumes a static portfolio. Generation expects to actively manage its portfolio to mitigate market price exposure. Actual results could differ depending on the specific timing of, and markets affected by, price changes, as well as future changes in Generation’s portfolio.


	Proprietary Trading Activities

Generation uses financial contracts for proprietary trading purposes. Proprietary trading includes all contracts entered into purely to profit from market price changes as opposed to hedging an exposure. These activities are accounted for on a mark-to-market basis. The proprietary trading activities are a complement to Generation’s energy marketing portfolio but represent a very small portion of its overall energy marketing activities. For example, the limit on open positions in electricity for any forward month represents less than one percent of Generation’s owned and contracted supply of electricity. Generation expects this level of proprietary trading activity to continue in the future. The results of the trading portfolio for the six months ended June 30, 2004 was a loss $2 million (before taxes) which included a $1 million unrealized mark-to-market loss. The daily Value-at-Risk (VaR) on proprietary trading activity averaged $200,000 of exposure

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over the last 18 months. Because of the diminutive nature of the proprietary trading portfolio in comparison to Generation’s total gross margin of $1,771 million, Generation has not segregated proprietary trading activity in the following tables. The trading portfolio is subject to a risk management policy that includes stringent risk management limits, including volume, stop-loss and VaR limits to manage exposure to market risk. Additionally, the Exelon risk management group and Exelon’s RMC monitor the financial risks of the power marketing activities.

Generation’s energy contracts are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133). Most non-trading contracts qualify for the normal purchases and normal sales exemption to SFAS No. 133 discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” in Exelon’s 2003 Form 10-K. Those that do not are recorded as assets or liabilities on the balance sheet at fair value. Changes in the fair value of qualifying hedge contracts are recorded in Other Comprehensive Income (OCI), and gains and losses are recognized in earnings when the underlying transaction occurs. Changes in the fair value of derivative contracts that do not meet hedge criteria under SFAS No. 133 and the ineffective portion of hedge contracts are recognized in earnings on a current basis.

The following detailed presentation of the proprietary trading and non-trading marketing activities of Generation is included to address the recommended disclosures by the energy industry’s Committee of Chief Risk Officers. Generation does not consider its proprietary trading to be a significant activity of its business; however, Generation believes it is important to include these risk management disclosures.

The following tables describe the drivers of Generation’s energy trading and marketing business and gross margin included in the income statement for the three and six months ended June 30, 2004 and 2003. Normal operations and hedging activities represent the marketing of electricity available from Generation’s owned or contracted generation, including generation used to serve Energy Delivery’s retail load, sold into the wholesale market. As the information in these tables highlights, mark-to-market activities represent a small portion of the overall gross margin for Generation. Accrual activities, including normal purchases and sales, account for the majority of the gross margin. The mark-to-market activities reported here are those relating to changes in fair value due to external movement in prices. Further delineation of gross margin by the type of accounting treatment typically afforded each type of activity is also presented (i.e., mark-to-market vs. accrual accounting treatment).



		Three Months
		Ended June 30,

		2004			2003

Mark-to-market activities:
Unrealized mark-to-market gain/(loss)
	Origination unrealized gain/(loss) at inception	$	—		$	—
	Changes in fair value prior to settlements		115			108
	Changes in valuation techniques and assumptions		—			—
	Reclassification to realized at settlement of contracts		(125	)		(78	)

	Total change in unrealized fair value(a)		(10	)		30
Realized net settlement of transactions subject to mark-to-market			125			78

Total mark-to-market activities gross margin		$	115		$	108

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		Three Months
		Ended June 30,

		2004		2003

Accrual activities:
Accrual activities revenue		$	1,132	$	1,107
Hedge gains reclassified from OCI			684		616

	Total revenue — accrual activities		1,816		1,723

Purchased power and fuel			200		388
Hedges of purchased power and fuel reclassified from OCI			808		705

	Total purchased power and fuel		1,008		1,093

	Total accrual activities gross margin		808		630

Total gross margin(b)		$	923	$	738


(a)		Includes $2 million of unrealized losses due to proprietary trading activity during the three months ended June 30, 2003.

(b)		Total gross margin represents revenue, net of purchased power and fuel expense.



		Six Months Ended
		June 30,

		2004			2003

Mark-to-market activities:
Unrealized mark-to-market gain/(loss)
	Origination unrealized gain/(loss) at inception	$	—		$	—
	Changes in fair value prior to settlements(a)		150			132
	Changes in valuation techniques and assumptions		—			—
	Reclassification to realized at settlement of contracts		(200	)		(135	)

	Total change in unrealized fair value(b)		(50	)		(3	)
Realized net settlement of transactions subject to mark-to-market			200			135

Total mark-to-market activities gross margin		$	150		$	132


Accrual activities:
Accrual activities revenue		$	2,527		$	2,459
Hedge gains reclassified from OCI			1,185			1,014

	Total revenue — accrual activities		3,712			3,473

Purchased power and fuel			657			980
Hedges of purchased power and fuel reclassified from OCI			1,434			1,208

	Total purchased power and fuel		2,091			2,188

	Total accrual activities gross margin		1,621			1,285

Total gross margin(c)		$	1,771		$	1,417


(a)		Includes hedge ineffectiveness of $1 million recorded in earnings.

(b)		Includes $1 million and $4 million of unrealized losses due to proprietary trading activity during the six months ended June 30, 2004 and 2003, respectively.

(c)		Total gross margin represents revenue, net of purchased power and fuel expense.

The following table provides detail on changes in Generation’s mark-to-market net asset or liability balance sheet position from January 1, 2004 to June 30, 2004. It indicates the drivers behind changes in the

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balance sheet amounts. This table incorporates the mark-to-market activities that are immediately recorded in earnings, as shown in the previous table, as well as the settlements from OCI to earnings and changes in fair value for the hedging activities that are recorded in Accumulated Other Comprehensive Income on the June 30, 2004 Consolidated Balance Sheet.


Total mark-to-market energy contract net assets at January 1, 2004	$	(216	)
Total change in fair value during 2004 of contracts recorded in earnings		148
Reclassification to realized at settlement of contracts recorded in earnings		(199	)
Reclassification to realized at settlement from OCI		248
Effective portion of changes in fair value — recorded in OCI		(535	)
Purchase/sale/disposal of existing contracts or portfolios subject to mark-to-market		147

Total mark-to-market energy contract net assets (liabilities) at June 30, 2004	$	(407	)

The following table details the balance sheet classification of the mark-to-market energy contract net assets (liabilities) recorded as of June 30, 2004 and December 31, 2003:


		June 30,			December 31,
		2004			2003

Current assets		$	433		$	322
Noncurrent assets			390			100

	Total mark-to-market energy contract assets		823			422

Current liabilities(a)			(805	)		(505	)
Noncurrent liabilities			(425	)		(133	)

	Total mark-to-market energy contract liabilities		(1,230	)		(638	)

Total mark-to-market energy contract net assets (liabilities)		$	(407	)	$	(216	)


(a)		Mark-to-market energy contract liabilities at December 31, 2003 do not reflect a $76 million interest rate swap which was included in current mark-to-market derivative liabilities within Generation’s Consolidated Balance Sheet.

The majority of Generation’s contracts are non-exchange-traded contracts valued using prices provided by external sources, primarily price quotations available through brokers or over-the-counter, on-line exchanges. Prices reflect the average of the bid-ask midpoint prices obtained from all sources that Generation believes provide the most liquid market for the commodity. The terms for which such price information is available vary by commodity, region and product. The remainder of the assets represents contracts for which external valuations are not available, primarily option contracts. These contracts are valued using the Black model, an industry standard option valuation model. The fair values in each category reflect the level of forward prices and volatility factors as of June 30, 2004 and may change as a result of changes in these factors. Management uses its best estimates to determine the fair value of commodity and derivative contracts it holds or sells. These estimates consider various factors including closing exchange and over-the-counter price quotations, time value, volatility factors and credit exposure. It is possible, however, that future market prices could vary from those used in recording assets and liabilities from energy marketing and trading activities and such variations could be material.

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The following table, which presents maturity and source of fair value of mark-to-market energy contract net liabilities, provides two fundamental pieces of information. First, the table provides the source of fair value used in determining the carrying amount of Generation’s total mark-to-market asset or liability. Second, the table provides the maturity, by year, of Generation’s net assets/liabilities, giving an indication of when the mark-to-market amounts will settle and either generate or require cash.



			Maturities Within

															2008 and		Total Fair
			2004			2005			2006			2007			Beyond		Value

Normal operations, qualifying cash-flow hedge contracts(a):
	Actively quoted prices		$	2		$	1		$	—		$	—		$	—	$	3
	Prices provided by other external sources			(227	)		(217	)		(30	)		(6	)		—		(480	)

		Total	$	(225	)	$	(216	)	$	(30	)	$	(6	)	$	—	$	(477	)

Normal operations, other derivative contracts(b):
	Actively quoted prices		$	32		$	8		$	(1	)	$	—		$	—	$	39
	Prices provided by other external sources			(59	)		11			5			—			—		(43	)
	Prices based on model or other valuation methods			9			(13	)		13			9			56		74

		Total	$	(18	)	$	6		$	17		$	9		$	56	$	70


(a)		Mark-to-market gains and losses on contracts that qualify as cash-flow hedges are recorded in other comprehensive income.

(b)		Mark-to-market gains and losses on other non-trading derivative contracts that do not qualify as cash-flow hedges are recorded in earnings.

The table below provides details of effective cash-flow hedges under SFAS No. 133 included in the balance sheet as of June 30, 2004. The table gives an indication of the magnitude of SFAS No. 133 hedges Generation has in place; however, since under SFAS No. 133 not all hedges are recorded in OCI, the table does not provide an all-encompassing picture of Generation’s hedges. The table also includes a roll-forward of accumulated other comprehensive income related to cash-flow hedges for the six months ended June 30, 2004, providing insight into the drivers of the changes (new hedges entered into during the period and changes in the value of existing hedges). Information related to energy merchant activities is presented separately from interest-rate hedging activities.



	Total Cash-Flow Hedge Other Comprehensive
	Income Activity, Net of Income Tax

	Normal			Interest Rate			Total
	Operations and			and			Cash Flow
	Hedging Activities			Other Hedges(a)			Hedges

Accumulated OCI derivative loss at January 1, 2004	$	(133	)	$	(13	)	$	(146	)
Changes in fair value		(310	)		—			(310	)
Reclassifications from OCI to net income		151			12			163
Exelon Energy Company opening balance		2			—			2
Sithe		—			(11	)		(11	)

Accumulated OCI derivative loss at June 30, 2004	$	(290	)	$	(12	)	$	(302	)


(a)		Includes interest rate hedges at Generation.

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Credit Risk


	*Generation*

Generation has credit risk associated with counterparty performance on energy contracts which includes, but is not limited to, the risk of financial default or slow payment. Generation manages counterparty credit risk through established policies, including counterparty credit limits, and in some cases, requiring deposits or letters of credit to be posted by certain counterparties. Generation’s counterparty credit limits are based on a scoring model that considers a variety of factors, including leverage, liquidity, profitability, credit ratings and risk management capabilities. Generation has entered into payment netting agreements or enabling agreements that allow for payment netting with the majority of its large counterparties, which reduces Generation’s exposure to counterparty risk by providing for the offset of amounts payable to the counterparty against amounts receivable from the counterparty. The credit department monitors current and forward credit exposure to counterparties and their affiliates, both on an individual and an aggregate basis.

The following tables provide information on Generation’s wholesale credit exposure, net of collateral, as of June 30, 2004. The tables further delineate that exposure by the credit rating of the counterparties and provide guidance on the concentration of credit risk to individual counterparties and an indication of the maturity of Generation’s credit risk by credit rating of its counterparties. The figures in the tables below do not include sales to Generation’s affiliates or exposure through Independent System Operators, which are discussed below.


		Total						Number Of		Net Exposure Of
		Exposure						Counterparties		Counterparties
		Before Credit		Credit		Net		Greater than 10%		Greater than 10%
Rating(a)		Collateral		Collateral		Exposure		of Net Exposure		of Net Exposure

Investment grade		$	138	$	17	$	121		3	$	71
Split rating			—		—		—		—		—
Non-investment grade			77		10		67		1		55
No external ratings
	Internally rated — investment grade		13		2		11		—		—
	Internally rated — non-investment grade		1		—		1		—		—

Total		$	229	$	29	$	200		4	$	126


(a)		Table does not include credit risk associated with Generation’s retail operations.



		Maturity of Credit Risk Exposure

						Exposure		Total Exposure
		Less than				Greater than		Before Credit
Rating(a)		2 Years		2-5 Years		5 Years		Collateral

Investment grade		$	128	$	10	$	—	$	138
Split rating			—		—		—		—
Non-investment grade			75		2		—		77
No external ratings
	Internally rated — investment grade		13		—		—		13
	Internally rated — non-investment grade		1		—		—		1

Total		$	217	$	12	$	—	$	229


(a)		Table does not include credit risk associated with Generation’s retail operations.

Dynegy. Generation is counterparty to Dynegy, Inc. (Dynegy) in various energy transactions. The credit ratings of Dynegy are below investment grade. As of June 30, 2004, Generation has credit risk

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associated with Dynegy through Generation’s investment in Sithe. Sithe is a 100% owner of the Independence generating station, a 1,028-MW gas-fired facility that has an energy-only long-term tolling agreement with Dynegy, with a related financial swap arrangement. As of March 31, 2004, Generation consolidated the assets and liabilities of Sithe in accordance with the provisions of FIN No. 46-R. As a result, Generation has recorded an asset of $114 million on its Consolidated Balance Sheets related to the fair market value of the financial swap agreement with Dynegy that is marked-to-market under the terms of SFAS No. 133, “Accounting for Derivatives and Hedging Activities.” If Dynegy were unable to fulfill the terms of the financial swap agreement, Generation would be required to impair the related asset. Exelon estimates, as a 50% owner of Sithe, that the impairment would result in an after-tax reduction of its net income of approximately $21 million.

Collateral. As part of the normal course of business, Generation routinely enters into physical or financially settled contracts for the purchase and sale of capacity, energy, fuels and emissions allowances. These contracts either contain express provisions or otherwise permit Generation and its counterparties to demand adequate assurance of future performance when there are reasonable grounds for doing so. In accordance with the contracts and applicable law, if Generation is downgraded by a credit rating agency, especially if such downgrade is to a level below investment grade, it is possible that a counterparty would attempt to rely on such a downgrade as a basis for making a demand for adequate assurance of future performance. Depending on Generation’s net position with a counterparty, the demand could be for the posting of collateral. In the absence of express contractual provisions that specify the collateral that must be provided, the obligation to supply the collateral requested will be a function of the facts and circumstances of Generation’s situation at the time of the demand. If Generation can reasonably claim that it is willing and financially able to perform its obligations, it may be possible to successfully argue that no collateral should be posted or that only an amount equal to two or three months of future payments should be sufficient.

ISOs. Generation participates in the following established, real-time energy markets, which are administered by ISOs: PJM, ISO New England, New York ISO, California ISO, Midwest ISO, Inc., Southwest Power Pool, Inc. and Texas, which is administered by the Electric

Reliability Council of Texas. In these areas, power is traded through bilateral agreements between buyers and sellers and on the spot markets that are operated by the ISOs. In areas where there is no spot market, electricity is purchased and sold solely through bilateral agreements. For sales into the spot markets administered by the ISOs, the ISO maintains financial assurance policies that are established and enforced by those administrators. The credit policies of the ISOs may under certain circumstances require that losses arising from the default of one member on spot market transactions be shared by the remaining participants. Non-performance or non-payment by a major counterparty could result in a material adverse impact on Generation’s financial condition, results of operations or net cash flows.

Interest Rate Risk


	*ComEd*

ComEd uses a combination of fixed-rate and variable-rate debt to reduce interest rate exposure. Interest-rate swaps may be used to adjust exposure when deemed appropriate based upon market conditions. ComEd

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also utilizes forward-starting interest-rate swaps and treasury rate locks to lock in interest rate levels in anticipation of future financing. These strategies are employed to achieve a lower cost of capital. At June 30, 2004, ComEd did not have any interest-rate swaps designated as cash-flow hedges.

In 2004, ComEd entered into fixed-to-floating interest-rate swaps in order to maintain its targeted percentage of variable-rate debt associated with fixed-rate debt issuances in the aggregate amount of $240 million. At June 30, 2004, these interest-rate swaps, designated as fair-value hedges, had an aggregate fair market value of $1 million based on the present value difference between the contract and market rates at June 30, 2004. If these derivative instruments had been terminated at June 30, 2004, this estimated fair value represents the amount that would be paid by the counterparties to ComEd.

The aggregate fair value of the interest-rate swaps designated as fair-value hedges that would have resulted from a hypothetical 50 basis point decrease in the spot yield at June 30, 2004 is estimated to be $8 million in ComEd’s favor. If the derivative instrument had been terminated at June 30, 2004, this estimated fair value represents the amount the counterparties would pay ComEd.

The aggregate fair value of the interest-rate swaps designated as fair-value hedges that would have resulted from a hypothetical 50 basis point increase in the spot yield at June 30, 2004 is estimated to be $7 million in the counterparties’ favor. If the derivative instrument had been terminated at June 30, 2004, this estimated fair value represents the amount ComEd would pay the counterparties.

In April 2004, ComEd settled certain interest-rate swaps designated as fair-value hedges in the aggregate amount of $485 million for total proceeds of approximately $32 million, which included the $26 million settlement amount and $6 million of accrued interest. The $26 million settlement amount will be amortized as a reduction to interest expense over the remaining life of the related debt.


	*PECO*

In March 2004, PECO entered into a forward-starting interest rate swap in the aggregate amount of $75 million to lock in interest rate levels in anticipation of a future financing. The debt issuance that this swap was hedging was considered probable in March 2004 and closed in April 2004; therefore, PECO accounted for this interest-rate swap transaction as a hedge. In April 2004, PECO settled this interest-rate swap designated as a cash-flow hedge for net proceeds of approximately $5 million. The proceeds were recorded in other comprehensive income and are being amortized over the life of the debt issuance.


	*Generation*

Generation uses a combination of fixed-rate and variable-rate debt to reduce interest rate exposure. Generation also uses interest-rate swaps when deemed appropriate to adjust exposure based upon market conditions. These strategies are employed to achieve a lower cost of capital. As of June 30, 2004, a hypothetical 10% increase in the interest rates associated with variable- rate debt would not have a material impact on Generation’s pre-tax earnings.

Equity Price Risk


	*Generation*

Generation maintains trust funds, as required by the Nuclear Regulatory Commission, to fund certain costs of decommissioning its nuclear plants. As of June 30, 2004, decommissioning trust funds are reflected at fair value on Generation’s Consolidated Balance Sheets. The mix of securities in the trust funds is designed to provide returns to be used to fund decommissioning and to compensate for inflationary increases in decommissioning costs. However, the equity securities in the trust funds are exposed to price fluctuations in equity markets, and the value of fixed-rate, fixed-income securities are exposed to changes in interest rates. Generation actively monitors the investment performance of the trust funds and periodically reviews asset allocation in accordance with Generation’s nuclear decommissioning trust fund investment policy. A hypothetical 10% increase in interest rates and decrease in equity prices would result in a $308 million reduction in the fair value of the trust assets.

164


Item 4.	Controls and Procedures

During the second quarter of 2004, each registrant’s management, including its principal executive officer and principal financial officer, evaluated that registrant’s disclosure controls and procedures related to the recording, processing, summarization and reporting of information in that registrant’s periodic reports that it files with the SEC. These disclosure controls and procedures have been designed by each registrant to ensure that (a) material information relating to that registrant, including its consolidated subsidiaries, is made known to that registrant’s management, including its principal executive officer and principal financial officer, by other employees of that registrant and its subsidiaries, and (b) this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the SEC’s rules and forms. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.

Additionally, controls could be circumvented by the individual acts of some persons or by collusion of two or more people. Each registrant’s controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met. A registrant’s access and ability to apply its disclosure controls and procedures to unconsolidated entities and entities that are consolidated under FIN No. 46-R may be more limited than is the case for majority-owned subsidiaries.

Accordingly, as of June 30, 2004, the principal executive officer and principal financial officer of each registrant concluded that such registrant’s disclosure controls and procedures were effective to accomplish their objectives. Each registrant continually strives to improve its disclosure controls and procedures to enhance the quality of its financial reporting and to maintain dynamic systems that change as conditions warrant.

PART II — OTHER INFORMATION


Item 1.	Legal Proceedings

ComEd

See “Retail Rate Law” within the litigation section of Note 15 of the Combined Notes to Consolidated Financial Statements for a discussion of legal proceeding developments.

Generation

See “Raytheon and Mitsubishi Litigation” and “Oyster Creek” within the litigation section of Note 15 of the Combined Notes to Consolidated Financial Statements for a discussion of legal proceeding developments.

165


Item 2.	Changes in Securities and Use of Proceeds


	(e) Exelon

The attached table gives information on a monthly basis regarding purchases made by Exelon of its common stock. All share and per-share amounts included in the table below have been adjusted to reflect the stock split.


							Maximum Number
							(or Approximate
					Total Number of		Dollar Value) of
					Shares Purchased		Shares that May
	Total Number				As Part of Publicly		Yet Be Purchased
	of Shares		Average Price		Announced Plans		Under the Plans
Period	Purchased(a)		Paid per Share		or Programs(b)		or Programs

January 1 — January 31, 2004		157,785	$	32.57		—		—
February 1 — February 29, 2004		14,491		33.36		—		—
March 1 — March 31, 2004		18,657		33.92		—		—
April 1 — April 30, 2004		—		—		—		(a	)
May 1 — May 31, 2004		1,809,817		31.87		1,809,000		(a	)
June 1 — June 30, 2004		523,966		33.05		518,100		(a	)

Total		2,524,716		32.18		2,327,100		(a	)


(a)		Shares other than those purchased as a part of a publicly announced plan primarily represent restricted shares surrendered by employees to satisfy tax obligations arising upon the vesting of restricted shares.

(b)		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. The share repurchase program is intended to mitigate, in part, the dilutive effect of shares issued under Exelon’s employee stock option plan and Exelon’s Employee Stock Purchase Plan (ESPP). The aggregate shares of common stock repurchased pursuant to the program cannot exceed the economic benefit received after January 1, 2004 due to stock option exercises and share purchases pursuant to Exelon’s ESPP. The economic benefit consists of direct cash proceeds from purchases of stock and tax benefits associated with exercises of stock options. The share repurchase program has no specified limit and no specified termination date.


Item 4.	Submission of Matters to a Vote of Security Holders

Exelon

Exelon held its 2004 Annual Meeting of Shareholders on April 27, 2004.

Proposal 1 was the election of four Class I directors to serve three-year terms expiring in 2007. The following directors were elected:


	Votes For		Votes Withheld

Nicholas DeBenedictis		259,939,186		10,816,919
G. Fred DiBona, Jr.		264,314,416		6,441,689
Sue L. Gin		262,458,220		8,297,885
Edgar D. Jannotta		265,237,110		5,518,995

Proposal 2 was the ratification of PricewaterhouseCoopers LLP as independent accountants for Exelon and its subsidiaries for 2004. The shareholders approved the proposal with 262,663,675 votes cast for, 784,220 votes cast against and 2,308,210 votes abstaining.

Proposal 3 was the approval of the Exelon Corporation Annual Incentive Plan (the Plan) for Senior Executives effective January 1, 2004, as described in the proxy statement. The shareholders approved the Plan with 246,985,526 votes cast for, 18,996,405 votes cast against and 4,804,174 votes abstaining.

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PECO

PECO held its 2004 Annual Meeting of Shareholders on May 27, 2004. At the PECO annual meeting, the only proposal was the election of two Class III directors to serve three-year terms expiring in 2007. Denis P. O’Brien and Robert S. Shapard were elected with 170,478,507 votes cast for each director, no votes cast against and no votes abstaining.


Item 5.	Other Information

(a) ComEd, PECO and Generation


	*Regulatory Issues (ComEd)*

See Note 7 of the Combined Notes to Consolidated Financial Statements and ComEd’s “Management’s Discuss and Analysis of Financial Condition and Results of Operations — Executive Overview” for a discussion of regulatory developments.


	*Labor Relations (PECO)*

As previously reported in the 2003 Form 10-K, on August 15, 2002, the International Brotherhood of Electrical Workers (IBEW) filed a petition with the National Labor Relations Board (NLRB) to conduct a unionization vote of certain of PECO’s employees. On May 21, 2003, the PECO union election was held and a majority of PECO workers voted against union representation. The results of the election were not certified due to pending challenges and objections. On March 22, 2004, the IBEW withdrew its objections to the May 21, 2003 election, and asked the NLRB to allow for a new election at PECO. On April 22, 2004, the NLRB granted IBEW’s request. A new election was held on July 21, 2004, and a majority of PECO employees eligible to vote voted in favor of representation by the IBEW. The NLRB will certify the election on July 29, 2004.


	*Jointly Owned Electric Utility Plant (Generation)*

(b) Exelon, ComEd, PECO and Generation

None.

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Item 6.	*Exhibits and Reports on Form 8-K*

(a) Exhibits:


3-1	—	Amendment to Articles of Incorporation for Exelon Corporation effective as of April 19, 2004.
10-1	—	Amended and Restated Power Purchase Agreement between Exelon Generation Company, LLC and Commonwealth Edison Company as of April 30, 2004.
10-2	—	$1,000,000,000 Five Year Credit Agreement dated as of July 16, 2004 among Exelon Corporation, Commonwealth Edison Company, PECO Energy Company and Exelon Generation Company, LLC as Borrowers and Various Financial Institutions as Lenders.
10-3	—	First Amendment dated as of July 16, 2004 to Three Year Credit Agreement dated as of October 31, 2003 among Exelon Corporation, Commonwealth Edison Company, PECO Energy Company, Exelon Generation Company, LLC, various financial institutions and Bank One, NA, as administrative agent.

Certifications Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities and Exchange Act of 1934 as to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004 filed by the following officers for the following companies:


31-1	—	Filed by John W. Rowe for Exelon Corporation
31-2	—	Filed by Robert S. Shapard for Exelon Corporation
31-3	—	Filed by John L. Skolds for Commonwealth Edison Company
31-4	—	Filed by J. Barry Mitchell for Commonwealth Edison Company
31-5	—	Filed by John L. Skolds for PECO Energy Company
31-6	—	Filed by J. Barry Mitchell for PECO Energy Company
31-7	—	Filed by Oliver D. Kingsley Jr. for Exelon Generation Company, LLC
31-8	—	Filed by J. Barry Mitchell for Exelon Generation Company, LLC

Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 United States Code (Sarbanes-Oxley Act of 2002) as to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004 filed by the following officers for the following companies:


32-1	—	Filed by John W. Rowe for Exelon Corporation
32-2	—	Filed by Robert S. Shapard for Exelon Corporation
32-3	—	Filed by John L. Skolds for Commonwealth Edison Company
32-4	—	Filed by J. Barry Mitchell for Commonwealth Edison Company
32-5	—	Filed by John L. Skolds for PECO Energy Company
32-6	—	Filed by J. Barry Mitchell for PECO Energy Company
32-7	—	Filed by Oliver D. Kingsley Jr. for Exelon Generation Company, LLC
32-8	—	Filed by J. Barry Mitchell for Exelon Generation Company, LLC

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(b) Reports on Form 8-K:

Exelon, ComEd, PECO and/or Generation filed Current Reports on Form 8-K during the three months ended June 30, 2004 regarding the following items:


Date of Earliest
Event Reported		Description of Item Reported

	April 8, 2004	“ITEM 5. OTHER EVENTS” filed for Exelon announcing the record and distribution dates for the previously announced 2-for-1 stock split.
	April 16, 2004	“ITEM 5. OTHER EVENTS” and “ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS” filed for PECO regarding an Underwriting Agreement entered into due to the issuance of First and Refunding Mortgage Bonds.
	April 27, 2004	“ITEM 5. OTHER EVENTS” filed for Exelon announcing the declaration of a quarterly dividend and an equity plan share repurchase program.
	May 10, 2004	“ITEM 5. OTHER EVENTS” filed for Exelon and Generation regarding the FERC’s authorization of the transfer of ownership of BG to the lenders’ special purpose entity.
	May 25, 2004	“ITEM 5. OTHER EVENTS” filed for Exelon and Generation regarding the completion of the transfer of ownership of Boston Generating to the lenders’ special purpose entity.
	May 25, 2004	“ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS” AND “ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS” filed for Exelon and Generation including pro forma financial information related to the transfer of ownership of Boston Generating.

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SIGNATURES

Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXELON CORPORATION



/s/ JOHN W. ROWE John W. Rowe				Chairman and Chief Executive Officer (Principal Executive Officer)

/s/ ROBERT S. SHAPARD Robert S. Shapard				Executive Vice President and Chief Financial Officer (Principal Financial Officer)

/s/ MATTHEW F. HILZINGER Matthew F. Hilzinger				Vice President and Corporate Controller (Principal Accounting Officer)

July 28, 2004

Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

COMMONWEALTH EDISON COMPANY



/s/ JOHN L. SKOLDS John L. Skolds				President, Exelon Energy Delivery (Principal Executive Officer)

/s/ J. BARRY MITCHELL J. Barry Mitchell				Senior Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer)

/s/ MATTHEW F. HILZINGER Matthew F. Hilzinger				Vice President and Corporate Controller, Exelon (Principal Accounting Officer)

/s/ FRANK M. CLARK Frank M. Clark				President, ComEd

July 28, 2004

170

Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PECO ENERGY COMPANY



/s/ JOHN L. SKOLDS John L. Skolds				President, Exelon Energy Delivery (Principal Executive Officer)

/s/ J. BARRY MITCHELL J. Barry Mitchell				Senior Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer)

/s/ MATTHEW F. HILZINGER Matthew F. Hilzinger				Vice President and Corporate Controller, Exelon (Principal Accounting Officer)

/s/ DENIS P. O’BRIEN Denis P. O’Brien				President, PECO

July 28, 2004

Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXELON GENERATION COMPANY, LLC



/s/ OLIVER D. KINGSLEY JR. Oliver D. Kingsley Jr.				Chief Executive Officer and President (Principal Executive Officer)

/s/ J. BARRY MITCHELL J. Barry Mitchell				Senior Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer)

/s/ JON D. VEURINK Jon D. Veurink				Vice President and Controller (Principal Accounting Officer)

July 28, 2004

171


(a)	A portion of the net periodic postretirement benefit cost is capitalized within Exelon’s Consolidated Balance Sheets.


(a)	Net income for the three and six months ended June 30, 2004 included an after-tax gain of $52 million related to the sale of Boston Generating in the second quarter of 2004.


(a)	Includes the acquisition of the remaining 50% interest in AmerGen, and the transfer of Exelon Energy Company to Generation.


(a)	See Notes to Consolidated Financial Statements of Exelon in the 2003 Form 10-K for information regarding the adoption of SFAS No. 143.


(a)	In addition to the stated interest rate, an additional 1.97% and 0.99% of interest on the carrying amount of the secured bonds payable is being credited due to debt premiums and 1.63% of interest on the carrying amount of the subordinated debt is being incurred due to the debt discount recorded at the time of the purchase.


(a)	In 2004, PECO recorded a charge of $4 million for new positions identified.


(b)	In 2004, Generation recorded a charge of $2 million for new positions identified and reversed $7 million to reduce accruals for individuals previously identified under The Exelon Way.


(c)	In 2004, Generation increased the reserve for liabilities acquired upon the transfer of the operations of Exelon Energy Company to Generation and reduced the reserve for liabilities associated with Boston Generating, which was sold in May 2004.


(a)	ComEd, PECO and Generation were allocated curtailment charges for pension and other postretirement benefits of $3 million, $2 million and $3 million, respectively.


(a)	See Note 3 — Acquisitions and Dispositions for further information regarding these investments.


(a)	The ARO of Thermal was removed from the balance sheet upon its sale in the second quarter of 2004.


(b)	Additional liabilities incurred are primarily due to the consolidation of Sithe.


	•	Sithe has power-only sales commitments of $46 million, transmission rights of $27 million and minimum fuel purchase commitments of $109 million.


	•	In connection with the transfer of Exelon Energy Company to Generation effective January 1, 2004, Generation acquired $162 million in energy marketing contract guarantees. This transfer had no effect on the guarantees of Exelon.


	•	Generation acquired a $50 million letter of credit to support the contractual obligations of Sithe and its subsidiaries.

	•	Mystic Development LLC (Mystic) a former affiliate of Exelon New England has a long-term agreement through January 2020 with Distrigas of Massachusetts Corporation (Distrigas) for gas supply, primarily for the Boston Generating units. Under the agreement, gas purchase prices from Distrigas are indexed to the New England gas markets. Exelon New England has guaranteed Mystic’s financial obligations to Distrigas under the long-term supply agreement. Exelon New England’s guarantee to Distrigas remained in effect following the transfer of ownership interest in Boston Generating in May 2004. Under FIN No. 45, approximately $17 million is included as a liability within the Consolidated Balance Sheets of Exelon and Generation as of June 30, 2004 related to this guarantee. The terms of the guarantee do not limit the potential future payments that Exelon New England could be required to make under the guarantee.


(a)	$57 million and $51 million in utility taxes are included in the revenues and expenses for the three months ended June 30, 2004 and 2003, respectively, for ComEd. $50 million and $47 million in utility taxes are included in the revenues and expenses for the three months ended June 30, 2004 and 2003, respectively, for PECO.

(b)	Effective January 1, 2004, Enterprises’ competitive retail sales business, Exelon Energy Company, was transferred to Generation. Segment information for the three months ended June 30, 2003 included in the table above has been adjusted to reflect Exelon Energy Company as part of the Generation segment. For the three months ended June 30, 2003, Exelon Energy Company reported the following:


(a)	$119 million and $113 million in utility taxes are included in the revenues and expenses for the six months ended June 30, 2004 and 2003, respectively, for ComEd. $100 million and $98 million in utility taxes are included in the revenues and expenses for the six months ended June 30, 2004 and 2003, respectively, for PECO.

(b)	Effective January 1, 2004, Enterprises’ competitive retail sales business, Exelon Energy Company, was transferred to Generation. Segment information for the six months ended June 30, 2003 and as of December 31, 2003 included in the table above has been adjusted to reflect Exelon Energy Company as part of the Generation segment. Exelon Energy Company’s total assets as of December 31, 2003 were $104 million and for the six months ended June 30, 2003, Exelon Energy Company reported the following:


(c)	Includes $1,423 million of Sithe consolidated assets under the provisions of FIN No. 46-R. See Note 4 — Sithe for further information regarding the consolidation of Sithe.


	•	Energy Delivery, whose businesses include the regulated sale of electricity and distribution and transmission services by Commonwealth Edison Company (ComEd) in northern Illinois and PECO Energy Company (PECO) in southeastern Pennsylvania and the purchase and sale of natural gas and distribution services by PECO in the Pennsylvania counties surrounding the City of Philadelphia.

	•	Generation, consisting of Exelon Generation Company, LLC’s (Generation) owned and contracted for electric generating facilities, energy marketing operations, a 50% interest in EXRES SHC, Inc., the holding company of Sithe Energies, Inc. and its subsidiaries, hereafter referred to as Sithe, and, effective January 1, 2004, the competitive retail sales business of Exelon Energy Company.

	•	Enterprises, consisting primarily of the remaining energy services business of Exelon Services, Inc. (Services), the remaining district cooling investments of Exelon Thermal Holdings, Inc. (Thermal), the remaining electrical contracting business of F & M Holdings, LLC, and other investments related to the communications, energy services and retail services industries. Effective January 1, 2004, the competitive retail sales business of Exelon Energy Company was transferred to Generation. See Note 3 of the Combined Notes to Consolidated Financial Statements for information regarding the disposition of businesses within the Enterprises segment during 2004.


	•	On May 25, 2004, Generation completed the sale, transfer and assignment of ownership of its indirect wholly owned subsidiary Boston Generating, which owns the companies that own Mystic 4-7, Mystic 8 and 9 and Fore River generating facilities, to a special purpose entity owned by the lenders under Boston Generating’s $1.25 billion credit facility. The resulting pre-tax gain of $85 million ($52 million after-tax) was recorded within Exelon’s Consolidated Statements of Income and Comprehensive Income during the second quarter of 2004.

	•	Exelon continued to execute its divestiture strategy for Enterprises by selling five units of Exelon Services, Inc. (Services) during the six months ended June 30, 2004 for total expected proceeds of $34 million subject to post-closing adjustments, and selling its investment in PECO TelCove, a communications joint venture, along with certain telecommunications assets, for proceeds of $49 million in June 2004. Exelon closed on the sale of the Chicago business of Exelon Thermal during the second quarter of 2004 for net cash proceeds of $134 million and expects to close on the sale of the Aladdin thermal facility during the second half of 2004.


	•	During the six months ended June 30, 2004, Exelon’s federal income tax position changed from a net federal income tax payable to a net federal income tax receivable. The large increase in cash from the changes in receivables is due primarily to the current year federal income tax provision of approximately $200 million and the receipt of a $150 million federal income tax refund in the first quarter of 2004, partially offset by a $58 million increase in customer accounts receivable and the payment of $67 million for federal income taxes.

	•	Natural gas inventories and deferred natural gas costs decreased $24 million and $56 million, respectively, during the six months ended June 30, 2004 resulting in an $80 million increase to operating cash flows. During 2003, an increase in natural gas inventories of $1 million and an increase in deferred natural gas costs of $24 million resulted in a $25 million decrease to operating cash flow. PECO’s gas cost rates are subject to periodic adjustments by the PUC and are designed to recover from or refund to customers the difference between the actual cost of purchased gas and the amount included in rates. During 2004, PECO was recovering fuel revenues from customers in excess of gas costs being incurred. During 2003, PECO was incurring gas costs in excess of fuel revenues being recovered from customers.


	•	An increase in required deposits for energy trading activity of $136 million resulted from Generation exceeding its negotiated credit positions with counterparties during the six months ended June 30, 2003. During 2004, required deposits for trading activity resulted in a $2 million net cash inflow.

	•	Discretionary tax-deductible pension plan payments were $288 million for the six months ended June 30, 2004 compared to $246 million for the same period in 2003. Additionally, $42 million and $30 million were contributed to the postretirement welfare benefit plans for the six months ended June 30, 2004 and 2003, respectively.


	•	Cash proceeds of $210 million received during the six months ended June 30, 2004 from the sales of Exelon Thermal, certain businesses of Exelon Services and Enterprises’ investments in PECO TelCove and other equity method investments.

	•	Cash proceeds of $42 million received from the sale of three gas turbines at Generation that were classified as assets held for sale at December 31, 2003.

	•	A decrease in capital expenditures of $89 million net of liquidating damages received in 2003.

	•	An increase in investments in nuclear decommissioning trust funds of $30 million.

	•	On March 31, 2004, Exelon consolidated the assets and liabilities of Sithe under the provisions of FIN No. 46-R, which resulted in an increase in cash of $19 million. See Note 2 and Note 4 of the Combined Notes to Consolidated Financial Statements for further information regarding the FIN No. 46-R consolidation of Sithe.

	•	Early settlement on an acquisition note receivable from the 2003 disposition of InfraSource resulted in cash proceeds of $30 million during the six months ended June 30, 2004.


	•	Generation acquired a $50 million letter of credit that supports the contractual obligations of Sithe and its subsidiaries.

	•	See Note 9 and Note 19 to the Combined Notes to Consolidated Financial Statements for discussion of material changes in the registrants’ respective debt from the amounts set forth in the 2003 Form 10-K.


	•	During the first half of 2003, ComEd made additional payments to Generation for amounts owed under the PPA. At June 30, 2004 and December 31, 2003, ComEd had accrued payments due to Generation under the PPA of $182 million and $171 million, respectively. At June 30, 2003 and December 31, 2002, ComEd had accrued payments due to Generation under the PPA of $185 million and $339 million, respectively.

	•	Discretionary contributions by ComEd to Exelon’s defined benefit pension plans were $144 million for the six months ended June 30, 2004 compared to $117 million for the same period in 2003.


	•	Deferred natural gas costs decreased $56 million during the six months ended June 30, 2004 resulting in an increase to operating cash flows. During 2003, an increase in deferred natural gas costs of $24 million resulted in a decrease to operating cash flows. PECO’s gas cost rates are subject to periodic adjustments by the PUC and are designed to recover from or refund to customers the difference between the actual cost of purchased gas and the amount included in rates. During 2004, PECO was recovering fuel revenues from customers in excess of gas costs being incurred. During 2003, PECO was incurring gas costs in excess of fuel revenues being recovered from customers.

	•	Discretionary contributions by PECO to Exelon’s defined benefit pension plans were $5 million during the six months ended June 30, 2004 compared to $12 million for the same period in 2003.


	•	See Note 9 and 19 to the Combined Notes to Consolidated Financial Statements for discussion of material changes in PECO’s debt from the amounts set forth in the 2003 Form 10-K.


	•	Receivables from Exelon Delivery under the PPA increased $31 million for the six months ended June 30, 2004, compared to a decrease of $157 million during the same period in 2003.

	•	Net cash received for collateral for the six months ended June 30, 2004 was $2 million, compared to $136 million paid during the same period in 2003.

	•	Discretionary contributions to Exelon’s defined benefit pension plans were $121 million for the six months ended June 30, 2004 compared to $98 million for the same period in 2003.