SCHEDULE 14C
INFORMATION STATEMENT PURSUANT TO SECTION 14(c) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Check the appropriate box:
/ / Preliminary Information Statement / / Confidential,
for use of the Commission only
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Peco Energy Company
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
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[PECO LOGO]
NOTICE OF 2002 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MONDAY, MAY 20, 2002
AT THE OFFICES OF EXELON CORPORATION,
10 SOUTH DEARBORN STREET, 35TH FLOOR, CHICAGO, ILLINOIS 60603,
AT 3:30 P.M. (CENTRAL TIME)
The annual meeting of shareholders of PECO Energy Company ("PECO" or the
"Company") will be held at the offices of Exelon Corporation, 10 South Dearborn
Street, 35th Floor, Chicago, Illinois 60603, on Monday, May 20, 2002, at 3:30
p.m. (Central Time). At the meeting shareholders will be asked to consider and
act upon the election of five directors and to transact such other business as
may properly be brought before the meeting.
Only shareholders of record on the books of PECO at 4:00 p.m., Central
Time, on April 26, 2002 will be entitled to vote at the meeting.
Because of security requirements, we need to know in advance if you are
attending the meeting so that we can arrange access to the building. If you wish
to attend, please write to Thomas Boin, Exelon Corporation, P.O. Box 805398,
Chicago, Illinois 60680-5398 or call him at (312) 394-3867 for tickets.
Sincerely,
/s/ KATHERINE K. COMBS
Katherine K. Combs
Secretary
April 30, 2002
TABLE OF CONTENTS
Election of Directors....................................... 2
Board Compensation.......................................... 3
Attendance at Meetings...................................... 3
Board Committees............................................ 3
Beneficial Ownership........................................ 6
Summary Compensation Table.................................. 8
Option Grants in 2001....................................... 9
Option Exercises and Year End Value......................... 10
Retirement Plans............................................ 11
Employment Agreements....................................... 12
Performance Graph........................................... 16
Other Information........................................... 17
Report of the Exelon Compensation Committee................. 18
Report of the Exelon Audit Committee........................ 21
Charter of the Exelon Audit Committee....................... 22
INFORMATION STATEMENT
WE ARE NOT ASKING FOR A PROXY
AND YOU ARE REQUESTED NOT TO SEND US A PROXY
This Information Statement is being sent to you in connection with the
annual meeting of shareholders of PECO Energy Company ("PECO" or the "Company")
to be held on Monday, May 20, 2002, at 3:30 p.m. (Central Time), at the offices
of Exelon Corporation, 10 South Dearborn Street, 35th Floor, Chicago, Illinois
60603. Confirmation of stock ownership will be required for admission to the
meeting.
As of April 26, 2002, PECO had outstanding 170,478,507 shares of Common
Stock, without par value, all of which are beneficially owned by Exelon
Corporation ("Exelon"), and 1,560,120 shares of Cumulative Preferred Stock,
without par value, comprised of six series (the $4.68 Series, the $4.40 Series,
the $4.30 Series, the $3.80 Series, the $7.48 Series and the $6.12 Series,
collectively the "Preferred Stock"). The PECO Common Stock and the Preferred
Stock vote together as a single class on the election of directors. Exelon
intends to vote its shares of PECO Common Stock FOR the election of the nominees
for director named under "Election of Directors" below. Consequently, the
election of these directors is expected to be approved.
This Information Statement and the combined Annual Report on Form 10-K for
the year ended December 31, 2001 for PECO, Exelon and Commonwealth Edison
Company ("ComEd") are being mailed to shareholders on or about April 30, 2002.
ELECTION OF DIRECTORS
Five Directors are to be elected at the annual meeting to serve a term of
one year and until their respective successors have been elected. The nominees
for Director, all of whom except Mr. Clark have been serving as Directors since
October 20, 2000 (the effective date of the share exchange and merger pursuant
to which PECO became a subsidiary of Exelon), are listed below along with
certain biographical information. Except as otherwise indicated, each Director
or nominee has been engaged in his or her present principal occupation for at
least the past five years. Corbin A. McNeill, Jr., who had served as a Director
since October 2000, retired as a Director of the Company and as a director and
officer of Exelon Corporation on April 23, 2002.
JOHN W. ROWE
Mr. Rowe, age 56. President and Co-CEO of Exelon since October 2000. Chairman,
President and Chief Executive Officer of ComEd from March 1998 to October 2000.
Co-Chief Executive Officer of PECO from October 2000 to October 2001. Former
Chairman, President and CEO of Unicom Corporation and Commonwealth Edison
Company. Former President and CEO of New England Electric System. Other
Directorships: UnumProvident Corporation and The Northern Trust Company.
PAMELA B. STROBEL
Ms. Strobel, age 49. Executive Vice President of Exelon Corporation since
October 2000, and Vice Chair and CEO of Exelon Energy Delivery Company since
October 2001. Vice Chair of PECO from October 2000 to October 2001. Chair of
PECO since October 2001. Former Executive Vice President of Unicom Corporation
and ComEd. Other Directorships: IMC Global, Inc. and Sabre Holdings Corporation.
RUTH ANN M. GILLIS
Ms. Gillis, age 47. Senior Vice President and Chief Financial Officer of Exelon
Corporation since October 2000. Senior Vice President and Chief Financial
Officer of Unicom Corporation and ComEd from October 1999 to October 2000.
Previously Vice President and Treasurer of Unicom and ComEd since from 1997 to
1999. Other Directorships: The Parson Group, a Chicago-based professional
services group.
KENNETH G. LAWRENCE
Mr. Lawrence, age 54. President of PECO Energy since October 20, 2000. President
and COO of Exelon Energy Delivery since October 20, 2001.
FRANK M. CLARK
Mr. Clark, age 56. President of ComEd since October 2001. Previously, Senior
Vice President, Distribution, Customer and Market Services and External Affairs
of ComEd and Senior Vice President of ComEd and Unicom.
2
BOARD COMPENSATION
Since the date of the merger, the board of directors of PECO has been
comprised solely of employees of PECO, Exelon Corporation or its subsidiaries.
These individuals receive no additional compensation for serving as directors of
PECO.
ATTENDANCE AT MEETINGS
During 2001, PECO's Board of Directors did not hold any scheduled meetings.
Corporate actions were taken by unanimous written consent of the Directors.
BOARD COMMITTEES
Prior to October 20, 2000, the PECO Board of Directors had the following
standing committees: Audit; Compensation; Corporate Governance; Finance; Public
Affairs; and Nuclear Oversight.
After the merger, the functions performed by these committees were assumed
by similar committees of the Exelon Board of Directors. The PECO Board no longer
has any standing committees.
The following table and accompanying information describes the committees
of the Exelon Board of Directors.
-------------------------------------------------------------------------------------------
EXELON BOARD COMMITTEE MEMBERSHIP ROSTER
AS OF JANUARY 29, 2002
-------------------------------------------------------------------------------------------
CORPORATE
NAME BOARD EXECUTIVE AUDIT COMPENSATION GOVERNANCE
-------------------------------------------------------------------------------------------
C. A. McNeill, Jr. X* X
-------------------------------------------------------------------------------------------
J. W. Rowe X X*
-------------------------------------------------------------------------------------------
E. A. Brennan X X*
-------------------------------------------------------------------------------------------
C. H. Cantu X X*
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D. L. Cooper X X X
-------------------------------------------------------------------------------------------
M. W. D'Alessio X X X*
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B. DeMars X
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G. F. DiBona, Jr. X X
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S. L. Gin X X
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R. H. Glanton X
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R. B. Greco X X
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E. D. Jannotta X X X
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J. M. Palms X X
-------------------------------------------------------------------------------------------
J. W. Rogers, Jr. X X
-------------------------------------------------------------------------------------------
R. Rubin X X
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R. L. Thomas X X X
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No. of Meetings in 2001 13 3 7 6 4
-------------------------------------------------------------------------------------------
------------------------- -------------------------------------------------------------------------------------------
EXELON BOARD COMMITTEE MEMBERSHIP ROSTER
AS OF JANUARY 29, 2002
------------------------- -------------------------------------------------------------------------------------------
ENERGY
GENCO DELIVERY ENTERPRISES
NAME OVERSIGHT OVERSIGHT OVERSIGHT
------------------------- -------------------------------------------------------------------------------------------
C. A. McNeill, Jr.
--------------------------------------------------------------------------------------
J. W. Rowe
-------------------------------------------------------------------------------------------
E. A. Brennan X
-------------------------------------------------------------------------------------------
C. H. Cantu X
-------------------------------------------------------------------------------------------
D. L. Cooper
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M. W. D'Alessio
-------------------------------------------------------------------------------------------
B. DeMars X X
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G. F. DiBona, Jr. X
-------------------------------------------------------------------------------------------
S. L. Gin X*
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R. H. Glanton X X
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R. B. Greco X*
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E. D. Jannotta
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J. M. Palms X*
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J. W. Rogers, Jr. X
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R. Rubin X
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R. L. Thomas
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No. of Meetings in 2001 4 4 8
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*Chairperson
3
The Exelon Board of Directors approved the charter for each committee. Each
committee reviews its own charter and conducts an assessment of its own
performance. The corporate governance committee reviews each of the individual
committee assessments and presents the findings to the full Board.
Audit: The Audit Committee reviews financial reporting and accounting
practices and internal control functions. The committee also reviews and makes
recommendations to the full board regarding risk management policy and risk
limits, officers' and directors' expenses, compliance with appropriate policies
and the Company's code of business conduct, and environmental, legal and
regulatory compliance matters. This committee recommends the independent
accountants and approves the scope of the annual audit by the independent
accountants and internal auditors. All members of this committee are independent
directors. The committee meets outside the presence of management for portions
of its meetings with both the independent accountants and the internal auditors.
Compensation: The Compensation Committee reviews executive compensation and
administers and oversees the employee benefit plans and programs. The committee
makes recommendations to the full board for approval of compensation for the
positions of chairman, chief executive officer, president and executive vice
president. The committee also oversees executive and management development
programs and reviews succession planning and related leadership continuity
matters. When appropriate, the committee uses the services of an independent
compensation consultant who reports directly to the committee. All members of
the committee are independent directors.
Corporate Governance: The Corporate Governance Committee considers and
recommends nominees for election as directors. The committee reviews individual
committee self-assessments and makes recommendations on board and committee
organization, membership, functions, compensation and effectiveness. The
committee coordinates the board's role in establishing performance criteria for
the Co-Chief Executive Officers and evaluating the Co-Chief Executive Officers'
performance. The Committee also oversees director orientation and continuing
education programs and oversees the Company's efforts to promote diversity among
directors, officers, employees and contractors. All members of this committee
are independent directors.
Executive: The Executive Committee reviews and makes recommendations to the
full board about significant financial matters and strategic and other business
opportunities. The committee acts on behalf of the full board when the board is
not in session. The committee also oversees the management and investment of
assets in the Company's service annuity fund and nuclear decommissioning trust
funds.
Energy Delivery Oversight: The Energy Delivery Oversight Committee advises
and assists the full board in fulfilling its responsibilities to oversee the
safe, reliable and cost effective delivery of energy and related differentiated
products and services to consumers. The committee also oversees the development
of a growth strategy for the Energy Delivery business. The committee reviews the
regulatory and public policy strategies and practices of the Energy Delivery
business and its relations with regulators, public officials, consumers and
other stakeholders.
Enterprises Oversight: The Enterprises Oversight Committee advises and
assists the full board in fulfilling its responsibilities to oversee the
performance of its unregulated businesses. The committee reviews any significant
investments, acquisitions, divestitures, major initiatives or changes in the
Enterprises strategy. The committee also reviews the Enterprises budget and
business plans and monitors the Enterprises business, operating and financial
performance and
4
key performance indicator results and trends. The committee reviews the
Enterprises risk management strategy, policies and procedures.
Genco Oversight: The Genco Oversight Committee advises and assists the full
board in fulfilling its responsibilities to oversee the safe and reliable
operation of all generating facilities owned or operated by the Company, or its
subsidiaries, including those in which the Company has significant equity or
operational interests. The committee also assists the full board in fulfilling
its fiduciary responsibilities towards facilities in which the Company has
non-operational or minority ownership interests. The committee reviews potential
acquisitions and divestitures, major investments and changes in strategy
regarding the generating facilities and power marketing activities. The
committee also oversees the power marketing activities of the Power Team,
reviews and makes recommendations to the full board on power trading risk
management strategy and performance and the hedged condition of the generation
portfolio.
Each director attended at least eighty-five percent of the meetings of the
board and the meetings of committees of which he or she was a member.
5
BENEFICIAL OWNERSHIP
As of April 26, 2002, PECO had outstanding 170,478,507 shares of Common
Stock, all of which is beneficially owned by Exelon, and 1,560,120 shares of
Preferred Stock. No other person is known to PECO to be the beneficial owner of
more than five percent of the combined voting power of the PECO Common Stock and
the Preferred Stock. None of the nominees for election as Directors of PECO or
the executive officers of PECO own any Preferred Stock.
The following table indicates how much Exelon Corporation Common Stock was
owned by the beneficial owners of more than 5% of Exelon Common Stock and by
Exelon's Directors and executive officers, including the persons named in the
Summary Compensation Table below. Those individuals who also serve as Directors
of PECO are noted as such by an asterisk.
- The shares listed as "Beneficially Owned" include stock options
exercisable within 60 days of December 31, 2001.
- The shares listed as "May Be Acquired" include shares of Exelon
Corporation common stock which can be acquired upon the exercise of stock
options granted under Exelon Corporation plans that are not exercisable
within 60 days of December 31, 2001.
- The shares listed as "Deferred Share Equivalents" include shares not
considered to be "beneficially owned" under rules of the Securities and
Exchange Commission because they are deferred under Exelon Corporation
plans.
- Beneficial ownership of directors and executive officers as a group
represents less than 1% of the outstanding shares of Exelon Corporation
common stock.
------------------------------------------------------------------------------------------------------
BENEFICIALLY DEFERRED
OWNED MAY BE SHARE
NAME SHARES ACQUIRED EQUIVALENTS TOTAL
------------------------------------------------------------------------------------------------------
Wellington Management Company, LLP(1) 23,919,260 23,919,260
Oppenheimer Capital LLC(2) 19,093,588 19,903,588
------------------------------------------------------------------------------------------------------
Edward A. Brennan, Director 3,954 3,837 7,791
Carlos H. Cantu, Director 3,012 1,156 4,168
Daniel L. Cooper, Director 185 5,157 5,342
M. Walter D'Alessio, Director 1,165 6,000 10,991 18,156
Bruce DeMars, Director 4,130 1,537 5,667
G. Fred DiBona, Jr., Director 950 4,454 5,404
Sue L. Gin, Director 12,588 2,857 15,445
Richard H. Glanton, Director 100 6,534 6,634
Rosemarie B. Greco, Director 1,000 5,527 6,527
Edgar D. Jannotta, Director 6,620 7,445 14,065
John M. Palms, Ph.D., Director 1,175 12,121 13,296
John W. Rogers, Jr., Director 2,188 2,935 5,123
Ronald Rubin, Director 1,359 6,000 11,123 18,482
Richard L. Thomas, Director 10,567 4,724 15,291
Corbin A. McNeill, Jr., Director & Officer 1,128,393 375,266 26,754 1,530,413
John W. Rowe, Director & Officer* 506,129 372,916 63,529 942,574
Pamela B. Strobel, Officer* 103,193 69,696 20,594 193,843
Kenneth G. Lawrence, Officer* 114,158 48,200 7,606 169,964
Ruth Ann M. Gillis, Officer* 86,437 49,917 15,466 151,820
Frank F. Frankowski, PECO Officer 6,529 4,666 0 11,195
------------------------------------------------------------------------------------------------------
Exelon Directors & Executive Officers as a
group (28) 2,600,998 1,425,196 311,524 4,337,718
------------------------------------------------------------------------------------------------------
6
BENEFICIAL OWNERSHIP
(1) In a Form 13G filed with the SEC on February 14, 2002, an investment
adviser, Wellington Management Company, LLP, 75 State Street, Boston, MA
02109, disclosed that as of December 31, 2001, it was the beneficial owner
of 23,919,260 Exelon shares, or approximately 7.45% of Exelon's issued and
outstanding common shares. Wellington disclosed that it shared voting power
as to 14,539,002 shares and shared dispositive power as to 23,919,920
shares.
(2) In a Form 13G filed with the SEC on February 12, 2002, an investment
adviser, Oppenheimer Capital LLC, 1345 Avenue of the Americas, 49th Floor,
New York, NY 10105, disclosed that as of December 31, 2001, it was the
beneficial owner of 19,093,588 Exelon shares, or approximately 5.99% of
Exelon's issued and outstanding common shares, and that it held sole voting
and dispositive power as to these shares.
This table does not include 489,093 shares of common stock held under the
Exelon Corporation Retirement Plan. Mr. McNeill, Mr. Rowe, Mr. D'Alessio, Mr.
DiBona, Mr. Jannotta and Mr. Thomas are members of the executive committee which
monitors the investment policy and performance of the investments under that
plan.
7
SUMMARY COMPENSATION TABLE
The following table shows the compensation for the last three years of
Exelon's co-CEO's, who also served as directors and officers of PECO, and the
other four most highly compensated officers of the Company.
------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
------------------------------------------------------------------------------------------------------------
Bonus Awards
----------------------- -----------------------
Restricted
Stock
Name and Stock Award(s) Options(3)
Principal Position Year Salary($) Cash($) Based(1)($) Other(2)($) ($) (#)
------------------------------------------------------------------------------------------------------------
Corbin A. McNeill, Jr. 2001 1,050,000 1,500,300 0 84,987 1,354,104 233,000
Co-CEO & Chairman, 2000 855,830 1,081,472 0 0 2,803,513 392,500
Exelon Corp.; 1999 659,857 1,000,000 0 0 942,188 0
Chairman & President,
Exelon Generation
------------------------------------------------------------------------------------------------------------
John W. Rowe 2001 1,050,000 1,500,300 0 71,369 1,354,104 233,000
Co-CEO & President, 2000 989,423 1,180,269 0 134,473 0 385,450
Exelon Corp.; 1999 957,692 529,125 529,125* 55,112 0 116,850
Chairman, Exelon
Energy Delivery &
Exelon Enterprises
------------------------------------------------------------------------------------------------------------
Pamela B. Strobel 2001 450,000 500,500 0 0 378,187 0
EVP, Exelon Corp.; 2000 377,423 269,824 0 0 0 122,250
Vice Chair & CEO 1999 375,131 208,961 69,654* 0 0 28,500
Exelon Energy
Delivery;
Chair, ComEd and
PECO Energy
------------------------------------------------------------------------------------------------------------
Kenneth G. Lawrence 2001 370,577 378,700 0 0 243,979 0
Sr. VP, Exelon Corp.; 2000 318,923 225,666 0 0 777,112 81,600
President & COO, 1999 291,847 241,200 0 0 94,219 0
Exelon Energy
Delivery;
President, PECO
Energy
------------------------------------------------------------------------------------------------------------
Ruth Ann M. Gillis 2001 330,000 221,800 0 0 243,979* 0
Sr. VP & Chief 2000 305,770 216,330 24,037 0 0 86,750
Financial Officer, 1999 300,163 135,923 45,307 0 0 23,750
Exelon Corp.
------------------------------------------------------------------------------------------------------------
Frank F. Frankowski 2001 148,120 76,823 0 0 6,457* 0
VP & Chief 2000 134,040 43,120 0 0 0 7,000
Financial Officer, 1999 123,960 52,400 0 0 0 4,166
PECO
------------------------------------------------------------------------------------------------------------
------------------------ --------------------------------------
Long Term Compensation
------------------------ -----------------------
Payouts
--------------------------------------
All Other
Compen-
Name and Stock sation
Principal Position Cash($) Based(1)($) ($)
------------------------ --------------------------------------
Corbin A. McNeill, Jr. 0 0 26,573
Co-CEO & Chairman, 0 0 3,200
Exelon Corp.; 0 0 3,200
Chairman & President,
Exelon Generation
------------------------------------------------------------------------------------------------------------
John W. Rowe 0 0 52,729
Co-CEO & President, 1,071,878* 1,071,878* 60,293
Exelon Corp.; 475,246 203,677* 42,478
Chairman, Exelon
Energy Delivery &
Exelon Enterprises
------------------------------------------------------------------------------------------------------------
Pamela B. Strobel 0 0 23,605
EVP, Exelon Corp.; 331,618 331,618* 19,181
Vice Chair & CEO 84,410 84,410* 16,483
Exelon Energy
Delivery;
Chair, ComEd and
PECO Energy
------------------------------------------------------------------------------------------------------------
Kenneth G. Lawrence 0 0 14,029
Sr. VP, Exelon Corp.; 0 0 4,093
President & COO, 0 0 3,200
Exelon Energy
Delivery;
President, PECO
Energy
------------------------------------------------------------------------------------------------------------
Ruth Ann M. Gillis 0 0 16,620
Sr. VP & Chief 0 431,405* 13,300
Financial Officer, 0 94,773 13,060
Exelon Corp.
------------------------------------------------------------------------------------------------------------
Frank F. Frankowski 0 0 7,400
VP & Chief 0 0 4,410
Financial Officer, 0 0 8,544
PECO
------------------------------------------------------------------------------------------------------------
(1) All of the amounts shown under "Bonus--Stock-Based" and "Long Term
Compensation Payouts--Stock-Based" were either paid in shares of Exelon
common stock or were deferred and since the merger, are deemed to be
invested in shares of Exelon common stock, and thus fully "at risk"
until the end of the deferral period. Deferred amounts are noted with
an asterisk.
(2) Excludes perquisites and other benefits, unless the aggregate amount of
such compensation is at least $50,000. For 2001, includes $42,805 paid
to Mr. McNeill for financial and legal services and $22,879 paid to Mr.
Rowe for the payment of other taxes.
(3) Grants of options to Mr. Rowe, Ms. Strobel, and Ms. Gillis prior to the
merger have been adjusted to reflect the substitution of options to
acquire shares of Exelon common stock in accordance with the merger
agreement.
8
OPTION GRANTS IN 2001
The "grant date present values" indicated in the option grant table below
are an estimate based on the Black-Scholes option pricing model. Although
executives risk forfeiting these options in some circumstances, these risks are
not factored into the calculated values. The actual value of these options will
be determined by the excess of the stock price over the exercise price on the
date that the options are exercised. There is no certainty that the actual value
realized will be at or near the value estimated by the Black-Scholes option
pricing model. The assumptions used for the Black-Scholes model are as of
December 31, 2001 and are as follows: Risk-free interest rate: 4.85%;
Volatility: 37.17%; Dividend Yield: 3.24%; Time of Exercise: 5 Years.
-----------------------------------------------------------------------------------------------------------------------------
Grant Date
Individual Grants Value
------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options Grant Date
Underlying Granted to Exercise or Present
Options Employees Base Price Expiration Value
Name Granted (#) (1) in 2000 ($/Sh.) Date ($)
-----------------------------------------------------------------------------------------------------------------------------
Corbin A. McNeill,
Jr. 233,300 37.08% $67.88 01/01/2011 $4,710,327
John W. Rowe 233,300 37.08% $67.88 01/01/2011 $4,710,327
Pamela B. Strobel 0
Kenneth G. Lawrence 0
Ruth Ann M. Gillis 0
Frank F. Frankowski 0
-----------------------------------------------------------------------------------------------------------------------------
(1) Regular stock options that would have normally been granted to
eligible participants in January 2001 were granted at the time of
the merger in October 2000 with the exception of the Co-CEOs. Due
to Plan limitations as to the maximum number of options that can
be granted in a calendar year, the 10/20/2000 launch grant to the
Co-CEOs was split between that date and January 2, 2001. The
remaining stock options granted during 2001 were deemed
"off-cycle" grants and were usually awarded as part of an
employment offer.
9
OPTION EXERCISES
AND YEAR-END VALUE
This table shows the number and value of exercised and unexercised stock
options for the named executive officers during 2001. Value is determined using
the market value of Exelon common stock at the year-end price of $47.88 per
share, minus the value of Exelon common stock at the exercise price. All options
whose exercise price exceeds the market value are valued at zero.
-----------------------------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at 12/31/2001 at 12/31/2001
-----------------------------------------------------------------------------------------------------------------------------
Shares
Acquired (#) ($)
on Value Exercisable Exercisable
Name Exercise (#) Realized ($) Unexercisable Unexercisable
-----------------------------------------------------------------------------------------------------------------------------
Corbin A. McNeill, Jr. 32,500 $1,478,750 545,833 E $11,586,765 E
494,967 U $ 886,265 U
-----------------------------------------------------------------------------------------------------------------------------
John W. Rowe 100,000 $2,980,000 348,000 E $2,936,529 E
525,100 U $1,058,110 U
-----------------------------------------------------------------------------------------------------------------------------
Pamela B. Strobel 28,025 $1,136,224 78,750 E $ 487,315 E
91,000 U $ 293,680 U
-----------------------------------------------------------------------------------------------------------------------------
Kenneth G. Lawrence 8,000 $ 305,000 87,200 E $1,490,879 E
54,400 U $ 131,037 U
-----------------------------------------------------------------------------------------------------------------------------
Ruth Ann M. Gillis 0 $ 0 68,500 E $ 596,790 E
65,750 U $ 221,350 U
-----------------------------------------------------------------------------------------------------------------------------
Frank F. Frankowski 0 $ 0 4,834 E $ 41,171 E
6,332 U $ 38,022 U
-----------------------------------------------------------------------------------------------------------------------------
10
RETIREMENT PLANS
The following tables show the estimated annual retirement benefits payable
on a straight-life annuity basis to participating employees, including officers,
in the earnings and year of service classes indicated, under Exelon's
non-contributory retirement plans. Effective January 1, 2001, Exelon Corporation
assumed sponsorship of the Commonwealth Edison Company Service Annuity System
and the PECO Energy Company Service Annuity Plan. Effective December 31, 2001,
these plans were merged to form the Exelon Corporation Retirement Program, which
incorporates the separate benefit formula of each merged plan for employees in
business units formerly covered by that merged plan. Effective January 1, 2001,
Exelon Corporation also established two cash balance pension plans which cover
management employees and electing bargaining unit employees hired on or after
such date. The amounts shown in the table are not subject to any deduction for
Social Security or other offset amounts.
Covered compensation includes salary and bonus which is disclosed in the
Summary Compensation Table on page 8 for the named executive officers. The
calculation of retirement benefits under the plans is based upon average
earnings for the highest consecutive five-year period under the PECO Energy
Company Service Annuity Benefit Formula and for the highest four-year period
(three-year for certain represented employees) under the ComEd Service Annuity
Benefit Formula.
The Internal Revenue Code limits the annual benefits that can be paid from
a tax-qualified retirement plan to $170,000 as of January 1, 2001. As permitted
by the Employee Retirement Income Security Act of 1974, Exelon sponsored
supplemental plans which allow the payment out of its general assets, any
benefits calculated under provisions of the applicable retirement plan which may
be above these limits.
PECO ENERGY SERVICE ANNUITY FORMULA TABLE
-------------------------------------------------------------------------------------------------------------
Annual Normal Retirement Benefits After Specified Years of Service
Highest 5-Year -------------------------------------------------------------------------------
Average Earnings 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years 40 Years
-----------------------------------------------------------------------------------------------------
$ 100,000.00 $ 19,272 $ 26,407 $ 33,543 $ 40,679 $ 47,815 $ 54,950 $ 62,086
200,000.00 39,772 54,657 69,543 84,429 99,315 114,200 129,086
300,000.00 60,272 82,907 105,543 128,179 150,815 173,450 196,086
400,000.00 80,772 111,157 141,543 171,929 202,315 232,700 263,086
500,000.00 101,272 139,407 177,543 215,679 253,815 291,950 330,086
600,000.00 121,772 167,657 213,543 259,429 305,315 351,200 397,086
700,000.00 142,272 195,907 249,543 303,179 356,815 410,450 464,086
800,000.00 162,772 224,157 285,543 346,929 408,315 469,700 531,086
900,000.00 183,272 252,407 321,543 390,679 459,815 528,950 598,086
1,000,000.00 203,772 280,657 357,543 434,429 511,315 588,200 665,086
-------------------------------------------------------------------------------------------------------------
Mr. McNeill, Mr. Lawrence and Mr. Frankowski have 34, 32 and 6 credited
years of service, respectively, under PECO Energy Company's pension program.
11
COMMONWEALTH EDISON SERVICE ANNUITY FORMULA TABLE
-------------------------------------------------------------------------------------------------------------
Annual Normal Retirement Benefits After Specified Years of Service
Highest 4-Year -------------------------------------------------------------------------------
Average Earnings 10 15 20 25 30 35 40
-----------------------------------------------------------------------------------------------------
$ 100,000 $ 19,523 $ 31,016 $ 41,648 $ 51,626 $ 61,113 $ 70,232 $ 79,076
200,000 39,647 63,290 85,181 105,720 125,221 143,923 162,013
300,000 59,770 95,563 128,714 159,815 189,328 217,613 244,949
400,000 79,893 127,836 172,247 213,909 253,435 291,303 327,885
500,000 100,017 160,109 215,780 268,003 317,543 364,994 410,822
600,000 120,140 192,383 259,313 322,097 381,650 438,684 493,758
700,000 140,263 224,656 302,846 376,191 445,757 512,375 576,694
800,000 160,386 256,929 346,379 430,286 509,864 586,065 659,630
900,000 180,510 289,202 389,912 484,380 573,972 659,755 742,567
1,000,000 200,633 321,476 433,445 538,474 638,079 733,446 825,503
-------------------------------------------------------------------------------------------------------------
The approximate number of years of credited service under ComEd's pension
programs for the persons named in the Summary Compensation Table are as follows:
John W. Rowe, 24 years; Pamela B. Strobel, 9 years, and Ruth Ann M. Gillis, 4
years. Ms. Strobel will be credited with an additional 9 years upon attaining
age 50.
EMPLOYMENT AGREEMENTS
EMPLOYMENT AGREEMENT WITH JOHN W. ROWE
Exelon entered into an amended employment agreement with Mr. Rowe, which
amended and restated his employment agreement with Unicom Corporation and
Commonwealth Edison Company in effect at the time of the merger forming Exelon
(the "prior agreement") and under which Mr. Rowe will serve as:
- co-chief executive officer and president of Exelon, chairman of the
executive committee of the Exelon board of directors and a member of the
Exelon board of directors during the first half of the transition period
provided for in Exelon's Bylaws, which is defined as the period from the
effective time of the merger forming Exelon (October 20, 2000) until
December 31, 2003,
- co-chief executive officer of Exelon, chairman of the Exelon board of
directors and a member of the Exelon board of directors during the second
half of the transition period, and
- chief executive officer of Exelon, chairman of the Exelon board of
directors and a member of the Exelon board of directors after the
transition period.
Mr. Rowe will succeed to the position of sole chief executive officer of
Exelon or chairman of the Exelon board of directors if:
- prior to the end of the transition period, Mr. McNeill should cease to be
a co-chief executive officer of Exelon or the chairman of the Exelon
board of directors, and
- Mr. Rowe is still a co-chief executive officer of Exelon at that time.
Mr. Rowe will receive an annual base salary determined by Exelon's
compensation committee. Mr. Rowe will be eligible to participate in annual
incentive award programs, long-term incentive plans and stock option plans on
the same basis as other senior executives of
12
Exelon. The agreement provided that a grant of options would be considered at
the time the merger was completed. Mr. Rowe is entitled to participate in all
savings, deferred compensation, retirement and other employee benefit plans
generally available to other senior executives of Exelon. During the transition
period, Mr. Rowe's base salary and participation in the plans and awards
described in this paragraph will be in an amount or on a basis that is not less
than that of Mr. McNeill's or on which Mr. McNeill participates.
Under his amended employment agreement and the prior agreement, Mr. Rowe is
entitled to receive a special supplemental executive retirement plan, or SERP,
benefit if he terminates due to normal retirement, early retirement, termination
without cause, termination for good reason, death or disability or if he
voluntarily terminates his employment for any other reason.
The term "good reason" includes the failure to appoint Mr. Rowe to the
management and Exelon board of director positions described above. The special
SERP benefit will equal the SERP benefit that Mr. Rowe would have received if:
- he had attained age 60 (or his actual age, if greater),
- he had earned 20 years of service on March 16, 1998 and one additional
year of service on each anniversary after that date and prior to
termination, and
- his annual incentive awards for each of 1998 and 1999 had been $300,000
greater than the annual incentive awards he actually received for those
years.
Except as provided in the next paragraph, if Exelon terminates Mr. Rowe's
employment for reasons other than cause, death or disability or if he should
terminate employment for good reason on or after December 31, 2004 and not
within 24 months following a change in control of Exelon, he would be entitled
to the following benefits:
- a prorated annual incentive award for the year in which termination
occurs,
- severance payments equal to his base salary for two years after
termination, and for each year during such period an amount equal to the
average of the annual incentive awards paid to him with respect to the
three years preceding the year of termination or, if greater, his annual
incentive award for the year before termination,
- for the two-year period, continuation of his life, disability, accident,
health and other welfare benefits, plus the retirement benefits described
above and post-retirement health care coverage,
- all of his exercisable options would remain exercisable until the
applicable option expiration date,
- unvested options would continue to become exercisable during the two-year
continuation period and thereafter remain exercisable until the
applicable option expiration date, and
- all compensation earned through the date of termination and coverage and
benefits under all benefit plans to which he is entitled.
Mr. Rowe will receive the termination benefits described in "Change in
Control and Severance Arrangements" below, rather than the benefits described in
the previous paragraph, if Exelon terminates Mr. Rowe without cause or he
terminates with good reason and
- the termination occurs within 24 months after a change in control of
Exelon, or
- the termination occurs at any other time prior to the earlier of normal
retirement or December 31, 2004, or
13
- the termination occurs at any other time on and before normal retirement
because of the failure to appoint or elect Mr. Rowe to the management or
Exelon board of director positions described above.
EMPLOYMENT ARRANGEMENT WITH CORBIN A. MCNEILL, JR.
Although Exelon has not entered into an employment agreement with Mr.
McNeill, the merger agreement provided that at any time during the transition
period when Messrs. McNeill and Rowe are co-chief executive officers, each of
them will receive the same salary, bonus and other compensation (including
option grants and other incentive awards and all other forms of compensation)
and enjoy the same other benefits and the same employment security arrangements
as the other. In February 2002, Mr. McNeill announced that he will retire as an
officer and director of Exelon effective immediately after the 2002 annual
meeting of shareholders on April 23, 2002. Under an agreement approved by the
board of directors of Exelon, Mr. McNeill will receive the termination benefits
described in "Change in Control Severance Arrangements" below upon his
retirement.
CHANGE IN CONTROL SEVERANCE ARRANGEMENTS
Exelon has entered into change in control agreements with certain senior
executives which generally protect such executives' position and compensation
levels through October 20, 2002 with respect to the Exelon merger in the case of
certain officers, and for two years after certain future changes in control if
such changes in control occur before June 1, 2003. The June 1, 2003 date is
subject to annual extension if there is no change in control before June 1 of
each year. In some cases, these agreements replaced change in control agreements
with PECO Energy and Unicom which became effective upon the completion of the
merger and which cover employment through October 20, 2002. A material adverse
change in compensation or position is included in the definition of "good
reason" for purposes of these agreements. If an executives resigns for good
reason or if the executive's employment is terminated by the company other than
for cause, severance pay and benefits become payable.
The severance payments and benefits provided under the change in control
agreements include:
- Severance payments equal to either two and one-half or three multiplied
by the sum of:
- the employee's annual base salary, plus
- an amount equal to the average of the annual incentive awards paid to
the employee for the two years preceding the year of termination or, if
greater, the target award under the annual incentive award program in
which the employee participates for the year in which termination
occurs.
- A prorated annual incentive award for the year in which termination
occurs.
- Continuation of life, disability, accident, health and other welfare
benefit coverage for three years; thereafter, if applicable, retiree
coverage is available.
- Outplacement services.
- All of a terminated employee's exercisable options remain exercisable
until the applicable option expiration date, and all unvested options
become fully exercisable and remain so until the applicable option
expiration date.
- Any deferred stock units, restricted stock, or restricted share units
become fully vested and any other long-term incentive plan award which is
unvested would vest.
14
- For purposes of determining benefits under the supplemental retirement
plan or arrangement in which the employee participates, the employee will
be credited with three additional years of credited service, age and
compensation.
- For purposes of determining eligibility for retiree welfare benefits, the
employee will be deemed to have three additional years of service and
age.
- All compensation earned through the date of termination as well as all
coverage and benefits under all benefit plans to which the employee is
entitled.
Pursuant to the terms of offers of employment or employment agreements,
certain employees are also entitled to additional service credits for purposes
of retiree health care eligibility and for determining benefits under the
supplemental retirement plan or arrangement in which they participate.
In connection with the severance benefits described above, each executive
who was an employee of PECO Energy prior to the merger is subject to a
non-compete agreement for 24 months from the applicable termination date.
Although a participating employee does not have a duty to mitigate the amounts
due from the company, continued welfare benefit coverage would be offset during
the applicable continuation period by comparable coverage provided under welfare
plans of another employer.
Employees who are senior vice-presidents or above will receive an
additional payment to cover excise taxes imposed under Section 4999 of the
Internal Revenue Code on "excess parachute payments" or under similar state or
local law if the after-tax amount of payments and benefits subject to these
taxes exceeds 110% of the "safe harbor" amount that would not subject the
employee to these excise taxes. If the after-tax amount, however, is less than
110% of the safe harbor amount, payments and benefits subject to these taxes
would be reduced or eliminated to equal the safe harbor amount. Benefits payable
to other employees subject to the excise taxes imposed under Section 4999 of the
Internal Revenue Code will be reduced to the employees' safe harbor amount.
15
PERFORMANCE GRAPH
COMPARISON OF FIVE-YEAR CUMULATIVE RETURN
The performance chart below illustrates a five-year comparison of
cumulative total returns based on an initial investment of $100 in PECO Energy
Company common stock that was exchanged for Exelon Corporation common stock in
the share exchange on October 20, 2000 as compared with the S&P 500 Stock Index
and the S&P Utility Average for the period 1997 through 2001.
This performance chart assumes:
- $100 invested on December 31, 1996 in PECO Energy Company common stock,
S&P 500 Stock Index and S&P Utility Average.
- All dividends are reinvested.
- PECO Energy common stock exchanged for Exelon Corporation common stock
on a 1:1 basis on October 20, 2000.
[PERFORMANCE GRAPH]
------------------------------------------------------------------------------------------
Value of Investment at December 31,
1996 1997 1998 1999 2000 2001
------------------------------------------------------------------------------------------
EXELON CORPORATION $100.00 104.11 185.71 158.40 327.47 230.61
-----
S&P 500 $100.00 133.36 171.47 207.56 188.66 166.24
------
S&P Utilities ........ $100.00 124.65 143.06 130.37 208.16 144.82
16
OTHER INFORMATION
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE: Based solely upon
a review of copies of Section 16 reports provided to Exelon Corporation and
written representations received from directors and executive officers that no
other reports were required during 2001, Exelon believes that its directors and
executive officers made all required filings during 2001 with three exceptions.
Mr. McNeill was granted shares of deferred phantom stock in an exempt
transaction. The grant was reflected in the Summary Compensation Table in
Exelon's 2001 Proxy Statement, but the grant was not reported in Mr. McNeill's
Form 5 for 2000. When the oversight was discovered, the grant was reported in
Mr. McNeill's Form 5 for 2001. S. Gary Snodgrass, Senior Vice President-Human
Resources of Exelon, executed a cashless exercise of stock options in January
2001 but no Form 4 was filed for that month. When the oversight was discovered,
the exercise and sale was reported in Mr. Snodgrass' Form 5 for 2001. Ms.
Strobel executed cashless exercises of two sets of stock options on the same day
in February 2001. Her Form 4 for that month reported the exercise and sale
related to one of the grants but did not report the exercise and sale of the
second grant. When the oversight was discovered, the exercise and sale was
reported in Ms. Strobel's Form 5 for 2001.
17
REPORT OF THE EXELON
COMPENSATION COMMITTEE
WHAT IS OUR COMPENSATION PHILOSOPHY?
Exelon's executive compensation program is designed to motivate and reward
senior management for achieving high levels of business performance and
outstanding financial results. In 2001, Exelon continued to direct its focus to
compensating executives competitive with high performing energy services
companies and general industry firms. This philosophy reflects a commitment to
attracting executives from competitive businesses and retaining key executives
to ensure continued focus on achieving long-term growth in shareholder value.
The compensation committee (the "Committee"), composed of non-employee
directors, is responsible for administering executive compensation programs,
policies and practices. Exelon's executive compensation program comprises three
elements:
- Base salary;
- Annual incentives; and
- Long-term incentives.
These components balance short-term and longer range business objectives
and align executive financial rewards with those of Exelon's shareholders.
WHAT FACTORS DO WE CONSIDER IN DETERMINING OVERALL COMPENSATION?
The Committee commissioned a study of compensation programs in the fall of
2001. This analysis was conducted by a leading external management compensation
consulting firm and included an assessment of business plans and strategic goals
and competitive compensation levels compared with the external market.
Exelon's total compensation levels were found to be generally competitive,
the study results indicated that the mix of compensation components (i.e.,
salary, annual and long-term incentives and stock options) is effectively
aligned with the competitive market. Exelon's pay-for-performance places an
emphasis on pay-at-risk. Pay will exceed market levels when excellent
performance is achieved. Failure to achieve target goals will result in below
market pay.
HOW DO WE DETERMINE BASE SALARY?
Base salaries for Exelon's executives are determined based on individual
performance with reference to the salaries of executives in similar positions in
general industry, and where appropriate, the energy services sector. Base salary
is intended to be competitive with comparable markets to attract and retain key
executives. Executive salaries are targeted to approximate the median (50th
percentile) salaries of the companies identified and surveyed.
Mr. McNeill's and Mr. Rowe's 2001 Base Salary: The Committee determined
Mr. McNeill's and Mr. Rowe's base salaries for serving as the Co-Chief Executive
Officers by considering:
- A review of competitive data and estimated competitive levels of base
pay, which were provided by external consulting firms
- performance achieved against financial and operational goals, and
- the implementation of Exelon's strategic plans.
18
During 2001, neither Mr. McNeill nor Mr. Rowe received any increase to
their total annual salary. Their base salaries were last increased to $1,050,000
effective October 20, 2000, the merger closing date, and a base salary review
was conducted on March 1, 2002.
Other Named Executives' 2001 Base Salary: The base salaries of the other
named executive officers listed in the Summary Compensation Table were
determined based upon individual performance and by considering comparable
compensation data from the industry surveys referred to above. A base salary
review was conducted on March 1, 2002.
HOW ARE 2001 ANNUAL INCENTIVES DETERMINED?
Exelon establishes corporate and business unit measures each year which are
based on factors necessary to achieve strategic business objectives. These
measures are incorporated into financial, customer and internal indicators
designed to measure corporate and business unit performance.
The annual incentive awards paid to Exelon executives for 2001 were
determined in accordance with the Exelon Corporation incentive programs. Annual
incentives were paid to executives based on a combination of the achievement of
pre-determined corporate and business unit-specific measures and individual
performance. The incentive plan was designed to tie executive annual incentives
to the achievement of key goals of Exelon Corporation, as applicable, and the
executive's particular business unit.
For 2001, Mr. McNeill's and Mr. Rowe's annual incentive payouts were
determined using the following corporate performance measures:
- Earnings Per Share
- Cash Flow Before Financings
- Customer Focus Index
- Employee Commitment Index
2001 Annual Incentive Award: In evaluating Mr. McNeill's and Mr. Rowe's
performance, the Committee considered the overall performance of Exelon
Corporation against the measures that were achieved under the applicable
incentive program. The committee also considered the leadership demonstrated in
positioning Exelon for the future.
Mr. McNeill's approved award was $1,500,300 and Mr. Rowe's approved award
was $1,500,300.
Other Named Executive Officers' 2001 Annual Incentives: The final 2001
incentive plan payouts as approved by the Committee for the other named
executive officers listed in the Summary Compensation Table were determined in
accordance with the applicable incentive programs and each individual's
performance.
HOW IS COMPENSATION USED TO FOCUS MANAGEMENT IN LONG-TERM VALUE CREATION?
Exelon has established a long-term incentive program that will include a
combination of non-qualified stock options (75%) and performance shares (25%).
Exelon granted long-term incentives in the form of stock options to Key
Management effective October 20, 2000. The purpose of stock options is to align
compensation directly to increases in shareholder value. Individuals receiving
stock options are provided the right to buy a fixed number of shares of Exelon
common stock at the closing price of such stock on the grant date.
19
STOCK OPTION AWARDS
Mr. McNeill and Mr. Rowe received grants of 500,000 non-qualified stock
options in two parts, 266,700 on October 20, 2000 and 233,300 on January 2,
2001. Other Senior executives received grants of two times the target grant size
on October 20, 2000 in support of the launch of Exelon and to motivate
executives to achieve aggressive stock appreciation in support of shareholder
value. All other executives received a target grant on October 20, 2000. The
next scheduled grant for all executives occurred on January 28, 2002.
EXELON PERFORMANCE SHARES
Long-term incentives were awarded in the form of restricted stock to retain
key executives engaged in positioning Exelon Corporation. Awards were determined
based upon the successful completion of strategic goals designed to achieve
long-term business success and increased shareholder value. Depending on Exelon
Corporation's performance each year, the Committee could award performance
shares with prohibitions on sale or transfer until the restrictions lapse.
Performance shares are paid in Exelon stock: 33% vest upon award date, 33%
after the second year and 34% after the third year.
The 2001 Long Term Performance Share Program was based on achievements of
Earnings Per Share (EPS) and Total Shareholder Return (TSR) comparing Exelon to
companies listed on the Dow Jones Utility Index using a three-year TSR
compounded monthly
The Board of Directors approved Mr. McNeill's Performance Share Award of
27,262 shares and Mr. Rowe's Performance Share Award of 27,262 shares.
CAN WE DEDUCT EXECUTIVE COMPENSATION UNDER SECTION 162(m) OF THE INTERNAL
REVENUE CODE?
Under Section 162(m) of the Internal Revenue Code, executive compensation
in excess of $1 million is generally not deductible for purposes of corporate
income taxes. However, "qualified performance-based compensation" which is paid
pursuant to a plan meeting certain requirements of the Code and applicable
regulations remains deductible. The Committee intends to continue reliance on
performance-based compensation programs, consistent with sound executive
compensation policy. Such programs will be designed to fulfill, in the best
possible manner, future corporate business objectives. The Committee's policy
has been to seek to cause executive incentive compensation to qualify as
"performance-based" in order to preserve its deductibility for federal income
tax purposes to the extent possible without sacrificing flexibility in designing
appropriate compensation programs. However, in order to provide executives with
appropriate incentives, the Committee may also determine, in light of all
applicable circumstances, that it would be in the best interests of Exelon for
awards to be paid under certain of its incentive compensation programs or
otherwise in a manner that would not satisfy the requirements to qualify as
performance-based compensation under Code Section 162(m). The portion of
incentive compensation and salary in excess $1 million that does not qualify as
performance-based compensation under Code Section 162(m) will not be deductible
by Exelon for purposes of corporate income taxes to the extent receipt of such
compensation is not deferred. Mr. McNeill and Mr. Rowe deferred 100% of their
long-term incentive awards payable for 2001.
February 25, 2002 COMPENSATION COMMITTEE
Edward A. Brennan, Chairman
Rosemarie B. Greco
Ronald Rubin
Richard L. Thomas
20
REPORT OF THE EXELON
AUDIT COMMITTEE
Management is responsible for Exelon's financial reporting process
including its system of internal controls, and for the preparation of
consolidated financial statements in accordance with generally accepted
accounting principles. Exelon's independent accountants, PricewaterhouseCoopers
LLP, are responsible for auditing those financial statements. The audit
committee's responsibility is to monitor and review these processes. It is not
the audit committee's responsibility to conduct auditing or accounting reviews
or procedures. The audit committee members are not employees of Exelon and are
not accountants or auditors by profession or experts in accounting or auditing.
Accordingly, the audit committee has relied, without independent verification,
on management's representation that the financial statements have been prepared
with integrity and objectivity and in conformity with generally accepted
accounting principles and on the representations of the independent accountants
included in their report on Exelon's financial statements. The audit committee's
oversight does not provide it with an independent basis to determine that
management has maintained appropriate accounting and financial reporting
principles or policies, or appropriate internal controls and procedures designed
to assure compliance with accounting standards and applicable laws and
regulations. Furthermore, the audit committee's considerations and discussions
with management and the independent accountants do not assure that Exelon's
financial statements are presented in accordance with generally accepted
accounting principles, that the audit of Exelon's financial statements has been
carried out in accordance with generally accepted auditing standards or that
Exelon's independent accountants are in fact "independent."
The audit committee met seven times in 2001. In addition, in January 2002
the audit committee held a special meeting with Exelon's accounting staff and
the independent accountants designed to provide the audit committee with an
opportunity to learn more about recent Securities and Exchange Commission
disclosure pronouncements, about the Enron failure and related disclosure
ramifications, and about Exelon's balance sheet composition and Exelon's most
important accounting policies.
In fulfilling its responsibilities, the committee has reviewed and
discussed the audited financial statements contained in the 2001 Annual Report
on SEC Form 10-K with Exelon Corporation's management and the independent
accountants. The committee discussed with the independent accountants the
matters required to be discussed by Statement on Auditing Standards No. 61,
Communication with Audit Committees, as amended. In addition, the committee has
discussed with the independent accountants the accountants' independence from
Exelon Corporation and its management, including the matters in the written
disclosures required by Independence Standard Board Standard No. 1, Independence
Discussions with Audit Committees.
In reliance on the reviews and discussions referred to above, the committee
recommended to the Board of Directors (and the Board has approved) that the
audited financial statements be included in Exelon Corporation's Annual Report
on SEC Form 10-K for the year ended December 31, 2001, for filing with the
Securities and Exchange Commission.
February 25, 2002 AUDIT COMMITTEE
Carlos H. Cantu, Chair
Daniel L. Cooper
Sue L. Gin
John M. Palms
21
CHARTER OF THE EXELON
AUDIT COMMITTEE
ORGANIZATION
MEMBERSHIP
The Committee shall consist of at least three directors, all of whom are
"independent", which means that they have no relationship to the Company that
may interfere with the exercise of their independence from management and the
Company. Membership is determined by the Board on the recommendation of the
Corporation Governance Committee. During the Merger Transition Period, the
committee will be comprised of an equal number of members of the former PECO and
Unicom Boards. Each member of the Committee shall be "financially literate", or
shall become financially literate within a reasonable period of time after his
or her appointment to the Committee. The Board has defined "financial literacy"
to mean familiarity with the Company's financial statements, including its
balance sheet, income statement and cash flow statement, and general knowledge
of key business and financial risks and related controls or control processes.
Such knowledge may be acquired after appointment to the committee through
company-sponsored education or review of educational materials or other
resources. At least one member of the Committee shall have "accounting or
related financial management expertise". The Board has defined accounting or
related financial management expertise to mean a solid background in finance,
accounting or auditing, acquired through past employment experience,
professional certification, or any other comparable experience that results in
the individual's financial sophistication, including being or having been a
chief executive officer or other senior officer with significant financial
oversight responsibilities.
In addition to the definition of "independent" above, the following restrictions
shall apply to every Committee member:
1. EMPLOYEES. A director who is an employee (including non-employee
executive officers) of the Company or any of its affiliates may not serve on the
Committee until three years following the termination of his or her employment.
In the event the employment relationship is with a former parent or predecessor
of the Company, the director could serve on the Committee after three years
following the termination of the relationship between the Company and the former
parent or predecessor.
2. IMMEDIATE FAMILY. A director who is an immediate family member
(including parents, spouse, children, in-laws, siblings and anyone who shares
such a person's home) of an executive officer of the Company or any of tis
affiliates can not serve on the Committee until three years following the
termination of the officer's employment.
3. BUSINESS RELATIONSHIP. A director who is a partner, controlling
shareholder, or executive officer of an organization that has a business
relationship with the Company (e.g., supplier or customer), or who has a direct
business relationship with the Company (e.g., attorney, consultant, advisor) may
serve on the Committee only if the Board determines in its business judgment,
considering the materiality of the relationship, that the relationship does not
interfere with the director's exercise of independent judgment. The Board has
the sole discretion to determine whether any such relationship is "significant"
on a case by case basis, depending on the volume of business, its importance to
the director, his or her business or the Company, and the degree to which the
relationship could affect the judgment of a person in the director's position.
Three years after the termination of the business or partnership relationship,
the director may serve on the Committee without any requirement that the Board
make such a determination.
22
4. CROSS COMPENSATION COMMITTEE LINK. A director who is employed as an
executive of another corporation where any of the Company's executives serves on
that corporation's compensation committee may not serve on the Audit Committee.
5. INDEPENDENCE OVERRIDE. One director who is no longer an employee, or
who is an immediate family member of a former executive officer, but who would
not be considered independent due to the three year restriction period, may be
appointed, under exceptional and limited circumstances, to the Committee if the
Board determines in its business judgment that membership is required by the
best interests of the Company and its shareholders, and the Company discloses in
the next annual proxy statement the nature of the relationship and the reason
for that determination.
MEETINGS
The Committee meets quarterly, or more frequently as circumstances require.
Regular meetings are scheduled in accordance with the annual schedule approved
by the Board. A majority of the members of the Committee shall constitute a
quorum for the transaction of business. Minutes are recorded by the Secretary to
the Committee. Approval by a majority of the members present at a meeting at
which a quorum is present shall constitute approval by the Committee. The
Committee may also act by unanimous written consent without a meeting. The
Chairman, the Co-CEOs, the other Senior Officers of the Company, the Internal
Auditor and representatives of the Company's outside auditors attend meetings at
the invitation of the Committee.
BASIC FUNCTION AND PURPOSE
The Audit Committee assists the Board of Directors in fulfilling its
responsibility to oversee and review the Company's financial reporting and
accounting practices, audit functions and internal controls. The Committee also
reviews and makes recommendations to the Board on risk management policy and
risk limits. In addition, the Committee oversees and reviews officers' and
directors' expenses, compliance with appropriate policies, and the Code of
Business Conduct, and environmental, legal and regulatory compliance.
RESPONSIBILITIES
OUTSIDE AUDITORS
The Committee shall:
1. Recommend to the Board of Directors the selection and retention of an
outside auditor to perform the annual audit of financial statements and the
appropriate fees to compensate the outside auditor. The outside auditor is
ultimately accountable to the Board and the Committee. The Board and the
Committee have the ultimate authority to select, evaluate, and, where
appropriate, replace the outside auditor, subject to ratification by the
shareholders.
2. Consider, in consultation with the outside auditor and management, the
planned scope of the annual audit of financial statements, including a review of
staffing and coordination of audit efforts between the outside auditor and the
internal auditor.
3. Review and satisfy itself of the independence of the outside auditor,
including a review of any out-of-scope services, and related compensation
provided to the outside auditor. To that end, the Committee shall request that
the outside auditor submit to the Committee on a periodic basis a formal written
statement delineating all relationships between the auditor and the Company
consistent with Independence Standards Board Standard No. 1. The Committee is
23
responsible for actively engaging in a dialogue with the outside auditor with
respect to any disclosed relationships or services that may effect the
objectivity and independence of the outside auditor, and for recommending that
the Board take appropriate action to satisfy itself of the outside auditor's
independence.
4. Consider and review with the outside auditor and management: a) the
adequacy of the Company's internal controls; b) the Company's annual financial
statements and related footnotes; c) emerging accounting standards and issues
affecting the Company; d) any significant and related findings and
recommendations of the outside auditor, together with management's response. The
Committee shall discuss with the outside auditor the auditor's judgments about
the quality, not just the adequacy, of the Company's accounting principles as
applied in its financial statements. This discussion, usually with management
present, will include such matters as consistency, clarity and completeness of
the disclosures, as well as items having a significant impact on the
representational faithfulness, verifiability, neutrality and consistency of the
accounting information.
5. Direct the outside auditor to conduct an SAS 71 interim review of
quarterly financial statements prior to filing of the quarterly report on Form
10-Q with the Securities and Exchange Commission. The outside auditor and/or
financial management will attempt to discuss with the Committee, or at least the
Committee chair, the results of the SAS 71 review if the SAS 71 review reveals
significant adjustments, management adjustments and accounting estimates,
significant new accounting policies or disagreements with management. The
discussion should be attempted prior to the quarterly report on Form 10-Q, or as
soon as practicable afterwards.
6. At least annually, at a regularly scheduled meeting of the Committee,
meet privately with the outside auditor without members of management in
attendance.
INTERNAL AUDITING
The Committee shall:
1. Consider and review with management the annual work plan and planned
activities of the internal auditor, the budget and staffing for the internal
audit function, the Charter of the internal auditor, and the degree of
compliance of the internal audit function with the Standards for the
Professional Practice of Internal Auditing (IIA).
2. Consider and review the coordination of audit efforts between the
internal audit staff and the outside auditor to ensure completeness of coverage
and efficient use of audit resources.
3. Consider and review with management and the internal auditor significant
internal auditing findings and recommendations related to the adequacy of
internal controls, compliance with policies and procedures, and effective and
efficient use of Company resources; also consider and review management's
response to the audit recommendations.
4. Meet privately with the internal auditor, as the Committee deems
appropriate. At least annually, meet in executive session with the internal
auditor at a regularly scheduled meeting of the Committee.
RISK MANAGEMENT POLICY AND RISK LIMITS
The Committee shall review and make recommendations to the Board on risk
management policy and risk limits.
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OFFICERS' AND DIRECTORS' EXPENSES, CODE OF BUSINESS CONDUCT AND
ENVIRONMENTAL, LEGAL AND REGULATORY COMPLIANCE
The Committee shall:
1. Review policies and procedures with respect to officers' and directors'
expense accounts and perquisites, including their use of corporate assets; and
consider the results of and reviews of officers and directors expenses and
perquisites by the internal auditor or the outside auditor.
2. Review policies and procedures with respect to prevention of illegal
payments, conflicts of interest, or other questionable practices; and consider
the results of monitoring of compliance with the Code of Business Conduct,
particularly by officers and directors.
3. Review policies and procedures with respect to environmental compliance
programs and recognition of contingent liabilities resulting from identified
environmental problems; and consider the results of any environmental compliance
assessments performed by Environmental Affairs, Internal Auditing, or the
outside auditor.
4. Review significant legal matters, including the Company's compliance
with applicable laws and regulations. Review the Company's use of outside
counsel to provide legal services and the fees for those services.
ANNUAL ASSESSMENT OF PERFORMANCE AND CHARTER REVIEW
The charter shall be approved by the Board of Directors. The Committee
shall annually assess its own performance and review the adequacy of its
charter. The text of the charter will be included in the proxy statement at
least once every three years.
REPORTING RESPONSIBILITY
1. All action taken by the Audit Committee shall be reported to the Board
of Directors at its next meeting succeeding such action.
2. The Committee shall make annual reports to the NYSE stating: (a) whether
the Board made any determination regarding the independence of directors; (b)
whether all members of the Committee are financially literate; (c) whether at
least one member of the Committee has accounting or related financial management
expertise; and (d) whether the Committee reviewed and assessed the adequacy of
the Committee charter.
3. The Committee shall include in the annual proxy statement a report
disclosing whether the Committee has a charter that has been approved by the
Board; the text of the charter will be included in the proxy statement every
three years. The Committee will annually disclose whether the discussions with
management, the inside and outside auditors took place, and whether, based on
its review of the financial statements, the Committee recommended to the Board
that it include the financial statements in the annual report on Form 10-K.
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