Exelon Corp. 10-Q Summary: Quarter Ended September 30, 2008
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2008, for Exelon Corporation and its subsidiaries: Exelon Generation Company, LLC (Generation), Commonwealth Edison Company (ComEd), and PECO Energy Company (PECO). Exelon operates as a utility services holding company with three primary segments: Generation (wholesale energy marketing and competitive retail), ComEd (regulated electric utility in northern Illinois), and PECO (regulated electric and gas utility in southeastern Pennsylvania). The filing reflects the impact of the 2008 global financial crisis, including the bankruptcy of Lehman Brothers and disruptions in credit markets.
Key Financial Metrics (Nine Months Ended Sept 30, 2008)
| Metric | Exelon Consolidated | Generation | ComEd | PECO |
|---|---|---|---|---|
| Operating Revenues | $14,366 million | $8,311 million | $4,594 million | $4,195 million |
| Net Income | $2,030 million | $1,725 million | $110 million | $246 million |
| Diluted EPS | $3.06 | N/A | N/A | N/A |
| Operating Cash Flow | $4,367 million | $2,785 million | $734 million | $767 million |
| Capital Expenditures | $2,282 million | $1,204 million | $723 million | $299 million |
| Total Assets | $45,214 million | $19,122 million | $18,880 million | $9,294 million |
| Long-Term Debt | $11,085 million | $2,502 million | $4,708 million | $1,672 million |
Material Changes vs. Prior Period
- Net Income Decline: Consolidated net income decreased by $143 million (6.6%) compared to the nine months ended September 30, 2007. This was primarily driven by unrealized losses on nuclear decommissioning trust funds, unfavorable weather conditions in ComEd and PECO territories, and increased allowances for uncollectible accounts.
- Segment Performance:
- Generation: Net income increased by $39 million due to higher realized margins on market sales and gains from uranium supply agreement settlements, offset by lower nuclear output and higher operating costs.
- ComEd: Net income increased by $12 million, driven by higher transmission rates and a distribution tax refund, partially offset by asset disallowances from the 2007 Rate Case.
- PECO: Net income decreased significantly by $146 million due to unfavorable weather, higher uncollectible accounts, and the impact of a favorable PJM billing settlement in the prior year.
- Lehman Brothers Impact: Generation established a full reserve of $22 million for its direct net exposure to Lehman Brothers Commodity Services Inc. following the bankruptcy filing.
- Decommissioning Trust Funds: Significant unrealized losses were recognized on nuclear decommissioning trust fund investments due to adverse financial market conditions. Under SFAS No. 159, these changes are recorded directly in results of operations.
Guidance, Outlook, and Risks
- Capital Markets: Management notes that while liquidity remains sufficient, disruptions in credit markets have increased borrowing costs. The company has accelerated bond issuances to secure liquidity. ComEd has been unable to access the commercial paper market and is utilizing its credit facility.
- Credit Ratings: Subsequent to the period end (October 21, 2008), S&P downgraded Exelon Corporate, Generation, and PECO to BBB from BBB+, placing them on CreditWatch with a negative outlook. This triggered collateral requirements for PECO with PJM ($90 million).
- Regulatory Developments:
- ComEd: The Illinois Commerce Commission (ICC) approved a $274 million annual revenue increase in the 2007 Rate Case, effective September 2008, but mandated $37 million in fixed asset disallowances.
- PECO: The Pennsylvania Public Utility Commission (PAPUC) approved a $77 million revenue increase for gas distribution, effective January 2009.
- Strategic Initiatives: On October 19, 2008, Exelon submitted a proposal to acquire NRG Energy, Inc. in a stock-for-stock transaction. Management has indefinitely deferred share repurchases to preserve liquidity.
- Environmental Risks: Ongoing uncertainty regarding the EPA's Phase II rule for cooling water intake structures (Section 316(b) of the Clean Water Act) and potential future greenhouse gas regulations.
Key Facts for Investor Verification
- Decommissioning Fund Adequacy: Verify the sufficiency of nuclear decommissioning trust funds against obligations, as market declines could require significant additional contributions or financial guarantees.
- Lehman Exposure: Confirm the final resolution of the $22 million reserve and any potential additional exposure from other counterparties in the energy trading portfolio.
- Regulatory Asset Disallowances: Monitor the status of ComEd's appeal regarding the $37 million asset disallowance mandated by the ICC in the 2007 Rate Case.
- Credit Facility Utilization: Track the utilization of revolving credit facilities, particularly for ComEd, which has shifted from commercial paper to credit facility borrowings due to market conditions.
- NRG Acquisition: Assess the progress and regulatory approval status of the proposed business combination with NRG Energy, Inc.