Exelon Corp. 10-Q Summary: Period Ended September 30, 2007
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2007, 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 and competitive retail energy sales), ComEd (regulated electric distribution in northern Illinois), and PECO (regulated electric and gas distribution in southeastern Pennsylvania).
Key Financial Metrics (Nine Months Ended Sept 30, 2007)
| Metric | Exelon Consolidated | Generation | ComEd | PECO |
|---|---|---|---|---|
| Operating Revenues | $14,362 million | $8,181 million | $4,668 million | $4,228 million |
| Net Income | $2,173 million | $1,686 million | $98 million | $392 million |
| Diluted EPS | $3.20 | N/A | N/A | N/A |
| Operating Cash Flow | $3,513 million | $2,424 million | $428 million | $728 million |
| Capital Expenditures | $1,892 million | $828 million | $806 million | $243 million |
| Total Assets | $45,719 million | $19,368 million | $18,906 million | $9,891 million |
| Total Liabilities | $35,211 million | $14,556 million | $12,478 million | $7,865 million |
Material Changes vs. Prior Period
- Significant Profit Increase: Consolidated net income increased from $1,000 million in the prior year to $2,173 million. This improvement is primarily driven by the absence of a $776 million non-deductible goodwill impairment charge recorded by ComEd in the third quarter of 2006.
- Generation Performance: Generation reported significantly higher margins due to the expiration of the below-market Power Purchase Agreement (PPA) with ComEd at the end of 2006, allowing Generation to sell more power at higher market prices. Nuclear output also increased due to fewer outage days.
- ComEd Transition: ComEd transitioned from a rate freeze period to market-based electricity procurement via a reverse-auction process. While revenues net of purchased power decreased due to the loss of competitive transition charges (CTC) and higher market power costs, operating income improved significantly compared to the prior year's loss.
- Illinois Settlement: In August 2007, Exelon, Generation, and ComEd reached a settlement with the State of Illinois to provide approximately $800 million in rate relief over four years, avoiding potential rate freezes or generation taxes. This resulted in recognized costs of $122 million for Generation and $32 million for ComEd in the nine-month period.
Guidance, Outlook, and Risks
- Regulatory Outlook: The Illinois Settlement Legislation provides stability for ComEd, establishing a new competitive procurement model and a five-year financial swap with Generation to stabilize costs. ComEd has filed a new delivery service rate case seeking a $361 million annual revenue increase.
- Share Repurchases: Exelon initiated an accelerated share repurchase (ASR) program in September 2007 for $1.25 billion, receiving 15.1 million shares initially. The company aims to return cash to shareholders after funding capital commitments.
- Key Risks:
- Commodity Price Risk: Generation remains exposed to unhedged portions of its electricity portfolio, though it maintains a high economic hedge ratio for 2007 and 2008.
- Regulatory Uncertainty: PECO faces potential legislative changes in Pennsylvania regarding rate caps expiring in 2010. ComEd faces ongoing regulatory proceedings regarding transmission rates and rate design.
- Tax Contingencies: The IRS has disallowed Exelon's tax deferral on the 1999 sale of fossil generating assets, asserting a potential liability of up to $988 million (including interest). Exelon is appealing this decision.
- Environmental Compliance: Uncertainty remains regarding the final compliance requirements for Section 316(b) of the Clean Water Act, which could require costly retrofits for cooling water intake structures.
Investor Verification Checklist
- Illinois Settlement Impact: Verify the actual cash outflows and revenue reductions associated with the $800 million rate relief commitment over the next four years.
- ComEd Rate Case: Monitor the outcome of ComEd's new delivery service rate case filed in October 2007, which seeks to recover costs not included in the 2004-based rate increase.
- IRS Tax Dispute: Track the status of the IRS appeal regarding the 1999 fossil asset sale, as an adverse ruling could result in a material tax payment.
- Generation Margins: Assess the sustainability of Generation's improved margins post-ComEd PPA expiration, considering future wholesale market price volatility.
- ComEd Credit Ratings: Review recent credit rating actions (downgrades and subsequent upgrades) for ComEd and their impact on borrowing costs and liquidity.