Exelon Corp. 10-Q Summary: Period Ended September 30, 2003
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2003, for Exelon Corporation and its primary subsidiaries: Commonwealth Edison Company (ComEd), PECO Energy Company (PECO), and Exelon Generation Company, LLC (Generation). Exelon operates in three segments: Energy Delivery (regulated utilities), Generation (power production and marketing), and Enterprises (competitive energy services and infrastructure). The filing reflects significant operational restructuring under "The Exelon Way" and the adoption of new accounting standards, specifically SFAS No. 143 regarding asset retirement obligations.
Key Financial Metrics (Nine Months Ended Sept 30, 2003)
| Metric | 2003 (in millions) | 2002 (in millions) |
|---|---|---|
| Operating Revenues | $12,236 | $11,245 |
| Net Income | $631 | $1,043 |
| Net Income (Excl. Accounting Changes) | $519 | $1,273 |
| Diluted EPS | $1.93 | $3.22 |
| Operating Cash Flow | $2,553 | $2,663 |
| Total Assets | $39,144 | $37,485 |
| Total Liabilities | $30,729 | $29,071 |
| Long-Term Debt | $12,468 | $13,127 |
Note: Net Income for 2003 includes a $112 million benefit from the cumulative effect of adopting SFAS No. 143. Net Income for 2002 includes a $230 million charge for the cumulative effect of adopting SFAS No. 142.
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased 40% year-over-year. Excluding accounting changes, income before taxes dropped 59% primarily due to significant impairment charges and restructuring costs.
- Impairment Charges: Generation recorded a $945 million impairment charge related to Exelon Boston Generating, LLC (EBG) long-lived assets due to the decision to transition out of ownership. Additionally, Generation recorded $255 million in impairment charges related to its investment in Sithe Energies, Inc.
- Restructuring Costs: Exelon recorded $167 million in charges associated with "The Exelon Way," including $87 million for cash severance and $80 million for pension and postretirement curtailment costs.
- Revenue Growth: Operating revenues increased 9% to $12.2 billion, driven by higher market sales in the Generation segment and increased gas sales at PECO, partially offset by unfavorable weather impacts on Energy Delivery.
- Accounting Changes: Adoption of SFAS No. 143 resulted in a $112 million net income benefit and the reclassification of certain preferred securities from equity to liabilities ($422 million total).
Guidance, Outlook, and Risks
- EBG Transition: Generation is in the process of an orderly transition out of ownership of EBG projects (Mystic 8 & 9 and Fore River). An event of default occurred under the EBG Facility due to missed project completion dates, though the debt is non-recourse to Exelon. Total net charges related to EBG are estimated at $550 million after taxes.
- Sithe Divestiture: Generation is executing a plan to divest its interest in Sithe. It has agreed to purchase the remaining 50.1% interest for $621 million and subsequently sell a 50% interest to Reservoir Capital Group for $75.8 million. The transaction is expected to close in Q4 2003.
- AmerGen Acquisition: Exelon executed an agreement to purchase British Energy's 50% interest in AmerGen for $276.5 million, expected to close in the first half of 2004.
- Regulatory Risks: ComEd and PECO face ongoing regulatory proceedings regarding rate adjustments and competitive transition charges. PECO is transferring 267,000 residential customers to alternative suppliers in December 2003.
- Counterparty Risk: Generation has credit exposure to Dynegy (via Sithe) and Midwest Generation (via coal purchase and railcar lease contracts). Midwest Generation's parent company faces potential bankruptcy, which could trigger contingent obligations for Generation.
Investor Verification Checklist
- EBG Liability Cap: Verify the final settlement terms and total cost of the EBG exit strategy, as the $550 million estimate is subject to change based on the transition timeline.
- Sithe Transaction Timing: Confirm the closing date of the Sithe buy-back and resale to Reservoir Capital Group to assess cash flow impacts in Q4 2003.
- Midwest Generation Exposure: Monitor the financial status of Edison Mission Energy (parent of Midwest Generation) to evaluate the risk of triggering $81 million in coal purchase obligations and $65 million in railcar lease obligations.
- Goodwill Impairment: Review the annual goodwill impairment test results for ComEd (scheduled for Q4 2003), as a significant impairment could restrict dividend payments.
- Regulatory Asset Recovery: Assess the status of ComEd's request for transmission rate adjustments and PECO's nuclear decommissioning cost recovery to ensure expected revenue streams remain intact.