EXC

Exelon Corporation (PECO Energy) 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2000. While filed by Exelon Corporation, the financial data primarily reflects the operations of PECO Energy Company and its subsidiaries, as Exelon had no substantive operations prior to the merger consummated on October 20, 2000. The filing documents the final quarter of PECO Energy as an independent entity before its merger with Unicom Corporation to form Exelon. The transaction is accounted for as a purchase with PECO Energy as the acquirer.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Mix Shift: Electric revenues declined 18% in Q3 and 7% for the nine months, driven by lower wholesale volumes, reduced competitive generation sales, and the termination of the Clinton Nuclear Power Station operating agreement. Conversely, Infrastructure Services revenues surged 3,500% in Q3 due to acquisitions by Exelon Infrastructure Services (EIS).
• Expense Dynamics: Fuel and energy interchange expenses decreased significantly (27% in Q3) due to lower volumes and prices, improving margins. However, Operating and Maintenance (O&M) expenses rose 34% in Q3, largely due to the inclusion of EIS operations.
• Equity Earnings: Equity in earnings of unconsolidated affiliates improved from a loss of $5 million in Q3 1999 to earnings of $23 million in Q3 2000, primarily due to earnings from the AmerGen joint venture.
• Capital Structure: The company issued $1 billion in Series 2000-A Transition Bonds in May 2000 to securitize stranded costs. Proceeds were used to repurchase $502 million of common stock and retire $422 million of debt.

Guidance, Outlook, and Risks

• Merger Integration: The merger with Unicom was completed on October 20, 2000. Management expects to incur charges in Q4 2000 related to severance, stock compensation, and settlements, though the aggregate impact was not estimable as of September 30.
• Regulatory Settlements: A comprehensive settlement with the Pennsylvania PUC mandates $200 million in rate reductions for customers from 2002-2005 and extended rate caps through 2006. Additionally, a $60 million rate reduction was agreed upon for 2001 related to transition bond issuance.
• Acquisitions: The company signed an agreement to purchase 49.9% of Sithe Energies North America for $682 million and completed the purchase of the Oyster Creek Nuclear Generating Facility via its AmerGen joint venture.
• Accounting Changes: The company is preparing to adopt SFAS No. 133 and 138 regarding derivative instruments effective January 1, 2001.
• Contingencies: Environmental liabilities for former manufactured gas plants are accrued at $55 million. The company is also monitoring potential costs related to nuclear waste storage delays, with a $16 million reimbursement agreement for the Peach Bottom plant.

Investor Verification Checklist

• Merger Closing Date: Verify the final financial impact of the PECO/Unicom merger consummated on October 20, 2000, and the specific Q4 charges mentioned in the outlook.
• Transition Bond Terms: Review the specific amortization schedules and interest rate risks associated with the $5 billion in securitized transition bonds.
• Competitive Market Share: Monitor the 35% market share threshold for retail electric customers in Pennsylvania, which triggers mandatory assignment to alternative suppliers if not met by January 1, 2001.
• Environmental Accruals: Assess the adequacy of the $55 million accrual for environmental remediation at 28 identified sites.
• Sithe Energies Deal: Track the closing of the $682 million Sithe Energies acquisition and the terms of the option to purchase the remaining 50.1%.