Business Context and Reporting Period
This Form 8-K, dated October 24, 2012, is a joint filing by Exelon Corporation and its subsidiary, Commonwealth Edison Company (ComEd). The report provides Regulation FD disclosure regarding the financial impacts of rate orders issued by the Illinois Commerce Commission (ICC) on May 29 and October 3, 2012. ComEd has filed an appeal with the Illinois Appellate Court regarding findings it contends are contrary to the Energy Infrastructure Modernization Act (EIMA).
Key Financial Metrics and Projections
The filing details a projected pre-tax revenue deficit resulting from the ICC orders. While the October 3 ruling allowed recovery on the pension asset, other findings create a shortfall estimated at approximately $100 million per year starting in 2014. The filing does not provide current period revenue, profit, cash flow, or debt figures, focusing instead on future revenue impacts.
| Item | 2012 ($M) | 2013 ($M) | 2014 ($M) | 2015 ($M) | 2016 ($M) |
|---|---|---|---|---|---|
| Short-Term Debt Rate on Reconciliation Adjustment Balances | (5) | (5) | (10) | (25) | (25) |
| Average Rate Base | 5 | (25) | (35) | (25) | (40) |
| Compensation Adjustments, Alignment of Allocators, and Other | (70) | (30) | (35) | (30) | (30) |
| Impact on Capital Structure due to Lower Revenues | (20) | — | (15) | (25) | (40) |
| Total Pre-Tax Impact | (90) | (60) | (95) | (105) | (135) |
Note: 2012 amounts include reconciliation adjustments related to the 2011 revenue requirement.
Material Changes and Operational Impacts
The aggregate findings from the ICC orders result in a significant projected revenue deficit compared to ComEd's original expectations under EIMA. The specific drivers for this deficit include:
- Cost of Capital: Earning a short-term debt rate on reconciliation balances denies recovery of the actual weighted average cost of capital.
- Regulatory Lag: The use of an average rate base method reintroduces regulatory lag for investments already in service.
- Operating Disallowances: Improper characterizations regarding compensation, allocators, and tax adjustments result in insufficient revenue to cover actual costs.
- Capital Structure: Reduced revenues decrease the equity available to support EIMA investments.
Due to this funding gap, ComEd has been forced to delay certain EIMA investments, specifically the deployment of smart meters, pending the outcome of its appeal.
Outlook, Risks, and Contingencies
ComEd remains committed to its EIMA obligations but faces uncertainty regarding the funding of these initiatives. The primary contingency is the outcome of the appeal filed with the Illinois Appellate Court on October 4, 2012. The filing includes standard forward-looking statement disclaimers, noting that actual results may differ materially due to risks discussed in Exelon's and Constellation Energy Group's 2011 Form 10-K filings and ComEd's 2012 Form 10-Q.
Investor Verification Checklist
- Verify the status and timeline of ComEd's appeal with the Illinois Appellate Court.
- Monitor the potential delay in smart meter deployment and its impact on long-term operational efficiency.
- Review the specific provisions of the Energy Infrastructure Modernization Act (EIMA) cited by ComEd as being violated by the ICC orders.
- Assess the impact of the projected $100 million+ annual revenue deficit on Exelon's consolidated earnings and cash flow.
- Check for subsequent filings regarding the resolution of the ICC rate orders or the appellate court's decision.