Business Context and Reporting Period
This Form 8-K, dated October 3, 2012, reports on regulatory developments concerning Commonwealth Edison Company (ComEd), a subsidiary of Exelon Corporation. The filing details the Illinois Commerce Commission's (ICC) final Order on Remand regarding ComEd's formula rate proceeding under the Electric Infrastructure Modernization Act (EIMA).
Key Financial Metrics and Impacts
- Revenue Adjustment: ComEd expects to record an increase in revenue of approximately $135 million pre-tax in the fourth quarter of 2012.
- Earnings Per Share (EPS) Impact: Management preliminarily determined that GAAP and adjusted operating earnings will increase by approximately $0.10 per Exelon share in 2012. Future impacts are estimated at $0.03 per share annually for 2013 and 2014.
- Regulatory Asset: As of June 30, 2012, ComEd recorded a net regulatory asset of $26 million.
- Unrecoverable Costs: ComEd estimates that issues in the ICC orders result in nearly $100 million per year in costs that cannot be recovered and reinvested in the distribution system starting in 2014.
Material Changes and Regulatory Rulings
The ICC's Rehearing Order addressed three key items from a prior May 2012 order:
- Pension Asset Recovery: The ICC adopted ComEd's position, resulting in a $35 million increase in the annual revenue requirement based on the 2010 Pension Asset.
- Rate Base Methodology: The ICC ruled against ComEd's request to use an "average year" rate base, affirming the use of a year-end rate base for reconciliation.
- Interest Rates: The ICC amended its prior order to apply a short-term debt rate to under/over recoveries of incurred costs, rather than the rate ComEd proposed.
ComEd intends to appeal both the May Order and the Rehearing Order in court due to the significant financial impact.
Outlook, Management Commentary, and Risks
- Grid Modernization Delays: As a result of the Rehearing Order, ComEd must delay elements of its grid modernization program. Specifically, the installation of additional smart meters is delayed until 2015.
- Capital Plan Review: ComEd is currently reviewing its capital investment plan in light of the regulatory decision.
- Guidance Update: Exelon plans to update its earnings guidance during its third-quarter earnings release and call on October 31, 2012.
- Risks: The filing includes standard forward-looking statement disclaimers, noting that actual results may differ due to risks outlined in previous 10-K and 10-Q filings, including regulatory and litigation risks.
Investor Verification Checklist
- Verify the final outcome of ComEd's court appeal regarding the ICC's May and Rehearing Orders.
- Monitor the October 31, 2012, earnings release for updated 2012 and 2013 guidance reflecting the $135 million revenue adjustment.
- Review the revised capital investment plan and the specific timeline for the delayed smart meter deployment.
- Assess the long-term impact of the $100 million annual unrecoverable cost estimate on future distribution system investments.