EXC

Exelon Corp. Q1 2007 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2007, for Exelon Corporation and its primary 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 reportable segments: Generation (wholesale/retail energy sales), ComEd (regulated electric utility in northern Illinois), and PECO (regulated electric and gas utility in southeastern Pennsylvania).

Key Financial Metrics

Note: Debt figures include long-term debt, debt due within one year, and debt to financing trusts.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased $968 million (25%) primarily due to higher wholesale market sales volumes following the expiration of the below-market Power Purchase Agreement (PPA) with ComEd, increased nuclear output, and favorable weather conditions.
• Profitability: Net income increased $291 million (73%). Key drivers included higher margins on Generation's wholesale sales, a favorable $43 million PJM billing settlement with PPL, and decreased nuclear refueling outage costs.
• Segment Performance:
  • Generation: Net income rose to $560 million from $268 million, driven by higher market sales and lower outage costs.
  • ComEd: Net income declined to $5 million from $54 million. This was due to the end of the regulatory transition period, the loss of margin on energy sales, and higher purchased power costs, despite an approved rate increase.
  • PECO: Net income increased to $128 million from $93 million, aided by favorable weather and rate increases.
• Cash Flow: Operating cash flow decreased $180 million to $668 million, largely due to changes in working capital, specifically increased collateral postings for derivatives and changes in payment terms with energy suppliers following ComEd's credit rating downgrades.

Outlook, Risks, and Contingencies

• Illinois Regulatory Risk: Significant uncertainty exists regarding potential Illinois legislation to roll back or freeze ComEd's electricity rates. Management warns that if rates are set below cost, ComEd could face material adverse consequences, including potential bankruptcy, which would severely impact Exelon and Generation.
• Credit Ratings: ComEd's credit ratings were downgraded by Fitch and Moody's in March 2007 due to regulatory and political uncertainty. ComEd has suspended dividend payments and is utilizing credit facilities ($340 million outstanding) as access to the commercial paper market is limited.
• Tax Contingencies: The IRS has proposed adjustments regarding the deferral of gain on the 1999 sale of ComEd's fossil generating assets. A successful challenge could result in a cash outflow of up to $978 million (including interest) and negatively impact operations by up to $146 million.
• Environmental Compliance: Uncertainty remains regarding the final compliance requirements for the EPA's Clean Water Act Section 316(b) rule following a court remand, which could require costly retrofits at nuclear facilities.
• Derivatives: Generation reported a net mark-to-market liability of $319 million on energy contracts as of March 31, 2007, compared to a net asset of $499 million at year-end 2006, reflecting market price fluctuations.

Investor Verification Checklist

• Monitor Illinois legislative developments regarding ComEd rate freezes and the potential for bankruptcy proceedings.
• Verify the status of ComEd's credit ratings and its ability to access capital markets without relying solely on credit facilities.
• Review the resolution of the IRS audit regarding the 1999 fossil plant sale and the potential $978 million tax liability.
• Assess the impact of the PJM Reliability Pricing Model (RPM) auctions on Generation's capacity revenues.
• Track the outcome of the Illinois Commerce Commission's investigation into ComEd's rate design and the "Residential Rate Stabilization Program" enrollment rates.