Exelon Corp. 10-Q Summary: Period Ended June 30, 2007
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 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). The filing includes unaudited consolidated financial statements and management discussion and analysis.
Key Financial Metrics (Six Months Ended June 30, 2007)
| Metric | Exelon Corp. (Consolidated) | Generation | ComEd | PECO |
|---|---|---|---|---|
| Operating Revenues | $9,330 million | $5,344 million | $2,911 million | $2,769 million |
| Net Income | $1,393 million | $1,138 million | $33 million | $224 million |
| Diluted EPS | $2.05 | N/A | N/A | N/A |
| Operating Cash Flow | $1,626 million | $1,115 million | $184 million | $467 million |
| Capital Expenditures | $1,284 million | $550 million | $559 million | $161 million |
| Total Assets | $45,305 million | $19,035 million | $18,466 million | $9,933 million |
| Total Liabilities | $34,047 million | $13,295 million | $12,131 million | $7,990 million |
| Shareholders' Equity | $11,171 million | $5,739 million (Member's Equity) | $6,335 million | $1,943 million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated operating revenues increased 23.4% ($1,771 million) compared to the first half of 2006. This was driven by higher wholesale market sales at Generation following the expiration of the below-market Power Purchase Agreement (PPA) with ComEd, favorable weather conditions, and increased transmission revenues at ComEd.
- Profitability: Net income increased 33.4% ($349 million) year-over-year. Generation's net income rose significantly ($370 million increase) due to higher margins on wholesale sales. Conversely, ComEd's net income declined sharply ($148 million decrease) due to the end of the regulatory transition period, loss of margin on energy sales, and increased costs associated with rate relief programs.
- Operating Expenses: Purchased power and fuel expenses increased $1,121 million, primarily due to higher market energy prices and volumes. Operating and maintenance expenses increased $214 million, driven by labor inflation, higher nuclear refueling outage costs, and ComEd's rate relief initiatives.
- Cash Flow: Operating cash flows decreased $562 million compared to the prior year, largely due to changes in working capital, specifically increased counterparty collateral postings by Generation and changes in payment terms for ComEd due to credit rating downgrades.
Guidance, Outlook, and Risks
- Illinois Regulatory Settlement: On July 24, 2007, Exelon, ComEd, and Generation reached an oral agreement with Illinois state representatives to address high electric bills. The settlement involves a commitment of approximately $800 million over four years for rate relief and funding a new Illinois Power Agency. This agreement aims to eliminate the risk of rate freeze or rollback legislation. The settlement is contingent upon the enactment of proposed legislation.
- ComEd Credit Ratings: During the period, ComEd's credit ratings were downgraded by Fitch, Moody's, and S&P due to regulatory and political uncertainty in Illinois. Consequently, ComEd suspended participation in the commercial paper market and borrowed $475 million under its secured credit facility.
- Commodity Price Risk: Generation remains exposed to commodity price risk, particularly for unhedged positions in future years. The company maintains a high economic hedge ratio for 2007 and 2008 but faces greater exposure in subsequent years.
- Tax Contingencies: Significant uncertainty exists regarding the IRS audit of Exelon's tax positions related to the 1999 sale of fossil generating assets. A successful IRS challenge could result in a potential cash outflow of up to $983 million (including interest) and a negative impact on results of operations.
- Environmental Compliance: Uncertainty remains regarding the final compliance requirements for the EPA's Clean Water Act Section 316(b) rule following a court remand. Compliance costs could be material if closed-loop cooling systems are required.
Key Facts for Investor Verification
- Illinois Legislation Status: Verify the enactment status of the proposed Illinois legislation required to make the July 2007 rate relief settlement effective.
- ComEd Liquidity: Monitor ComEd's ability to refinance maturing debt and its continued access to capital markets given recent credit rating downgrades.
- IRS Audit Resolution: Track the progress of the IRS audit regarding the 1999 fossil plant sale and the potential impact on tax liabilities and cash flows.
- Rate Relief Funding: Confirm the timing and accounting treatment of the $800 million rate relief commitment, particularly the portion allocated to ComEd customers versus other Illinois utilities.
- Generation Margins: Assess the sustainability of Generation's improved margins post-ComEd PPA expiration in the context of volatile wholesale energy prices.