Exelon Corp. 10-Q Summary: Period Ended June 30, 2006
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2006, for Exelon Corporation and its subsidiaries: Commonwealth Edison Company (ComEd), PECO Energy Company (PECO), and Exelon Generation Company, LLC (Generation). Exelon operates as a utility services holding company with three primary segments: regulated energy delivery (ComEd in Illinois, PECO in Pennsylvania) and competitive energy generation and marketing (Generation). The filing includes unaudited consolidated financial statements for all registrants.
Key Financial Metrics (Six Months Ended June 30, 2006)
| Metric | 2006 (Six Months) | 2005 (Six Months) |
|---|---|---|
| Operating Revenues | $7,559 million | $7,045 million |
| Net Income | $1,044 million | $1,035 million |
| Diluted EPS | $1.55 | $1.53 |
| Operating Cash Flow | $2,188 million | $286 million |
| Capital Expenditures | $1,156 million | $1,007 million |
| Total Assets | $42,290 million | $42,449 million |
| Total Liabilities | $32,468 million | $33,236 million |
| Shareholders' Equity | $9,735 million | $9,125 million |
Note: Operating cash flow for 2005 was significantly depressed by a $2 billion discretionary pension contribution made in the first quarter of 2005.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 7.3% year-over-year, driven by higher wholesale and retail electric sales at Generation due to increased market prices, higher nuclear output, and rate increases at PECO.
- Profitability: Net income increased slightly ($9 million) despite higher operating expenses. This was primarily due to a $149 million pre-tax gain from a reduction in Generation's nuclear Asset Retirement Obligation (ARO) and higher margins on wholesale market sales.
- Impairment Charges: Exelon recorded a $115 million pre-tax impairment charge related to investments in synthetic fuel-producing facilities, which were idled in May 2006 due to high oil prices.
- Stock-Based Compensation: Operating expenses increased due to the adoption of SFAS No. 123-R on January 1, 2006, requiring the recognition of stock-based compensation costs.
- Segment Performance: Generation reported the strongest performance with net income of $768 million (up $152 million), while PECO net income declined to $186 million (down $53 million) due to higher competitive transition charge (CTC) amortization.
Guidance, Outlook, and Risks
- Merger with PSEG: Exelon is pursuing a merger with Public Service Enterprise Group (PSEG). Regulatory approvals from the NRC and DOJ have been secured, but the New Jersey Board of Public Utilities (NJBPU) approval remains pending. The merger requires the divestiture of six fossil-fuel generating plants (approx. 5,600 MW).
- ComEd Regulatory Risk: The Illinois Commerce Commission (ICC) issued an order in July 2006 approving only an $8 million revenue increase for ComEd's rate case, significantly below the requested $317 million. The order also disallowed rate base treatment for a $639 million prepaid pension asset. This has led to credit rating downgrades for ComEd by Moody's and Fitch and may trigger a material goodwill impairment charge in the third quarter.
- Environmental Liabilities: Generation is addressing tritium leaks at the Braidwood, Byron, and Dresden nuclear stations. Remediation efforts have begun at Braidwood, and civil penalties remain uncertain. Additionally, Generation faces potential asbestos-related liability.
- Synthetic Fuel Investments: Facilities were idled due to oil price volatility. If oil prices remain high, Exelon may not earn tax credits for the remainder of 2006 and 2007, though the company anticipates generating approximately $120 million in cash over the life of the investments.
Investor Verification Checklist
- ComEd Goodwill Impairment: Verify the outcome of the interim goodwill impairment test required by the ICC rate order, which could result in a material charge.
- PSEG Merger Timeline: Monitor the status of the NJBPU approval and the terms of the divestiture required by the DOJ.
- ComEd Liquidity: Assess ComEd's ability to fund capital expenditures and operations without dividends (suspended in Q2 2006) given the regulatory revenue shortfall.
- Synthetic Fuel Tax Credits: Track oil prices to determine the extent of the phase-out of Section 45K tax credits for the remainder of the year.
- Environmental Remediation Costs: Review updates on the Braidwood tritium remediation and potential civil penalties from state authorities.