Exelon Corp. 10-Q Summary: Period Ended June 30, 2005
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2005, for Exelon Corporation and its primary subsidiaries: Commonwealth Edison Company (ComEd), PECO Energy Company (PECO), and Exelon Generation Company, LLC (Generation). Exelon operates in two primary segments: Energy Delivery (regulated retail electricity and gas sales via ComEd and PECO) and Generation (wholesale power generation and marketing). The filing reflects the completion of the sale of Sithe Energies, Inc. in January 2005 and ongoing regulatory proceedings regarding a proposed merger with Public Service Enterprise Group (PSEG).
Key Financial Metrics (Six Months Ended June 30, 2005)
| Metric | 2005 (Six Months) | 2004 (Six Months) | Variance |
|---|---|---|---|
| Operating Revenues | $7,045 million | $7,073 million | ($28) million |
| Operating Income | $1,828 million | $1,624 million | $204 million |
| Net Income | $1,035 million | $933 million | $102 million |
| Diluted EPS | $1.53 | $1.40 | $0.13 |
| Operating Cash Flow | $286 million | $1,907 million | ($1,621) million |
| Capital Expenditures | $1,007 million | $844 million | $163 million |
| Total Debt (Long-term + Current) | $9,639 million | $8,215 million | $1,424 million |
| Cash and Equivalents | $545 million | $766 million | ($221) million |
Note: Debt figures include long-term debt and current maturities. Operating cash flow decreased significantly due to a $2 billion discretionary pension contribution made in Q1 2005.
Material Changes vs. Prior Period
- Generation Segment Performance: Net income from continuing operations for Generation increased significantly to $601 million (from $258 million in 2004). This was driven by higher margins on wholesale sales, favorable weather, and realized gains from nuclear decommissioning trust fund investments. However, this was partially offset by a $43 million pre-tax charge for estimated future asbestos-related bodily injury claims.
- Energy Delivery Segment Performance: Net income decreased to $416 million (from $619 million in 2004). The decline was primarily due to higher purchased power costs effective January 1, 2005, under the amended Power Purchase Agreement (PPA) with Generation. This was partially offset by favorable weather and lower interest expenses due to debt retirements.
- Discontinued Operations: Results for Sithe Energies, Inc. and Exelon Enterprises are presented as discontinued operations. The sale of Sithe in January 2005 resulted in a net gain of $19 million (pre-tax) and the deconsolidation of approximately $820 million of debt.
- Dividends: Exelon declared a quarterly dividend of $0.40 per share, an increase from $0.275 per share in the prior year.
Guidance, Outlook, and Risks
- PSEG Merger: The proposed merger with PSEG received FERC approval on June 30, 2005, subject to a mitigation plan involving the divestiture of 4,000 MW of generation and the auction of 2,600 MW of nuclear output. Shareholder approvals were obtained in July 2005. Regulatory proceedings in New Jersey and Pennsylvania remain pending.
- Regulatory Risks:
- SECA Rates: FERC is reviewing the Seams Elimination Charge/Assignment (SECA) rates. Uncertainty remains regarding whether ComEd and PECO will be net payers or receivers, which could materially impact financial results.
- Illinois Retail Rates: ComEd is seeking approval for a reverse-auction model for post-2006 retail rates. The Illinois Commerce Commission (ICC) has denied motions to dismiss, but the final order is expected in January 2006.
- Asbestos Liability: Generation recorded a $43 million pre-tax charge for estimated future asbestos claims. Management believes the reserve is appropriate but notes that actual costs could vary significantly.
- Synthetic Fuel Tax Credits: Exelon estimates that tax credits from synthetic fuel investments will not phase out in 2005 given current crude oil prices (~$46/barrel). However, if prices rise above $66/barrel, credits could phase out completely, potentially resulting in a $70 million annual after-tax non-operating loss.
- Pension Funding: Exelon made a $2 billion discretionary contribution to pension plans in Q1 2005. No further contributions are anticipated for the remainder of 2005.
Investor Verification Checklist
- Merger Mitigation Plan: Verify the status of the divestiture of 4,000 MW of generation and the auction of 2,600 MW of nuclear output required by FERC for the PSEG merger.
- Asbestos Reserve Adequacy: Monitor the $43 million asbestos reserve for Generation against actual claim filings and legal developments.
- SECA Rate Outcome: Track the FERC hearing on SECA rates to determine the net financial impact on ComEd and PECO.
- Illinois Rate Case: Review the final ICC order expected in January 2006 regarding ComEd's post-2006 retail rate structure.
- Crude Oil Prices: Monitor domestic crude oil prices to assess the risk of phase-out for synthetic fuel tax credits.
- Debt Maturities: Review the $1.7 billion of senior notes issued in June 2005 and the $300 million term loan due December 1, 2005.