Exelon Corporation 10-Q Summary: Period Ended September 30, 2002
Business Context and Reporting Period
This Form 10-Q is a combined quarterly report filed by Exelon Corporation and its subsidiaries: Commonwealth Edison Company (ComEd), PECO Energy Company (PECO), and Exelon Generation Company, LLC (Generation). The report covers the three and nine months ended September 30, 2002. Exelon operates in three primary segments: Energy Delivery (regulated utilities), Generation (power production and marketing), and Enterprises (competitive energy services and infrastructure).
Key Financial Metrics (Nine Months Ended Sept 30, 2002)
| Metric | 2002 (in millions) | 2001 (in millions) |
|---|---|---|
| Operating Revenues | $11,245 | $11,625 |
| Operating Income | $2,417 | $2,593 |
| Net Income | $1,043 | $1,090 |
| Diluted EPS | $3.22 | $3.37 |
| Cash Flow from Operations | $2,601 | $2,957 |
| Total Assets | $35,236 | $34,817 |
| Total Debt (Short + Long Term) | $14,193 | $14,645 |
| Cash and Equivalents | $490 | $1,377 |
Note: Net Income for 2002 includes a $230 million charge for the cumulative effect of changes in accounting principles (goodwill impairment). Excluding this charge, income before cumulative effect was $1,273 million.
Material Changes vs. Prior Period
- Accounting Changes: The adoption of SFAS No. 142 resulted in a $357 million goodwill impairment charge (net of tax $243 million) recorded as a cumulative effect of a change in accounting principle. This significantly reduced reported Net Income and EPS for the nine-month period.
- Segment Performance:
- Energy Delivery: Net income increased 12% to $908 million (excluding cumulative effect) driven by warmer summer weather increasing retail sales and the discontinuation of goodwill amortization.
- Generation: Net income decreased 15% to $313 million (excluding cumulative effect) due to depressed wholesale market prices and increased nuclear refueling outage costs, partially offset by revenue from new plant acquisitions.
- Enterprises: Net income improved significantly to $69 million (excluding cumulative effect) due to a $116 million gain on the sale of its 49% interest in AT&T Wireless.
- Acquisitions: Generation acquired two natural-gas and oil-fired plants from TXU for $443 million in April 2002. It also agreed to purchase Sithe New England Holdings for a $543 million note.
- Regulatory: ComEd recorded a $12 million charge for a potential plant disallowance related to an audit of its delivery services rate case. PECO implemented a gross receipts tax rate increase, adding approximately $50 million to annual revenues and tax obligations.
Guidance, Outlook, and Risks
- Outlook: Management expects Energy Delivery and Generation to continue providing reliable cash flows. Capital expenditures for 2002 are estimated at $1.5 billion, focused on reliability improvements and nuclear refueling.
- Future Accounting Impact: The adoption of SFAS No. 143 (Asset Retirement Obligations) in 2003 is expected to result in a non-cash one-time cumulative effect gain of at least $1.5 billion but may negatively impact 2003 EPS by up to ten cents due to timing differences in expense recognition.
- Key Risks:
- Market Risk: Generation faces exposure to depressed wholesale energy prices and trading portfolio losses.
- Credit Risk: Counterparty Dynegy Inc. was downgraded to below investment grade, creating potential exposure of approximately $22 million in equity earnings from Sithe if Dynegy defaults on a financial swap.
- Regulatory/Litigation: Ongoing class action securities litigation regarding 2001 earnings expectations. Potential write-offs related to ComEd's rate case audit (up to $100 million exposure).
- Pension Obligations: Declines in equity markets may require additional pension funding contributions of $100-$200 million in late 2002 and $300-$350 million in 2003.
Investor Verification Checklist
- Verify the impact of the $230 million goodwill impairment charge on reported earnings versus adjusted earnings.
- Monitor the status of the ComEd delivery services rate case audit and potential asset write-offs.
- Assess the credit risk exposure related to Dynegy Inc. and its impact on Sithe Energies equity earnings.
- Review the progress of the Sithe New England acquisition and associated debt obligations.
- Track the outcome of the securities class action litigation filed in May/June 2002.
- Confirm the timing and magnitude of future pension funding requirements due to market volatility.