Exelon Corp. 10-Q Summary: Period Ended June 30, 2002
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2002, for Exelon Corporation and its subsidiaries: Commonwealth Edison Company (ComEd), PECO Energy Company (PECO), and Exelon Generation Company, LLC (Generation). Exelon operates in three primary segments: Energy Delivery (regulated utilities), Generation (electric power production and marketing), and Enterprises (competitive retail and infrastructure services). The filing includes unaudited consolidated financial statements and management discussion and analysis.
Key Financial Metrics (Six Months Ended June 30, 2002)
| Metric | 2002 (in millions) | 2001 (in millions) |
|---|---|---|
| Operating Revenues | $6,876 | $7,439 |
| Operating Income | $1,418 | $1,681 |
| Net Income | $492 | $714 |
| Diluted EPS | $1.52 | $2.21 |
| Operating Cash Flow | $1,638 | $1,953 |
| Capital Expenditures | $(1,028) | $(937) |
| Total Debt (Long-term + Current) | $14,833 | $14,645 |
| Cash and Equivalents | $713 | $1,160 |
Note: Net Income for 2002 includes a $230 million charge for the cumulative effect of changes in accounting principles (goodwill impairment). Income before this charge was $722 million.
Material Changes vs. Prior Period
- Revenue Decline: Operating revenues decreased 7.6% year-over-year, driven by lower wholesale energy prices, milder winter weather reducing gas demand, and reduced retail sales volumes in certain markets.
- Accounting Changes (SFAS 142): The adoption of SFAS No. 142 resulted in the discontinuation of goodwill amortization (beneficial to operating income) but triggered a one-time goodwill impairment charge of $357 million (pre-tax), recorded as a cumulative effect of a change in accounting principle. This significantly reduced reported Net Income and EPS.
- Segment Performance:
- Energy Delivery: Net income increased slightly ($538M vs $530M) due to warmer summer weather in Illinois and the cessation of goodwill amortization, offset by lower wholesale sales.
- Generation: Net income before accounting changes declined 34.4% ($150M vs $229M) due to depressed wholesale market prices and increased nuclear refueling outage costs.
- Enterprises: Reported a net loss of $188M (including the goodwill impairment charge). Excluding the impairment, net income improved significantly due to a $116 million after-tax gain from 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.
Guidance, Outlook, and Risks
- Outlook: Management expects Energy Delivery and Generation to continue providing reliable cash flows. Future results remain sensitive to weather conditions, customer choice trends, and wholesale energy market prices.
- Acquisition Pipeline: Generation agreed to purchase Sithe New England Holdings, LLC for approximately $543 million plus the assumption of $1.2 billion in non-recourse debt, subject to regulatory approval and expected to close in November 2002.
- Regulatory Risks:
- Illinois: ComEd faces potential revenue impacts from the Illinois Commerce Commission's interim order on delivery rates and ongoing litigation regarding retail rate laws.
- Pennsylvania: PECO's gross receipts tax rate was adjusted upward, increasing annual revenues and tax obligations by approximately $50 million, though this is under appeal.
- Counterparty Risk: Generation has exposure to Dynegy Inc., whose credit ratings were downgraded below investment grade in July 2002. While direct receivables are low (<$5M), there is indirect risk through equity investments in Sithe.
- Environmental Liabilities: Exelon has accrued $139 million for environmental investigation and remediation costs, primarily related to former manufactured gas plants (MGP). Delays in remediation projects could increase these reserves.
Investor Verification Checklist
- Goodwill Impairment: Verify the impact of the $357 million goodwill impairment charge on the Enterprises segment and the sustainability of earnings excluding this one-time item.
- Wholesale Market Exposure: Assess the sensitivity of Generation's margins to continued depressed wholesale energy prices and the impact of nuclear refueling outages.
- Sithe Acquisition: Monitor the regulatory approval status and financing terms for the Sithe New England acquisition, including the assumption of $1.2 billion in debt.
- Customer Choice Trends: Review the net impact of customers switching to alternative energy suppliers in Illinois and Pennsylvania on Energy Delivery revenues.
- Environmental Reserves: Track updates on MGP remediation costs and potential increases in accrued liabilities due to project delays.
- Debt Covenants: Confirm compliance with debt-to-capitalization ratios (currently 48% for Exelon) and the impact of potential rating downgrades on derivative contracts.