Exelon Corporation 10-Q Summary: Period Ended September 30, 2001
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2001, for Exelon Corporation and its principal subsidiaries, Commonwealth Edison Company (ComEd) and PECO Energy Company (PECO). The filing reflects the post-merger structure following the October 2000 combination of PECO and Unicom (parent of ComEd). A significant corporate restructuring occurred effective January 1, 2001, separating regulated energy delivery businesses (ComEd and PECO) from competitive generation and enterprise businesses (Exelon Generation and Exelon Enterprises).
Key Financial Metrics (Exelon Consolidated)
Revenue and Profitability (Nine Months Ended Sept 30, 2001):
- Operating Revenues: $11,759 million (vs. $4,366 million in 2000).
- Net Income: $1,117 million (vs. $540 million in 2000).
- Diluted Earnings Per Share: $3.46 (vs. $3.07 in 2000).
- Operating Income: $2,593 million (vs. $1,106 million in 2000).
- Operating Margin: 22% (vs. 25% in 2000).
Liquidity and Capital Structure (As of Sept 30, 2001):
- Cash and Cash Equivalents: $1,377 million (vs. $526 million at Dec 31, 2000).
- Long-Term Debt: $13,385 million.
- Total Assets: $35,680 million.
- Shareholders' Equity: $7,832 million.
- Debt to Total Capitalization: 49% (excluding securitization debt).
Cash Flows (Nine Months Ended Sept 30, 2001):
- Operating Cash Flow: $2,987 million provided.
- Investing Cash Flow: $1,583 million used (primarily plant investment).
- Financing Cash Flow: $553 million used (debt service and dividends).
Material Changes vs. Prior Period
The dramatic increase in revenue and net income compared to the nine months ended September 30, 2000, is primarily attributable to the inclusion of ComEd's results following the October 2000 merger. The 2000 comparative period reflects only PECO's operations prior to the merger.
- Merger Impact: The merger accounted for the majority of the variance in EBIT across all segments. For the nine months, the merger contributed $1,101 million to Energy Delivery EBIT and $87 million to Generation EBIT.
- Restructuring Impact: The January 2001 restructuring transferred generation assets to Exelon Generation, significantly altering the cost basis and expense structure for ComEd and PECO. ComEd and PECO now operate solely as regulated delivery utilities.
- Accounting Changes: Adoption of SFAS No. 133 (Derivatives) resulted in a $12 million net gain in 2001. A change in accounting estimate regarding the service lives of nuclear and fossil stations increased net income by $57 million for the nine-month period.
Outlook, Risks, and Management Commentary
Segment Performance:
- Energy Delivery: EBIT increased due to higher retail margins and lower O&M expenses, offset by regulatory asset amortization. Revenue growth was driven by rate increases and favorable weather.
- Generation: EBIT increased $209 million from normal operations, driven by higher wholesale market prices (particularly in PJM and MAIN regions) and improved nuclear capacity factors. However, margins were pressured by higher purchased power costs.
- Enterprises: EBIT improved slightly due to acquisitions and reduced losses in communications joint ventures, offset by investment writedowns.
Risks and Contingencies:
- Regulatory: The Illinois Commerce Commission (ICC) limited ComEd's annual recovery of nuclear decommissioning costs to $73 million through 2006, a reduction from prior levels. This order is under appeal.
- Legal Proceedings:
- FERC Allegations: FERC issued an order to show cause alleging PECO inappropriately shared outage information with Power Team (Generation) to profit from Firm Transmission Rights. Exelon denies the allegations.
- Midwest Generation: Midwest Generation filed a complaint seeking ~$25 million in refunds from ComEd regarding retail agreements.
- Cotter Corporation: Ongoing litigation regarding environmental contamination; Exelon indemnifies Cotter for liabilities.
- Environmental: Exelon has accrued $164 million for environmental remediation, primarily related to former manufactured gas plants.
- Market Risk: Exposure to commodity price volatility and interest rate fluctuations is managed through derivatives. Exelon recognized net gains of $27 million on mark-to-market adjustments for the nine months ended Sept 30, 2001.
Investor Verification Checklist
- Verify the status of the ICC appeal regarding ComEd's nuclear decommissioning cost recovery limits ($73 million annual cap).
- Monitor the outcome of the FERC investigation into PECO and Power Team regarding transmission rights and information sharing.
- Assess the impact of the January 2001 corporate restructuring on the long-term profitability of the regulated delivery segments (ComEd/PECO) versus the competitive segments.
- Review the adequacy of environmental reserves ($164 million) given the number of identified sites (72) and potential for additional liabilities.
- Confirm the sustainability of Generation's EBIT growth given the volatility of wholesale energy prices and the reliance on nuclear capacity factors.