Exelon Corp. 10-Q Summary: Period Ended June 30, 2008
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2008, for Exelon Corporation and its subsidiaries: Exelon Generation Company, LLC (Generation), Commonwealth Edison Company (ComEd), and PECO Energy Company (PECO). Exelon operates as a utility services holding company with three primary segments: Generation (electric generation and wholesale marketing), ComEd (regulated retail electricity in northern Illinois), and PECO (regulated retail electricity and natural gas in southeastern Pennsylvania).
Key Financial Metrics (Six Months Ended June 30, 2008)
| Metric | 2008 (in millions) | 2007 (in millions) |
|---|---|---|
| Operating Revenues | $9,139 | $9,330 |
| Net Income | $1,329 | $1,393 |
| Diluted EPS | $2.01 | $2.05 |
| Operating Cash Flow | $1,674 | $1,626 |
| Capital Expenditures | $1,511 | $1,284 |
| Total Assets | $46,800 | $45,361 |
| Total Debt (Long-term + Current) | $13,300 | $11,136 |
Note: Debt figures include long-term debt, debt due within one year, and debt to financing trusts.
Material Changes vs. Prior Period
- Net Income Decline: Consolidated net income decreased by $64 million (4.6%) compared to the first half of 2007. This was primarily driven by the impact of the Illinois Settlement agreement, unrealized and realized losses on nuclear decommissioning trust fund investments, and unfavorable weather conditions in ComEd and PECO service territories.
- Revenue Decrease: Operating revenues declined by $191 million, attributed to lower generation volumes, the expiration of wholesale contracts, and the Illinois Settlement. These were partially offset by higher realized market prices and increased transmission revenue.
- Segment Performance:
- Generation: Net income decreased by $48 million due to higher operating expenses (nuclear refueling outages) and decommissioning trust fund losses, partially offset by higher margins on energy sales.
- ComEd: Net income increased by $43 million, driven by higher transmission rates and a refund of Illinois distribution tax, despite unfavorable weather.
- PECO: Net income decreased by $69 million, primarily due to higher operating and maintenance expenses (allowance for uncollectible accounts) and increased competitive transition charge (CTC) amortization.
- Accounting Changes: The company adopted SFAS No. 159, electing the fair value option for nuclear decommissioning trust fund investments. This resulted in a cumulative effect adjustment increasing retained earnings by $160 million (net of tax) at the beginning of 2008.
Guidance, Outlook, and Risks
- Regulatory Outlook:
- ComEd: A final order on the 2007 delivery service rate case is expected by mid-September 2008. Administrative Law Judges recommended a $218 million rate increase, though a stipulation for a $20 million charge related to an Original Cost Audit remains pending. ComEd did not pay a dividend in the first half of 2008 to manage cash flows.
- PECO: A gas distribution rate case is pending, with results expected in Q4 2008. PECO faces potential legislative changes in Pennsylvania regarding rate caps expiring in 2010.
- Environmental and Legal Risks:
- Section 316(b) Clean Water Act: Uncertainty remains regarding compliance costs for cooling water intake structures. A Supreme Court decision is expected in 2009.
- CAIR Invalidation: The Clean Air Interstate Rule was vacated by a court in July 2008, creating uncertainty regarding future emissions regulations and the value of emission allowances.
- Tax Matters: The IRS has challenged Exelon's tax positions regarding the 1999 sale of fossil assets, with a potential cash outflow of up to $1.0 billion if the challenge is successful.
- Capital Projects: Generation is evaluating a new nuclear plant in Texas (up to $100 million committed) and a 600-MW natural gas plant in Pennsylvania. Accelerated decommissioning of the Zion Station is pending NRC approval.
Investor Verification Checklist
- Illinois Settlement Impact: Verify the final outcome of the ComEd 2007 rate case and the associated $20 million Original Cost Audit charge.
- Decommissioning Trust Funds: Monitor the volatility of the nuclear decommissioning trust fund investments, which are now marked-to-market and significantly impacted earnings in 2008.
- PECO Credit Quality: Review PECO's allowance for uncollectible accounts, which increased significantly due to billing system conversion issues and low-income program enrollments.
- Regulatory Tax Risks: Assess the status of the IRS audit regarding the 1999 fossil asset sale and the potential $1 billion liability.
- Dividend Policy: Confirm ComEd's dividend status for the remainder of 2008, as it suspended dividends in the first half to preserve liquidity.