EXC

Exelon Corporation 10-Q Summary: Quarter Ended March 31, 2003

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2003, for Exelon Corporation and its primary subsidiaries: Commonwealth Edison Company (ComEd), PECO Energy Company (PECO), and Exelon Generation Company, LLC (Generation). Exelon operates in three segments: Energy Delivery (regulated utilities), Generation (power production and marketing), and Enterprises (competitive energy services and infrastructure). The filing includes unaudited consolidated financial statements and management discussion.

Key Financial Metrics

Note: Debt figures include current and long-term debt obligations. Operating cash flow decreased significantly due to working capital changes.

Material Changes vs. Prior Period

• Accounting Changes (SFAS No. 143): The adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations," resulted in a cumulative effect income of $112 million in Q1 2003. This contrasts with Q1 2002, which included a $230 million charge related to the adoption of SFAS No. 142 (Goodwill). These accounting changes are the primary drivers of the reported Net Income increase.
• Operating Performance: Excluding accounting changes, Income Before Cumulative Effect increased $11 million (5%) to $249 million. This was driven by colder weather increasing demand, higher competitive transition charge recoveries, and reduced nuclear refueling outage costs.
• Segment Results:
  • Energy Delivery: Net income rose 53.5% to $330 million, aided by favorable weather and rate changes.
  • Generation: Net income fell 29.1% to $56 million. This decline was primarily due to a $200 million pre-tax impairment charge on the equity investment in Sithe Energies, Inc., and increased operating expenses from new plant acquisitions.
  • Enterprises: Net loss improved significantly from $271 million to $18 million, largely due to the absence of the prior year's goodwill impairment charge.
• Acquisitions: Generation acquired Sithe New England Holdings (Exelon New England) in November 2002, adding 4,066 MW of capacity, which impacted Q1 2003 operating costs and revenues.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items:
  • Sithe Impairment: A $200 million impairment charge was recorded for Generation's investment in Sithe due to a decline in fair value.
  • ComEd Regulatory Agreement: ComEd recorded a net one-time charge of $29 million related to a rate agreement with Illinois stakeholders, partially offset by the reversal of a reserve for potential capital disallowance.
• Outlook and Guidance: Management reaffirmed operating earnings guidance for 2003. Exelon expects Energy Delivery and Generation to continue providing reliable internal cash flows. Capital expenditures for 2003 are expected to be funded by internal cash flows, borrowings, and preferred securities issuances.
• Risks and Contingencies:
  • Regulatory: ComEd's rate agreement is subject to rehearing requests filed with the Illinois Commerce Commission (ICC). PECO faces market share threshold requirements that may force the transfer of up to 400,000 residential customers to alternative suppliers.
  • Legal: Ongoing litigation includes the Cotter Corporation environmental cases (recently remanded for retrial by the Tenth Circuit) and a securities class action lawsuit against Exelon. Generation is also involved in arbitration with Raytheon regarding construction delays.
  • Market Risk: Generation faces commodity price risk and credit risk, particularly regarding Dynegy (downgraded to below investment grade), though collateral has been received for receivables.

Investor Verification Checklist

• Accounting Impact: Verify the sustainability of earnings by excluding the $112 million SFAS No. 143 benefit and the $200 million Sithe impairment to assess core operational performance.
• Working Capital: Investigate the $305 million decrease in operating cash flow, driven by changes in working capital, to understand liquidity trends.
• Regulatory Status: Monitor the status of the ICC rehearing requests regarding ComEd's rate agreement and the potential revenue impact of the $65-$70 million annual reduction in Competitive Transition Charges (CTC).
• Debt Maturity: Review the $1.5 billion revolving credit facility usage and the maturity profile of the $15.4 billion total debt, noting the refinancing activities in Q1 2003.
• Legal Exposure: Track the retrial of the Cotter Corporation cases and the outcome of the Raytheon arbitration, as these could result in significant future liabilities.