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| EXC > SEC Filings for EXC > Form 10-Q on 23-Jul-2008 | All Recent SEC Filings |
23-Jul-2008
Quarterly Report
(Dollars in millions except per share data, unless otherwise noted)
General
Exelon is a utility services holding company. It operates through subsidiaries in the following operating segments:
• Generation, whose business consists of its owned and contracted electric generating facilities, its wholesale energy marketing operations and competitive retail sales operations.
• ComEd, whose business consists of the purchase and regulated retail sale of electricity and the provision of distribution and transmission services in northern Illinois, including the City of Chicago.
• PECO, whose business consists of the purchase and regulated retail sale of electricity and the provision of distribution and transmission services in southeastern Pennsylvania, including the City of Philadelphia, as well as the purchase and regulated retail sale of natural gas and the provision of distribution services in Pennsylvania in the counties surrounding the City of Philadelphia.
See Note 14 of the Combined Notes to Consolidated Financial Statements for segment information.
Exelon's corporate operations, some of which are performed through its business services subsidiary, Exelon Business Services Company, LLC (BSC), provide Exelon's business segments with a variety of support services at cost. The costs of these services are directly charged or allocated to the applicable business segments. Additionally, the results of Exelon's corporate operations include costs for corporate governance and interest costs and income from various investment and financing activities.
EXELON CORPORATION
Executive Overview
Financial Results. Exelon's net income was $748 million for the three months ended June 30, 2008 as compared to $702 million for the three months ended June 30, 2007 and diluted earnings per average common share were $1.13 for the three months ended June 30, 2008 as compared to $1.03 for the three months ended June 30, 2007.
Exelon's net income was $1,329 million for the six months ended June 30, 2008 as compared to $1,393 million for the six months ended June 30, 2007 and diluted earnings per average common share were $2.01 for the six months ended June 30, 2008 as compared to $2.05 for the six months ended June 30, 2007.
The increase for the three months ended June 30, 2008 was primarily due to the following:
• higher realized prices on Generation's market sales;
• net mark-to-market gains on economic hedging activities;
• increased revenue from certain long options in Generation's proprietary trading portfolio;
• increased nuclear output at Generation reflecting lower refueling and non-refueling outage days;
• a gain related to the settlement of a claim related to a uranium supply agreement;
• increased transmission revenue as a result of ComEd's 2007 transmission rate case, which became effective in May 2007 as a result of the impact of the Federal Energy Regulatory Commission (FERC)-approved formula rate; and
• a favorable income tax benefit associated with Exelon's method of capitalizing overhead costs.
The factors driving the overall increase in net income for the three months ended June 30, 2008 were partially offset by the following:
• the impact of the Illinois Settlement agreement reached in 2007 (Illinois Settlement). See Note 4 of the Combined Notes to Consolidated Financial Statements for further information;
• income associated with Exelon's investments in synthetic fuel-producing facilities, including the impact of mark-to-market gains (losses) associated with the related derivatives in 2007;
• increased allowance for uncollectible accounts expense at PECO;
• increased depreciation and amortization expense, primarily related to competitive transition charge (CTC) amortization at PECO;
• unfavorable weather conditions in the ComEd service territory;
• unrealized losses associated with Generation's nuclear decommissioning trust fund investments;
• nuclear site development costs for the evaluation and development of a new nuclear generating facility in Texas; and
• higher other operating and maintenance expenses, including wage-related inflation and higher storm costs at ComEd.
The decrease for the six months ended June 30, 2008 was primarily due to the following:
• the impact of the Illinois Settlement reached in 2007. See Note 4 of the Combined Notes to Consolidated Financial Statements for further information;
• unrealized losses associated with Generation's nuclear decommissioning trust fund investments;
• realized losses associated with Generation's nuclear decommissioning trust fund investments due to the execution of a tax-planning strategy;
• income associated with Exelon's investments in synthetic fuel-producing facilities, including the impact of mark-to-market gains (losses) associated with the related derivatives in 2007;
• decreased nuclear output at Generation reflecting increased refueling and non-refueling outage days;
• increased nuclear refueling outage costs;
• increased depreciation and amortization expense, primarily related to competitive transition charge (CTC) amortization at PECO;
• increased allowance for uncollectible accounts expense at PECO;
• higher other operating and maintenance expenses, including wage-related inflation and higher storm costs at ComEd;
• the impact of a favorable PJM Interconnection, LLC (PJM) billing settlement with PPL Electric (PPL) in 2007;
• unfavorable weather conditions in the ComEd service territory;
• nuclear site development costs for the evaluation and development of a new nuclear generating facility in Texas; and
• favorable settlement of a tax matter at Generation related to Sithe Energies, Inc. (Sithe) in 2007.
The factors driving the overall decrease in net income for the six months ended June 30, 2008 were partially offset by the following:
• higher realized prices on Generation's market;
• net mark-to-market gains on economic hedging activities;
• increased nuclear output at Generation reflecting lower refueling and non-refueling outage days;
• gains related to the settlement of claims related to uranium supply agreements;
• increased transmission revenue as a result of ComEd's 2007 transmission rate case, which became effective in May 2007 as a result of the impact of the Federal Energy Regulatory Commission (FERC)-approved formula rate;
• a favorable income tax benefit associated with Exelon's method of capitalizing overhead costs;
• increased energy delivery volume excluding the impact of weather;
• the one-day impact of lower revenues for January 1, 2007 due to the end of the rate freeze and implementation of the rate increase in Illinois effective January 2, 2007; and
• decreased stock-based compensation expenses.
Financing Activities. The Registrants' liquidity is a function of their ability to successfully generate cash flows, obtain access to capital markets, and obtain funding from their credit facilities. The Registrants are committed to maintaining strong cash flows that support a strong investment grade credit rating, which should provide access to capital markets to make investments to grow the business.
During the six months ended June 30, 2008, Exelon met its capital resource requirements primarily with internally generated cash as well as funds from external sources, including the capital markets and through bank borrowings. During the six months ended June 30, 2008, ComEd and PECO issued $1.3 billion and $650 million, respectively, and retired $893 million and $865 million, respectively, of long-term debt.
On February 26, 2008, Exelon entered into an agreement with an investment bank to repurchase a total of $500 million of Exelon's common shares under an accelerated share repurchase program. See Note 11 of the Combined Notes to Consolidated Financial Statements for further information.
Regulatory and Environmental Developments. The following significant regulatory and environmental developments occurred during the three and six months ended June 30, 2008. See Notes 4 and 12 of the Combined Notes to Consolidated Financial Statements for further information.
• Delivery Service Rate Case - On October 17, 2007, ComEd filed a request with the ICC seeking approval to increase its delivery service rates to reflect its continued investment in delivery service assets since rates were last determined. If approved by the ICC, the total proposed increase of approximately $360 million in the net annual revenue requirement, which was based on a 2006 test year and capital additions projected through the third quarter of 2008, would increase an average residential customer bill by approximately 7%. ICC proceedings relating to the proposed delivery service rates and related riders will take place over a period of up to eleven months. The ICC staff's testimony and briefs indicated that ComEd's rate increase after agreeing to the stipulation described below should be approximately $262 million on an annual basis. Various interveners and the ICC staff have suggested positions in the rate case which, if approved by the ICC, could lead to write-offs which could be material to ComEd's results of operations. ComEd cannot predict how much of the requested delivery service rate increase the ICC may approve, if any, when any rate increase may go into effect, or whether any rate increase that may eventually be approved will be sufficient for ComEd to adequately recover its costs when the increase goes into effect.
On April 10, 2008, ComEd and the ICC staff reached a stipulation covering portions of contested issues in the delivery service rate case as well as the Original Cost Audit (see Note 4 of the Combined Notes to Consolidated Financial Statements for details). The stipulation, which is conditioned upon approval by the ICC, would require ComEd to incur a charge of approximately $20 million (pre-tax) related to various items
identified in the Original Cost Audit. Under the terms of the stipulation, ComEd and the ICC have agreed to reflect the capital additions for 2007 and the first two quarters of 2008 in ComEd's rate base; however, the third quarter 2008 capital additions have been excluded. If the ICC does not approve the stipulation in its entirety, ComEd believes it has appropriately included third quarter 2008 capital additions in rate base in this proceeding. The stipulation does not preclude other parties to the rate case or to any future Original Cost Audit proceeding to take positions contrary to the stipulation. On April 21, 2008, ComEd filed its surrebuttal testimony, which included a $345 million revenue increase reflecting certain adjustments. ComEd's testimony also included informational data that reflected a $314 million increase reflecting the impacts of the stipulation and certain other reductions. If approved by the ICC, ComEd anticipates it would incur the $20 million (pre-tax) charge during the third quarter of 2008. A final ICC order must be issued by mid-September 2008, at which time any rate increase would become effective.
On July 10, 2008, the Administrative Law Judges (ALJs) issued a recommendation to the ICC for a $218 million rate increase. The proposed order does not approve the stipulation and recommends the issues in the Original Cost Audit should be addressed on their own merits in its own proceedings. The proposed order, if approved by the ICC, would also require ComEd to write off approximately $18 million (pre-tax) for various disallowances, which would be partially offset by the establishment of regulatory assets associated with previously incurred costs amounting to approximately $13 million (pre-tax). The proposed write-off is exclusive of the write-off discussed in the stipulation. The proposed order rejects the storm rider, while providing limited support for the system modernization rider.
A final ICC order must be issued by mid-September 2008, at which time any rate increase would become effective. The ICC may still approve the stipulation. If approved by the ICC, ComEd anticipates it would incur the $20 million charge associated with the stipulation during the third quarter of 2008. The ICC could also approve the $18 million (pre-tax) disallowance proposed by the ALJs in addition to or instead of the disallowance in the stipulation. As of June 30, 2008, ComEd has not recorded any disallowances or write-ups as a result of the stipulation on the proposed order. Any adjustments would take place at the time of the final ICC order.
The Original Cost Audit proceeding is expected to begin after the final ICC order in the distribution rate case. Note 4 of the Combined Notes to Consolidated Financial Statements for further information.
• Transmission Rate Case - On March 1, 2007, ComEd filed a request with FERC, seeking approval to update its transmission rates and change the manner in which such rates are determined from fixed rates to a formula rate. ComEd also requested incentive rate treatment for certain transmission projects. The settlement agreement is a comprehensive resolution of all issues in the proceeding, other than ComEd's pending request for rehearing on incentive returns on new investment. The settlement agreement resulted in an annual transmission network service revenue requirement increase of approximately $93 million. FERC approved the settlement on January 16, 2008. On January 18, 2008, FERC issued an order on rehearing that allowed a 1.5% adder to return on equity for ComEd's largest transmission project and authorized the inclusion of 100% of construction work in progress in rate base for that project but rejected incentive treatment for any other project ComEd has pending. On February 19, 2008, several parties filed a petition for rehearing of FERC's January 18 order. FERC has not yet ruled on this request.
On May 15, 2008 ComEd filed its first annual update filing, which updates ComEd's formula rate to include actual 2007 expenses and capital additions plus forecasted 2008 capital additions. The update resulted in a revenue requirement of $456 million, which includes $26 million related to the 2007 true-up for a total increase of approximately $66 million. The new rate will be used by PJM to determine charges for services in the ComEd zone for June 1, 2008 through May 31, 2009. The filing will be reviewed by FERC and intervenors, who have until December 2008 to challenge the calculation of the new rate. ComEd has been reflecting its best estimate of its anticipated approved true-up in the financial statements.
• Gas Distribution Rate Case - On March 31, 2008, PECO filed a petition before the Pennsylvania Public Utility Commission (PAPUC) for a $98 million increase to its delivery service revenue to fund critical infrastructure improvement projects that will ensure the safety and reliability of the natural gas delivery
• PECO AEPS Filing - On December 20, 2007, the PAPUC approved PECO's request to acquire and bank up to 450,000 non-solar Tier I Alternative Energy Credits (equivalent to up to 240 MWs of electricity generated by wind) annually for a five-year term in order to prepare for 2011, the first year of PECO's required compliance under the Alternative Energy Portfolio Standards Act (AEPS Act) following the completion of its transition period. Bids were received on March 13, 2008. On March 14, 2008, PECO's third-party monitor report was submitted to the PAPUC for approval. The PAPUC issued a letter on March 19, 2008, stating that while PECO had conducted the request for proposal (RFP) in accordance with the PAPUC approved process, the PAPUC required additional information. On March 21, 2008, the PAPUC rejected the bids PECO received for Alternative Energy Credits (AECs). The bidders sought reconsideration on April 7, 2008. At its public meeting on June 24, 2008, the PAPUC granted the petition for reconsideration by one of the bidders and authorized acceptance of the bid. PECO is planning to issue a second RFP later in 2008.
Outlook for 2008 and Beyond.
Exelon's future financial results will be affected by a number of factors, including the following:
• The legislation reflecting the agreement that ComEd and other generators and utilities in Illinois reached with various representatives from the State of Illinois (Illinois Settlement Legislation) is expected to provide ComEd with greater stability and certainty that it will be able to procure electricity and pass through the costs of that electricity to its customers with less risk that rate freeze or other harmful legislation will be pursued in the near term. The Illinois Settlement Legislation established a new competitive procurement model to be developed by the IPA, by which ComEd will procure its energy supply. ComEd has stabilized a portion of its costs of procurement pursuant to a five-year financial swap contract with Generation. ComEd will be allowed to fully recover the costs of procuring energy, capacity and ancillary services, including the impacts of the financial swap contract, in its rates. In the event that legislation is enacted in the Illinois General Assembly prior to August 1, 2011 that freezes or reduces electric rates or imposes a generation tax, the Illinois Settlement Legislation permits ComEd and Generation, as contributors to certain rate relief programs, to terminate their funding commitments to such programs.
• PECO is subject to caps on its generation rates through December 31, 2010. PECO's electric transmission and distribution rates will continue in effect until PECO files a rate case or there is some other specific regulatory action to adjust the rates. There are no current proceedings to do so. PECO is or will be involved in proceedings involving annual changes in its electric and gas universal service fund cost charges, its electric CTC/intangible transition charge reconciliation mechanism, its purchased gas cost rate, its every five-year nuclear decommissioning cost adjustment clause mechanism and its State Tax Adjustment Surcharge (STAS), all of which relate to PECO's recovery of the applicable costs. In Pennsylvania and other states where retail electric generation rate cap transition periods have ended or are approaching expiration, there is growing pressure from state regulators and elected officials to mitigate the potential impact of electricity price increases on retail customers. Such transition periods have ended for six Pennsylvania electric distribution companies and, in some instances, post-transition electricity price increases occurred. In response to concerns about post-transition rate increases in Pennsylvania, several measures have been either proposed or contemplated by various stakeholders. Other measures
On July 9, 2008 the Pennsylvania Legislature passed and the Governor signed legislation providing a $650 million fund to support investment in renewable power resources and conservation. The fund will be appropriated from Pennsylvania's General Fund. Other elements of the proposed comprehensive energy plan, including power procurement, rate-increase mitigation, and implementation of conservation and demand-side programs and smart-meter technology, were put off for further consideration when the Legislature reconvenes in its Fall session. Other measures suggested by elected officials in Pennsylvania include an extension of the electric rate cap period, a generation tax and contributions of value (potentially billions of dollars) by Pennsylvania utility companies toward rate relief initiatives or programs. PECO cannot predict what measures, if any, will be introduced in the state legislature or become law in Pennsylvania, nor the disposition of measures in the Pennsylvania Governor's Energy Independence Strategy. However, any legislation that requires PECO to sell electricity, beginning in 2011, at prices that are below PECO's cost to procure and deliver electricity to customers or other legislation that would freeze rates or extend the rate cap beyond 2010 could have a material adverse impact on Exelon's and PECO's results of operations, cash flows and financial positions.
• The final default service regulations became effective in Pennsylvania on September 15, 2007. The regulations allow for competitive procurement by distribution companies through auctions or RFPs, with full cost recovery and no retrospective prudence review. According to the policy statement, the PAPUC expects companies to procure power, on a customer-class basis, using contracts of varying expiration dates, and prefers contracts with a duration of one year or less, except for contracts for compliance with the AEPS Act. The PAPUC also expects companies to reconcile costs and adjust rates at least quarterly for most customers, but hourly or monthly for larger energy users. The PAPUC believes this combination will stimulate competition, send market-price signals and avoid price spikes following long periods of fixed, capped rates. The PAPUC also ordered the elimination of (1) declining-block rates, while allowing rates to be phased out if the resulting rate increase is greater than 25%; and (2) demand charges for large customers, while entertaining requests to retain those charges on a case-by-case basis. Electric distribution companies, such as PECO, will be required to make their implementation filings a minimum of 12 months prior to the end of the generation rate cap period, which, as described above, expires December 31, 2010 for PECO.
• Current market prices for energy have increased significantly over the past few years due to the rise in natural gas and other fuel prices. As a result, PECO customers' generation rates are below current wholesale energy market prices in PJM, and Generation's margins on sales in excess of PECO's requirements have improved historically. Generation's ability to achieve those margins following the expiration of its PPA with PECO in 2010 will partially depend on future wholesale energy market prices.
• Generation is exposed to commodity price risk. Generation has hedges in place that significantly mitigate this risk for 2008 and 2009. However, Generation is exposed to relatively greater commodity price risk in the subsequent years for which a larger portion of its electricity portfolio may be unhedged. Generation has been and will continue to be proactive in using hedging strategies to mitigate this risk in subsequent years as well.
• Generation procures coal through annual, short-term and spot-market purchases and natural gas through annual, monthly and spot-market purchases. Nuclear fuel assemblies are obtained through long-term contracts for uranium concentrates, and long-term contracts for conversion services, enrichment services and fuel fabrication services. The supply markets for coal, natural gas, uranium concentrates and certain nuclear fuel services are subject to price fluctuations and availability restrictions. Supply market conditions may make Generation's procurement contracts subject to credit risk related to the potential non-performance of counterparties to deliver the contracted commodity or service at the contracted prices. Generation currently procures uranium concentrates through long-term contracts, and three
• Generation pursues growth opportunities that are consistent with its disciplined approach to investing to maximize shareholder value, taking results of operations, cash flow and financial risk into account. On September 29, 2006, Generation notified the NRC that Generation will begin the application process for a combined Construction and Operating License (COL) that would allow for the possible construction of a new nuclear plant in Texas. The filing of the letter with the NRC launched a process that preserves for Exelon and Generation the option to develop a new nuclear plant in Texas without immediately committing to the full project. In order to continue preserving and assessing this option, Exelon and Generation have approved expenditures on the project of up to $100 million, which includes fees and costs related to the COL, reservation payments and other costs for long-lead components of the project, and other site evaluation and development costs. Amounts spent on the project to date have been expensed. The development phase of the project is expected to extend into 2009, with approval of funding beyond the $100 million commitment subject to management review and board approval. Generation has not made a decision to build a new nuclear plant at this time. Among the various conditions that must be resolved before any formal decision to build is made are a workable solution to spent nuclear fuel disposal, broad public acceptance of a new nuclear plant and assurances that a new plant using the new technology can be financially successful, which would entail economic analysis that would incorporate assessing construction and financing costs, production and other potential tax credits, and other key economic factors. Generation expects to submit the COL application to the NRC in 2008.
• On May 1, 2008, Generation announced that it is actively pursuing the development of a 600-megawatt combined-cycle natural gas power plant in Pennsylvania. The new plant would advance Exelon's efforts to combat carbon emissions associated with electricity generation. Generation has been looking at several existing plant sites that it owns with access to the transmission lines, water and fuel needed to operate a new power plant. Generation has stated that a final decision on whether to move forward would be made only after it had more certainty around the environmental permitting process and had performed a more detailed economic review of building a new plant. Generation estimates that the earliest a plant could be operational is 2012. Amounts spent on the project to date, which are not . . .
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