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| EXC > SEC Filings for EXC > Form 10-K on 6-Feb-2009 | All Recent SEC Filings |
6-Feb-2009
Annual Report
Exelon
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 supply 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 transmission and distribution 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 the Pennsylvania counties surrounding the City of Philadelphia.
See Note 20 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 $2,737 million in 2008 as compared to $2,736 million in 2007 and diluted earnings per average common share were $4.13 for 2008 as compared to $4.05 for 2007.
The following factors contributed to an increase in net income:
• higher average realized margins at Generation;
• net mark-to-market gains on economic hedging activities;
• increased transmission and delivery service revenue at ComEd in 2008 resulting from the 2007 transmission and distribution rate cases;
• the impact of the decreased charges in 2008 associated with the 2007 Illinois Settlement; and
• a 2007 loss associated with Generation's tolling agreement with Georgia Power related to the contract with Tenaska
Offsetting these factors above are the following decreases in net income:
• net unrealized and realized losses on Generation's nuclear decommissioning trust funds related to the former AmerGen nuclear generating units and the unregulated portions of the Peach Bottom nuclear generating units (Unregulated Units);
• income associated with investments in synthetic fuel-producing facilities in 2007; and
• the impact of the termination of Generation's PPA with State Line in 2007.
See Exelon Corporation-Results of Operations for further information regarding the changes in net income.
Economic Environment. As the economic environment has worsened, the Registrants have performed additional assessments to determine the impact, if any, of recent market developments, including the bankruptcy, restructuring or merging of certain financial and energy companies, on the Registrants' financial statements. The Registrants' additional assessments have included a review of macroeconomic conditions, access to liquidity in the capital and credit markets, counterparty creditworthiness, value of the Registrants' investments (particularly in the employee benefit plans and nuclear decommissioning trust funds) and exposure to other risks. The recent unprecedented volatility in the economy may create additional risks in the upcoming months and possibly years.
• Macroeconomic conditions
U.S. and global economic conditions worsened significantly in the last quarter of 2008. The stress caused to international credit markets, initially driven in large part by the devaluation of risky U.S. subprime debt, led to a dramatic tightening in liquidity. The U.S. government has responded with several initiatives to alleviate the strain on the financial markets. While these programs have had some positive effects on financial systems, credit remains tight and economic conditions in the U.S. and globally have continued to deteriorate.
The slowdown, initially led by housing declines in specific regional markets, has spread to encompass almost the entire U.S. economy. Both industrial production and consumer spending have fallen sharply in the last half of 2008, while the U.S. unemployment rate has increased. As a result of the decline in economic output, energy demand in ComEd's and PECO's service territories is lower, which has led to reduced sales to industrial, commercial and residential customers. Lower demand for electricity may also lead to lower margins for Exelon's wholesale fleet, although this effect will be mitigated in the short term by Exelon's hedging policies. In addition, customers may not be able to pay, or may delay payment of their utility bills. Management has taken steps to mitigate this risk through heightened collection efforts.
In addition, the world slowdown in economic activity has reduced demand for oil, coal and natural gas, and has led to sharply falling commodity prices. By the end of 2008, Eastern coal, oil and gas were trading at less than half of their prices at the summer peak. As a result, wholesale electricity prices in the U.S. have fallen. Due to Exelon's hedging policies, as described in ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk, it has had limited exposure to lower power prices in the short term; however, prolonged lower commodity prices would adversely impact Exelon's results of operations in the future.
• Liquidity in the capital and credit markets
The Registrants believe they have sufficient liquidity despite the disruption of the capital and credit markets. The Registrants fund liquidity needs for capital investment, working capital, energy hedging and other financial commitments through cash flow from continuing operations, public debt offerings, commercial paper markets and large, diversified credit facilities ($7.3 billion in aggregate total commitments with $6.9 billion available as of December 31, 2008, of which no financial institution, assuming announced consolidations, has more than 10% of the aggregate commitments for Exelon, Generation and PECO and 12% for ComEd). Generation and ComEd also have additional letter of
While not significant to the Registrants to date, the disruptions in capital and credit markets may result in increased borrowing costs associated with short-term and long-term debt. The Registrants accelerated a number of bond issuances in 2008 in order to limit the risk of volatility in the credit markets and to enhance liquidity. As more fully discussed in "Liquidity and Capital Resources", the Registrants completed all their long-term financings planned for 2008. With the exception of debt to unconsolidated financing affiliates, the Registrants have $29 million of debt maturing in 2009 ($12 million and $17 million at Generation and ComEd, respectively) and $613 million of debt maturing in 2010 ($400 million and $213 million at Exelon Corporate and ComEd, respectively). The debt to unconsolidated financing affiliates at PECO is repaid through the collection of competitive transition charges from customers as allowed by restructuring legislation that was adopted in Pennsylvania in 1996.
The Registrants routinely review liquidity sufficiency, including appropriate sizing of credit facility commitments, by performing various stress test scenarios, such as commodity price movements and the impacts of hypothetical credit downgrades. Management continues to closely monitor events and the financial institutions associated with its credit facilities, including monitoring credit ratings and outlooks, credit default swap levels, capital raising and merger activity. See PART I. ITEM 1A. Risk Factors for information regarding the effects of a longer-term disruption in the capital and credit markets or significant bank failures.
• Counterparty creditworthiness
The Registrants are subject to credit risk, which relates to the ability of counterparties to meet their contractual payment obligations or the potential non-performance of counterparties to deliver contracted commodities or services at the contracted price. Generation's power-marketing activities are governed by risk management policies limiting transactions to a diversified group of high quality counterparties. During 2008, the bankruptcy of Lehman Brothers Holdings Inc. and the weakening of companies within the energy industry have underscored the importance of these risk management practices. Although Generation's credit exposure was predominately with investment grade companies at December 31, 2008, changes in forward market prices could have a disproportionate impact to the percentage of credit exposure with non-investment grade companies. As of December 31, 2008, the net exposure after credit collateral for Generation's commodity contracts of $1,143 million included $1,119 million of exposure to investment-grade companies and $24 million of exposure to non-investment grade companies, primarily in the coal supply industry. As a result of management's review of Generation's counterparties, the direct net exposure of $22 million to Lehman Brothers Commodity Services Inc., a counterparty in wholesale energy marketing transactions, was fully reserved and charged to expense in the third quarter of 2008. As further discussed below, Generation also currently procures uranium concentrates through long-term contracts. Approximately 60% of the requirements from 2009 through 2013 are supplied by three producers. In the event of non-performance by these or other suppliers, Generation believes that replacement uranium concentrates can be obtained, although at prices that may be unfavorable when compared to the prices under the current supply agreements. Management continues to closely monitor the status of Generation's counterparties and will take action, as appropriate, to further manage its counterparty credit risk.
Under the Illinois Settlement Legislation, ComEd procures power through supplier forward contracts, standard block energy purchases, and spot market purchases. Collateral postings are required only of suppliers for the supplier forward contracts that ComEd entered into with winning
PECO has counterparty credit risk related to its electricity and natural gas suppliers. Generation provides 100% of PECO's electric energy under a purchase power agreement (PPA). There are no collateral posting provisions included in PECO's electric supply agreement with Generation. PECO procures natural gas from suppliers under both short-term and long-term contracts. The potential failure of natural gas suppliers to perform is mitigated by PECO's ability to seek recovery of its actual costs to procure natural gas through the PAPUC's purchased gas cost clause, subject to PAPUC review. A further discussion of counterparty risk is included in ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
• Value of investments (particularly in employee benefit plan trusts and nuclear decommissioning trust funds)
Exelon sponsors defined benefit pension plans and postretirement benefit plans for the employees of the Registrants. The Registrants believe that the oversight of the investments held under Exelon's employee benefit plans is rigorous and that the investment strategies are prudent. The market value of the investments within the employee benefit plan trusts declined by approximately 26% during the year ended December 31, 2008. The benefit plan assets and obligations of Exelon and AmerGen are remeasured annually using a December 31 measurement date. Reductions in plan assets from investment losses during 2008 was a significant driver contributing to an increase of approximately $3.9 billion to the plans' unfunded status upon actuarial revaluation of the plan on December 31, 2008. Changes in the value of plan assets did not have an impact on the income statement for 2008; however, the change in value resulted in an after-tax reduction of shareholders' equity of approximately $1.5 billion. Reduced benefit plan assets are expected to result in increased benefit costs and required funding contributions in future years. Such increases could be material to 2009 and subsequent years. Exelon estimates that pension and other postretirement benefits expense will total approximately $425 million in 2009 as compared to approximately $240 million in 2008. See Critical Accounting Policies for additional information regarding the potential impacts of declines in the return on benefit plan assets that is less than assumed and Liquidity and Capital Resources for information regarding future funding requirements.
Nuclear decommissioning trust funds have been established on a unit-by-unit basis to satisfy Generation's nuclear decommissioning obligations. Currently, Generation is making contributions only to the trust funds of the former PECO units based on amounts being collected by PECO from its customers and remitted to Generation. While Generation has recourse to collect additional amounts from PECO customers (subject to certain limitations and thresholds) with respect to the former PECO units, it has no recourse to collect additional amounts from ComEd customers for the former ComEd units or from the previous owners of the AmerGen plants, if there is a shortfall of funds necessary for decommissioning. Generation believes that its oversight of these trust funds is rigorous and the investment strategy is prudent. At December 31, 2008, approximately 39% of the funds were invested in equity and 61% were invested in fixed income securities, with limitations related to concentration and investment grade ratings. See Note 12 of the Combined Notes to Consolidated Financial Statements for the amounts of unrealized losses on the trust funds during the year ended December 31, 2008.
Based on a regulatory agreement with the ICC that applies to the former ComEd nuclear generating units on a unit-by-unit basis, as long as funds held in the nuclear decommissioning trust funds exceed the total estimated decommissioning obligation, decommissioning impacts recognized in the Consolidated Statement of Operations, including realized and unrealized income and losses of the trust funds and accretion of the decommissioning obligation, are generally offset within Exelon's and Generation's Consolidated Statements of Operations. Should the trust funds for the former ComEd units continue to experience declines in market value such that the value of the trust funds for any unit falls below the amount of the estimated decommissioning obligation for that unit, the accounting to offset decommissioning impacts in the Consolidated Statement of Operations for that unit would be discontinued, the decommissioning impacts would be recognized in the Consolidated Statements of Operations and the adverse impact to Exelon's and Generation's results of operations and financial positions could be material. At December 31, 2008, the trust fund investment values for each of the former ComEd units exceeded the related decommissioning obligation for each of the units. See Note 12 of the Combined Notes to Consolidated Financial Statements for additional information regarding the accounting for the former ComEd nuclear generating units as a result of the ICC order.
The Registrants engage in a securities lending program with respect to the investments within their employee benefit plan trusts and nuclear decommissioning trust funds. In connection with this program, the securities loaned are supported by collateral posted by the borrowers, which the Registrants invest in a short-term collateral fund or in assets with maturities matching, or approximating, the duration of the loan of the related securities. The Registrants bear the risk of loss with respect to their invested cash collateral. Such losses may result from a decline in fair value of specific investments or due to liquidity impairments resulting from current market conditions. Losses recognized by the Registrants have not been significant to date. Exelon has invested collateral of $660 million as of December 31, 2008. Management continues to monitor the performance of the invested collateral and to work closely with the trustees to limit any potential further losses. In the fourth quarter of 2008, the Registrants decided to end their participation in the securities lending program and have chosen to initiate a gradual withdrawal of their participation in the securities lending program in order to avoid potential losses on invested cash collateral due to the lack of liquidity in the market. Currently, the weighted average maturity of the securities within the collateral pools is approximately 7.5 months. Exelon's withdrawal from the securities lending program based on the maturities of securities within the collateral pools is expected to result in the return of approximately 70% of its loaned securities (in terms of value) by the end of 2009, 94% by the end of 2010 and the return of the remaining securities by the end of 2011.
In the fourth quarter of 2008, ComEd assessed its goodwill for impairment and the analysis indicated that there was no impairment. However, the recent economic downturn and the capital and credit market crisis have impacted the market-related assumptions, resulting in a significant decrease in the estimated fair value of ComEd since the November 1, 2007 assessment. Further declines could result in an impairment and such a charge could be material. See Note 7 of the Combined Notes to Consolidated Financial Statements for information regarding the goodwill impairment analysis.
Generation regularly evaluates the economic viability of its generating plants. Generation's plants continue to be economically viable, and Generation's review indicated there was no impairment as of December 31, 2008 under a held and used model. See Outlook for 2009 and Beyond - Proposal for acquisition of NRG for discussion of Generation's evaluation of its Texas generating plants for impairment in connection with the potential divestiture of these plants as a result of Exelon's proposed acquisition of NRG.
• Other risks
The Registrants have reviewed their exposure to insurance risk and have concluded that there have been no material changes related to the availability and cost of liability, property, nuclear risk, and other forms of insurance. Management continues to monitor closely events and the ratings for insurance companies associated with its insurance programs. Further declines in the market may have a significant adverse impact on the availability and cost of insurance.
Regulatory and Environmental Developments. The following significant regulatory and environmental developments occurred during 2008. See Notes 3 and 18 of the Combined Notes to Consolidated Financial Statements for additional information.
Exelon
• Exelon surpassed its U.S. EPA Voluntary Climate Leaders goal announced on May 5, 2005 to reduce its GHG emissions by 8% from 2001 levels by the end of 2008. The GHG management efforts undertaken in support of the goal, including the previous closure of older, inefficient fossil power plants, reduced leakage of SF6, increased use of renewable energy and its current energy efficiency initiatives, yielded greater than expected reductions. Exelon is in the process of having its GHG reductions verified by a third party and endorsed by U.S. EPA. While Exelon met its goal, on July 15, 2008, Exelon announced a new longer-term comprehensive environmental plan, Exelon 2020.
ComEd
• Delivery Service Rate Case-On September 10, 2008, the ICC issued its final order in ComEd's rate case proceeding that was initiated in October 2007. The order approved an increase in the annual revenue requirement of $274 million, which became effective on September 16, 2008.
• Transmission Rate Case-On January 16, 2008, FERC approved an annual transmission network service revenue requirement for ComEd of approximately $390 million, effective May 1, 2007. The revenue requirement represented an increase of approximately $93 million and was based on a newly approved formula rate model.
On May 15, 2008, ComEd filed its first annual formula 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 $430 million, plus an additional $26 million related to the 2007 true-up of actual costs for a total increase of approximately $66 million, which became effective for the period June 1, 2008 through May 31, 2009.
• Gas Distribution Rate Case-During 2008, PECO filed a petition before the PAPUC for a $98 million rate increase. On October 23, 2008, the PAPUC approved a settlement of a distribution rate increase that provides for an annual revenue increase of $77 million. The approved distribution rate adjustment became effective on January 1, 2009.
• PECO AEPS Filing-In August 2008, PECO entered into a five-year agreement with an accepted bidder to purchase AECs from the March 2008 RFP. PECO launched its second RFP in November 2008 and anticipates entering into fixed-price, five-year agreements by March 2009, with purchases beginning no later than December 31, 2009.
• PECO Default Service Filing-On November 14, 2008, PECO amended its comprehensive Default Service Program and Rate Mitigation Plan with the PAPUC relating to its plan to provide default electric service following the expiration of rate caps on December 31, 2010. The purpose of the amendment was to address the requirements of Act 129 of 2008 (Act 129), which was signed into law in October 2008. PECO has withdrawn its Energy Efficiency Package and will revise its energy efficiency programs consistent with the new requirements of Act 129. The PAPUC will conduct a formal proceeding to give all interested parties the opportunity to examine aspects of the amended filing and make independent recommendations. The process is expected to be completed by July 2009.
Outlook for 2009 and Beyond.
Several significant events may occur during the rest of 2009 and beyond, including the following:
Proposal for acquisition of NRG
• On October 19, 2008, with authorization from Exelon's Board of Directors, Exelon submitted a proposal to NRG to enter into a business combination with NRG under which Exelon would exchange 0.485 of a share of Exelon common stock for each share of NRG common stock. On November 12, 2008, Exelon announced an exchange offer in which Exelon, through its wholly owned subsidiary Exelon Xchange, offered to acquire all of the outstanding NRG common stock in exchange for 0.485 of a share of Exelon common stock plus cash in lieu of fractional shares, representing a total equity value of approximately $6.2 billion for NRG based on Exelon's closing price on October 17, 2008. On January 7, 2009, Exelon announced that the initial expiration of the offer on January 6, 2009, NRG shareholders had tendered approximately 106 million shares of common stock of NRG, representing just over 45.6% of all outstanding shares of NRG common stock, and Exelon was extending the expiration date of the exchange offer until 5:00 PM New York City Time on February 25, 2009 unless further extended. Exelon is taking steps to obtain the regulatory approvals required for the proposed acquisition of NRG. NRG rejected Exelon's initial offer and remains opposed to Exelon's exchange offer. See PART I ITEM 1. Business for further information.
As part of its FERC filing related to the NRG offer to address potential market power concerns, Exelon proposed to divest its three facilities in Texas - Mountain Creek, Handley and LaPorte - totaling approximately 2,400 MW of capacity. The plans also include transferring to a third party Exelon's power purchase agreements in Texas totaling approximately 1,200 MW of capacity. In addition, the combined company would divest approximately 1,000 MW of capacity in the PJM East market, including plants currently owned by NRG. Exelon does not believe there are any other generation overlap issues related to the proposed combination.
In connection with the decline in current market conditions and the potential divestiture of the Texas plants proposed in its December 2008 FERC filing, Generation evaluated its Texas plants for potential impairment as of December 31, 2008 pursuant to SFAS No. 144. The impairment evaluation was performed to assess whether the carrying values of the plants were
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