What did the Unicom merger mean for Exelon's shareholders and balance sheet?

The merger closed October 20, 2000. Unicom shareholders received 0.875 Exelon shares plus $3.00 cash per share, and PECO's shares converted one-for-one into Exelon. Because it was accounted for as a purchase, ComEd's assets were revalued, producing about $4.8 billion of goodwill and different cost bases before and after the merger date, which makes year-over-year comparisons difficult.

Is PECO's earnings decline a sign of weakness?

Mostly not. PECO's net income on common stock fell to $497 million from $570 million, but the decline is largely explained by $248 million of pre-tax merger costs and a $24 million accounting-change benefit. Operating income fell about 11%, partly from higher depreciation on transition-cost amortization and higher interest expense on transition bonds.

What are the main regulatory risks for Exelon's utilities?

ComEd's residential customers can choose alternative suppliers starting May 2002, and Illinois rate freezes run through January 2005 with a 5% residential reduction in October 2001. PECO's generation rates are capped through 2010, and its distribution rates through 2006, with $200 million of rate reductions from 2002 to 2005 under the merger settlement.

How exposed is Exelon to nuclear risk after the restructuring?

Generation holds about 13.9 GW of owned nuclear capacity and 50% of AmerGen's 2.4 GW. Nuclear operations carry Price-Anderson liability of $9.5 billion per incident, with only $200 million of commercial insurance, and decommissioning estimates total roughly $6.9 billion for Generation. The restructuring moved these risks from PECO and ComEd to Generation, so the utilities' prospective exposure is reduced, but Generation's exposure is substantial.

Will Exelon pay a dividend?

Exelon paid no cash dividends in 2000. Its Board announced an intention to declare annual dividends of $1.69 per share for 2001, subject to quarterly Board approval. Dividends at the subsidiary level are limited by PUHCA to retained earnings, with ComEd and PECO reporting retained earnings of $133 million and $197 million at year-end 2000.

EXC 10-K FY2000 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 2, 2001. Cited figures are marked; the original filing is the authoritative source.

Exelon Corporation's combined 2000 Form 10-K (filed April 2001, covering Exelon, PECO Energy and ComEd) reflects a company in the middle of a major transformation following its October 20, 2000 merger with Unicom, which was accounted for as a purchase.

Exelon's market value of nonaffiliate common equity was roughly $21.0 billion^a as of March 1, 2001, and it operates through three segments after a January 2001 restructuring: Energy Delivery (regulated distribution and transmission for ComEd and PECO, plus PECO gas), Generation (about 33 GW of owned and contracted capacity including roughly 14 GW of nuclear, plus 50% of AmerGen and 49.9% of Sithe), and Enterprises (competitive retail energy, infrastructure services, and communications investments). Investors should note that this filing is a combined report, and the Exelon-level financial statements are incorporated by reference from an 8-K dated March 16, 2001, so the figures shown in this document are mainly for PECO and ComEd. The financial picture at the subsidiary level is mixed.

PECO's 2000 net income on common stock fell to $497 million^b from $570 million, driven by $248 million of merger-related costs, while its operating revenues rose to $5.95 billion. PECO's stranded-cost securitizations ($5 billion of transition bonds issued since 1999) reduced its equity base and shifted its capital structure toward debt, and its common equity fell to about 24% of capitalization. ComEd's post-merger results are not directly comparable to earlier periods because of purchase accounting, which created roughly $4.8 billion of goodwill and reduced net plant by about $4.8 billion.

ComEd reported net income of $599 million^c for January through October 2000 and $133 million for the post-merger period, and it faces ongoing reliability scrutiny after the summer 1999 outages, class-action litigation, and a pending ICC investigation. The main risks for investors include the transition to competitive markets (ComEd residential customers gain choice in May 2002, and Pennsylvania rate caps run through 2010), nuclear operating and decommissioning exposure (ComEd's decommissioning cost estimate is $5.2 billion and PECO's is $1.7 billion, both transferring to Generation), merger integration and workforce reductions, and the Enterprises segment's exposure to infrastructure services and communications ventures. Exelon's planned 2001 dividend of $1.69 per share was announced but had not yet been declared at filing.

02—Key points

Key Highlights

Exelon became the parent of PECO and ComEd on October 20, 2000 through a merger with Unicom, accounted for as a purchase; Unicom holders received 0.875 Exelon shares plus $3.00 cash per share.
Exelon's nonaffiliate market value was about $21.0 billion as of March 1, 2001, with 320.1 million shares outstanding.
A January 2001 restructuring separated regulated Energy Delivery from Generation (about 33 GW including 14 GW nuclear) and Enterprises, with ComEd and PECO transferring competitive assets to subsidiaries.
PECO's 2000 net income on common stock was $497 million, down from $570 million, reflecting $248 million of pre-tax merger-related costs; operating revenues rose 9% to $5.95 billion.
PECO has securitized $5 billion of stranded costs through transition bonds, and its common equity was about 24% of total capitalization at year-end 2000.
ComEd's post-merger goodwill of about $4.8 billion and its nuclear decommissioning liabilities ($5.2 billion estimate) are key balance-sheet items; ComEd's residential customers gain retail choice in May 2002.
ComEd faces class-action suits and an ICC reliability investigation stemming from the summer 1999 outages, and Exelon's 2001 dividend was announced at $1.69 per share, subject to Board declaration.

03—Questions

Frequently Asked Questions

What did the Unicom merger mean for Exelon's shareholders and balance sheet?
The merger closed October 20, 2000. Unicom shareholders received 0.875 Exelon shares plus $3.00 cash per share, and PECO's shares converted one-for-one into Exelon. Because it was accounted for as a purchase, ComEd's assets were revalued, producing about $4.8 billion of goodwill and different cost bases before and after the merger date, which makes year-over-year comparisons difficult.
Is PECO's earnings decline a sign of weakness?
Mostly not. PECO's net income on common stock fell to $497 million from $570 million, but the decline is largely explained by $248 million of pre-tax merger costs and a $24 million accounting-change benefit. Operating income fell about 11%, partly from higher depreciation on transition-cost amortization and higher interest expense on transition bonds.
What are the main regulatory risks for Exelon's utilities?
ComEd's residential customers can choose alternative suppliers starting May 2002, and Illinois rate freezes run through January 2005 with a 5% residential reduction in October 2001. PECO's generation rates are capped through 2010, and its distribution rates through 2006, with $200 million of rate reductions from 2002 to 2005 under the merger settlement.
How exposed is Exelon to nuclear risk after the restructuring?
Generation holds about 13.9 GW of owned nuclear capacity and 50% of AmerGen's 2.4 GW. Nuclear operations carry Price-Anderson liability of $9.5 billion per incident, with only $200 million of commercial insurance, and decommissioning estimates total roughly $6.9 billion for Generation. The restructuring moved these risks from PECO and ComEd to Generation, so the utilities' prospective exposure is reduced, but Generation's exposure is substantial.
Will Exelon pay a dividend?
Exelon paid no cash dividends in 2000. Its Board announced an intention to declare annual dividends of $1.69 per share for 2001, subject to quarterly Board approval. Dividends at the subsidiary level are limited by PUHCA to retained earnings, with ComEd and PECO reporting retained earnings of $133 million and $197 million at year-end 2000.

04—Continue

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