Why did Generation swing to a net loss in 2003?

Generation reported a $133 million net loss, compared with $400 million net income in 2002. The main drivers were the $945 million pre-tax (about $573 million after-tax) impairment of Boston Generating's long-lived assets, after management decided to exit that business, and a $255 million pre-tax impairment of the Sithe equity investment. Excluding these charges, operating revenue growth from higher market prices and the Exelon New England acquisition was positive.

What is the main long-term risk to ComEd's earnings and balance sheet?

ComEd's Illinois rate freeze and CTC collections end in 2006, and the CTC revenue stream is declining to roughly $180-200 million a year. Management says ComEd's roughly $4.7 billion of goodwill has a reasonable possibility of material impairment in 2004 or later, and it estimates a 5% decline in discounted cash flows would trigger about a $500 million charge. Post-2006 rates are uncertain, and the filing says it is hard to predict the regulatory framework.

What are the Exelon Way savings and restructuring costs?

Exelon targets annual cash savings of about $300 million in 2004 rising to about $600 million in 2006. In 2003 the company identified about 1,500 positions for elimination by end-2004 (729 at ComEd, 166 at PECO, 470 at Generation) and recorded severance and curtailment charges of about $137 million at ComEd, $30 million at PECO, and $60 million at Generation. Further charges are possible if more positions are cut.

What is the status of Exelon's divestitures and capital allocation?

Generation is working to fully divest Sithe, with put and call options that can run through March 2006, and it expects to transition out of Boston Generating in 2004. Enterprises is selling non-core businesses, including the Chicago district cooling operations, and has agreed to sell Exelon Thermal. Exelon's board raised the quarterly dividend to $0.55 and approved a 2-for-1 split. Capital spending plans for 2004 include about $972M at Generation, $616M at ComEd and $239M at PECO.

What regulatory and nuclear risks does the filing flag?

Key risks include the uncertain post-transition rate framework in Illinois and Pennsylvania, PJM integration of ComEd's transmission (expected around May 2004), and FERC market-power rules that could require cost-based rates for Generation outside PJM. On the nuclear side, the DOE's spent-fuel acceptance is delayed to about 2010, the GAO found some decommissioning trust funds underfunded, and Generation's Price-Anderson coverage is capped at $10.9 billion industry-wide. The Illinois trial over DOE damages is set for November 2004.

EXC 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 20, 2004. Cited figures are marked; the original filing is the authoritative source.

Exelon Corporation's FY2003 combined Form 10-K (filed February 20, 2004) covers four registrants: Exelon (holding company), ComEd, PECO, and Exelon Generation.

Exelon's three segments are Energy Delivery (regulated ComEd and PECO), Generation (about 28.5 GW owned, including 16,959 MW nuclear), and Enterprises (non-core businesses being divested). Financial results were mixed. ComEd net income fell 10.5% to $707 million^a on weather, customer choice, and Exelon Way costs.

PECO net income fell 2.7% to $473 million^b. Generation swung to a net loss of $133 million, driven by a $945 million pre-tax impairment on Boston Generating (about $573 million after tax) and a $255 million Sithe investment impairment. Generation's operating revenues rose 18.6% to $8.1 billion, but the impairments dominated results.

The filing highlights a strategic shift. The 'Exelon Way' restructuring targets roughly $300 million^c of annual cash savings in 2004 rising to about $600 million by 2006, and about 1,500 positions are slated for elimination. Management is exiting Boston Generating and Sithe and pursuing divestitures in Enterprises.

Generation bought British Energy's 50% stake in AmerGen for $276.5 million^d. ComEd faces a material goodwill-impairment risk: its roughly $4.7 billion of goodwill could be impaired in 2004 or later as CTC revenues decline after the 2006 transition period, and management said a 5% cash-flow decline would trigger a roughly $500 million charge. Other risks include the post-2006 rate framework in Illinois and Pennsylvania, PJM integration of ComEd, nuclear decommissioning funding (the GAO challenged shortfalls), and the DOE's delayed spent-fuel acceptance.

Capital and balance sheet items to note: Exelon's board declared a 2-for-1 stock split (not reflected in the filing's per-share data) and raised the quarterly dividend to $0.55 per share. PUHCA financing authority of $2.0 billion remained, with an $8 billion application pending. Generation's Boston Generating debt of about $1.0 billion was reclassified as current due to defaults, and its interest-rate swaps were terminated in January 2004 at a net $82 million payable.

02—Key points

Key Highlights

Net income by segment: ComEd $707M (down 10.5%), PECO $473M (down 2.7%), Generation a net loss of $133M versus $400M in 2002.
Generation took a $945M pre-tax impairment on Boston Generating (about $573M after tax) and a $255M pre-tax impairment on its Sithe investment, after deciding to exit both.
Exelon Way cost-cutting targets about $300M of annual cash savings in 2004, rising to about $600M by 2006, with roughly 1,500 positions eliminated by end-2004.
ComEd's roughly $4.7B goodwill faces a 'reasonable possibility' of material impairment in 2004 or later, as CTC revenues fall from about $300M to $180-200M annually through 2006.
Exelon declared a 2-for-1 stock split (effective upon regulatory approval) and a quarterly dividend of $0.55 per share, an annual rate of $2.20.
Generation's owned capacity is 28,492 MW, with a 93.4% nuclear capacity factor in 2003, and it bought British Energy's 50% AmerGen stake for $276.5M in December 2003.
Boston Generating's roughly $1.0B project debt was reclassified as a current liability after the July 2003 Project Completion default, and Boston Generating's swaps were terminated in January 2004 at a net $82M payable.

03—Questions

Frequently Asked Questions

Why did Generation swing to a net loss in 2003?
Generation reported a $133 million net loss, compared with $400 million net income in 2002. The main drivers were the $945 million pre-tax (about $573 million after-tax) impairment of Boston Generating's long-lived assets, after management decided to exit that business, and a $255 million pre-tax impairment of the Sithe equity investment. Excluding these charges, operating revenue growth from higher market prices and the Exelon New England acquisition was positive.
What is the main long-term risk to ComEd's earnings and balance sheet?
ComEd's Illinois rate freeze and CTC collections end in 2006, and the CTC revenue stream is declining to roughly $180-200 million a year. Management says ComEd's roughly $4.7 billion of goodwill has a reasonable possibility of material impairment in 2004 or later, and it estimates a 5% decline in discounted cash flows would trigger about a $500 million charge. Post-2006 rates are uncertain, and the filing says it is hard to predict the regulatory framework.
What are the Exelon Way savings and restructuring costs?
Exelon targets annual cash savings of about $300 million in 2004 rising to about $600 million in 2006. In 2003 the company identified about 1,500 positions for elimination by end-2004 (729 at ComEd, 166 at PECO, 470 at Generation) and recorded severance and curtailment charges of about $137 million at ComEd, $30 million at PECO, and $60 million at Generation. Further charges are possible if more positions are cut.
What is the status of Exelon's divestitures and capital allocation?
Generation is working to fully divest Sithe, with put and call options that can run through March 2006, and it expects to transition out of Boston Generating in 2004. Enterprises is selling non-core businesses, including the Chicago district cooling operations, and has agreed to sell Exelon Thermal. Exelon's board raised the quarterly dividend to $0.55 and approved a 2-for-1 split. Capital spending plans for 2004 include about $972M at Generation, $616M at ComEd and $239M at PECO.
What regulatory and nuclear risks does the filing flag?
Key risks include the uncertain post-transition rate framework in Illinois and Pennsylvania, PJM integration of ComEd's transmission (expected around May 2004), and FERC market-power rules that could require cost-based rates for Generation outside PJM. On the nuclear side, the DOE's spent-fuel acceptance is delayed to about 2010, the GAO found some decommissioning trust funds underfunded, and Generation's Price-Anderson coverage is capped at $10.9 billion industry-wide. The Illinois trial over DOE damages is set for November 2004.

04—Continue

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