What drove the large increase in Exelon's 2007 earnings?

Most of the increase reflects the absence of the $776 million ComEd goodwill impairment recorded in 2006. Generation also benefited from higher average wholesale margins after the below-market ComEd PPA expired at the end of 2006, along with favorable weather in the ComEd and PECO territories and a $223 million gain from terminating the State Line PPA. These gains were partly offset by the Illinois Settlement costs, higher operating and maintenance expense, and mark-to-market losses.

How significant is the Illinois Settlement Legislation for investors?

It is material. Generation has committed $747 million and ComEd about $53 million over four years to rate relief, with $361 million paid or credited in 2007. The legislation provides regulatory stability for ComEd's power procurement and prevents a rate freeze for now. However, it can be reversed if the Illinois General Assembly enacts a rate freeze or generation tax before August 1, 2011, and contributors could then terminate their funding commitments.

What are the main risks to ComEd's financial position?

ComEd faces sub-investment-grade ratings at S&P and Moody's, limited commercial paper market access, and a 2007 dividend suspension. It also faces a $2.9 billion potential extraordinary gain or $3.0 billion PECO-related charge if SFAS 71 regulatory accounting were discontinued, a possible further goodwill impairment, and the IRS challenge to the 1999 fossil-asset tax deferral. A $370 million credit facility borrowing was outstanding at year-end.

What is Exelon's capital allocation and dividend policy?

Exelon follows a value return policy that uses share repurchases and dividends to return cash after funding maintenance capital and other commitments. In 2007 it repurchased $1.2 billion of stock, including a $1.25 billion accelerated share repurchase, and authorized an additional $500 million program in December 2007. The quarterly dividend was $0.44 for 2007 and was raised to $0.50 for 2008, with the board expecting modest growth over time.

What nuclear risks and exposures does Generation carry?

Generation operates 19 nuclear units totaling 16,969 MW, with a 94.5% capacity factor in 2007. Key exposures include Price-Anderson liability limits of $10.76 billion per incident, NEIL insurance assessments of up to $172 million, decommissioning trust funds of $6.8 billion against a $3.6 billion ARO, and the pending Oyster Creek and TMI license renewals. The DOE has not yet accepted spent fuel, so Generation maintains dry cask storage and expects reimbursement claims.

EXC 10-K FY2007 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 7, 2008. Cited figures are marked; the original filing is the authoritative source.

Exelon Corporation (EXC) reported a strong fiscal 2007 with net income of $2,736 million^a, or $4.05 diluted EPS, up from $1,592 million ($2.35) in 2006.

The improvement was driven mainly by the absence of a $776 million^b ComEd goodwill impairment in 2006, higher wholesale margins at Generation after the below-market ComEd PPA expired, and favorable weather. Operating revenues rose 21% to $18.9 billion. Generation, the largest contributor at $2,025 million of income from continuing operations, operates 24,808 MW of owned capacity, roughly 93% of its output from nuclear units with a 94.5% fleet capacity factor.

The filing also highlights material risks. The Illinois Settlement Legislation of August 2007 requires roughly $800 million^c in rate relief contributions from Generation and ComEd, and it could be reversed by future legislation. ComEd's credit ratings were downgraded to sub-investment grade at S&P and Moody's in 2007, and ComEd did not pay a dividend in 2006 or 2007.

The IRS has challenged a 1999 fossil-asset sale tax deferral, with a potential cash outflow of up to $992 million^d including interest. Pennsylvania's post-2010 rate cap expiration at PECO is a further policy uncertainty. Shareholder returns were significant.

Exelon repurchased $1.2 billion of stock in 2007 under an accelerated share repurchase program and a new $500 million authorization. The quarterly dividend rose to $0.44 in 2007 and was declared at $0.50 for 2008, a value return policy that the board expects to grow modestly over time.

02—Key points

Key Highlights

Net income rose 72% to $2.74 billion ($4.05 diluted EPS), largely reflecting the non-recurrence of the 2006 $776 million ComEd goodwill impairment.
Generation (24.8 GW owned capacity; 93% nuclear output) generated $2.03 billion of net income, the largest segment contribution.
Operating revenues reached $18.9 billion, up 21% year over year, aided by higher wholesale prices after the ComEd PPA expired and favorable weather.
The Illinois Settlement Legislation requires about $800 million of rate relief from Generation and ComEd over four years, and could be reversed by future legislation before August 2011.
ComEd's credit ratings were cut to sub-investment grade at S&P and Moody's in 2007 and it paid no dividend in 2006 or 2007, though Fitch upgraded ComEd after the Settlement.
The IRS challenges a 1999 fossil-asset sale tax deferral; potential cash outflow with interest could reach $992 million.
The board raised the quarterly dividend to $0.50 for 2008 and repurchased $1.2 billion of stock in 2007 under its value return policy.

03—Questions

Frequently Asked Questions

What drove the large increase in Exelon's 2007 earnings?
Most of the increase reflects the absence of the $776 million ComEd goodwill impairment recorded in 2006. Generation also benefited from higher average wholesale margins after the below-market ComEd PPA expired at the end of 2006, along with favorable weather in the ComEd and PECO territories and a $223 million gain from terminating the State Line PPA. These gains were partly offset by the Illinois Settlement costs, higher operating and maintenance expense, and mark-to-market losses.
How significant is the Illinois Settlement Legislation for investors?
It is material. Generation has committed $747 million and ComEd about $53 million over four years to rate relief, with $361 million paid or credited in 2007. The legislation provides regulatory stability for ComEd's power procurement and prevents a rate freeze for now. However, it can be reversed if the Illinois General Assembly enacts a rate freeze or generation tax before August 1, 2011, and contributors could then terminate their funding commitments.
What are the main risks to ComEd's financial position?
ComEd faces sub-investment-grade ratings at S&P and Moody's, limited commercial paper market access, and a 2007 dividend suspension. It also faces a $2.9 billion potential extraordinary gain or $3.0 billion PECO-related charge if SFAS 71 regulatory accounting were discontinued, a possible further goodwill impairment, and the IRS challenge to the 1999 fossil-asset tax deferral. A $370 million credit facility borrowing was outstanding at year-end.
What is Exelon's capital allocation and dividend policy?
Exelon follows a value return policy that uses share repurchases and dividends to return cash after funding maintenance capital and other commitments. In 2007 it repurchased $1.2 billion of stock, including a $1.25 billion accelerated share repurchase, and authorized an additional $500 million program in December 2007. The quarterly dividend was $0.44 for 2007 and was raised to $0.50 for 2008, with the board expecting modest growth over time.
What nuclear risks and exposures does Generation carry?
Generation operates 19 nuclear units totaling 16,969 MW, with a 94.5% capacity factor in 2007. Key exposures include Price-Anderson liability limits of $10.76 billion per incident, NEIL insurance assessments of up to $172 million, decommissioning trust funds of $6.8 billion against a $3.6 billion ARO, and the pending Oyster Creek and TMI license renewals. The DOE has not yet accepted spent fuel, so Generation maintains dry cask storage and expects reimbursement claims.

04—Continue

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