UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
January 29, 2003
(Date of earliest
event reported)
Commission File Name of Registrant; State of Incorporation; Address of IRS Employer
Number Principal Executive Offices; and Telephone Number Identification Number
--------------------- ---------------------------------------------------------- ------------------------
1-16169 EXELON CORPORATION 23-2990190
(a Pennsylvania corporation)
10 South Dearborn Street - 37th Floor
P.O. Box 805379 Chicago, Illinois 60680-5379
(312) 394-7398
1-1839 COMMONWEALTH EDISON COMPANY 36-0938600
(an Illinois corporation)
10 South Dearborn Street - 37th Floor
P.O. Box 805379 Chicago, Illinois 60680-5379
(312) 394-4321
1-1401 PECO ENERGY COMPANY 23-0970240
(a Pennsylvania corporation)
P.O. Box 8699 2301 Market Street
Philadelphia, Pennsylvania 19101-8699
(215) 841-4000
333-85496 EXELON GENERATION COMPANY, LLC 23-3064219
(a Pennsylvania limited liability company)
300 Exelon Way
Kennett Square, Pennsylvania 19348
(610) 765-8200
Item 9. Regulation FD Disclosure
A. On January 29, 2002, Exelon Corporation issued a news release disclosing
its earnings for the fourth quarter of 2002 and for the year ended
December 31, 2002. The press release is attached as Exhibit 99.
B. Fourth Quarter Earnings Release Conference Call
As previously announced, on January 29, 2003 Exelon Corporation conducted its
Fourth Quarter 2002 Earnings Conference Call. The call was open to all on a
listen-only basis and was audio web-cast. Telephone replays will be available
through February 15, 2003. The U.S. call-in number for replays is 877-519-4471
and the international call-in number is 973-341-3080. The confirmation code is
3653872. In addition, the call will be archived on Exelon's web site,
www.exeloncorp.com; please choose the Investor Relations page.
During the call, management reviewed issues outlined in the news release. Other
matters management discussed associated with the year and quarter ended December
31, 2002 included:
o Upon completing the 2003 budget in November 2002, the outlook for ComEd
earnings weakened based on more modest sales growth and higher pension
expense. Accordingly, ComEd accelerated the regulatory asset amortization
by only $8 million after tax, or 2 cents per share, instead of $28 million
after tax, or 9 cents per share, as was previously indicated in October
2002. This change resulted in a 7 cents per share increase in earnings in
the fourth quarter 2002 compared to our guidance. As provided under the
Illinois restructuring act, the regulatory asset amortization is not level
quarter to quarter but changes based on ComEd's earnings expectations.
o In December 2002, Exelon made a $150 million cash contribution to the
pension fund. Also, Exelon recorded a $1 billion after-tax charge to Other
Comprehensive Income related to our pension obligation. Neither of these
items affected Exelon's earnings for 2002.
Exelon's 2002 pension and postretirement obligation expense totaled $93 million.
Also, in the fourth quarter of 2002, Exelon made a $150 million contribution to
ComEd to reduce its payable to ComEd. ComEd recorded this payment in equity as
reduction of its receivable from the parent company.
2003 Earnings Guidance
- ----------------------
Management provided additional information on the change in the earnings release
to the Exelon 2003 earnings guidance range of $4.80 to $5.00 per share, assuming
normal weather. The 2003 earnings guidance is based on the actual 2002 results
and the following assumptions for 2003:
o Nuclear Capacity factor: 94.2%
o ComEd kWh sales: 1.5% annually assuming normal weather
o PECO kWh sales: 0.6% assuming normal weather
o ComEd load retention: 85%, same as 2002
o PECO load retention: 80%
o Effective income tax rate: 37.3%
Management noted that there is no longer simple earnings sensitivity to changes
in wholesale power prices. The earnings sensitivity varies from region to region
and quarter to quarter. Also, the New England assets are spark spread sensitive
rather than simply power price sensitive.
Exelon's 2002 weather normalized earnings were $4.75 per share. Detail on
several of the large factors affecting 2003 estimated earnings include:
Positive effects
----------------
o The exercise of options under the Midwest Generation contract is
expected to provide net savings on the capacity charges of about $130
million pre-tax in 2003 compared to 2002. On an after-tax basis that is
about 25 cents per share positive.
o Three fewer nuclear plant refueling outages are scheduled in 2003,
which should provide savings of about $60 million pre-tax or 11 cents
per share positive.
o Exelon anticipates Enterprises to break even or be slightly positive in
2003. This would result in approximately $51 million, or 16 cents per
share, of earnings growth.
o The ongoing program of debt refinancing and transition bond retirement
is expected to provide 13 cents per share of earnings growth in 2003.
o Exelon has a modest outlook for sales growth at Energy Delivery to
provide 5 to 10 cents of earnings growth.
o Management believes that the ongoing benefit of Cost Management
Initiatives will offset inflation in operating expenses in 2003.
Negative effects
----------------
o Exelon previously disclosed that the expected impact of the
implementation of Statement of Financial Accounting Standard No. 143
(SFAS No. 143), "Asset Retirement Obligations," would be no more than 10
cents per share negative. Exelon now estimates that the effect will be
approximately 7 cents per share negative based on its current
interpretation of the accounting guidance. This estimate is subject to
continued refinement and may change based on the finalization of the
adoption of the standard. This amount includes Exelon's
portion of the effect of the adoption of the standard at AmerGen, a 50%
owned joint venture between Exelon and British Energy plc.
o As previously disclosed, the investment in Sithe is anticipated to be
dilutive by 20 cents per share more in 2003 compared to 2002.
o Exelon has revised some of its assumptions related to pension and other
postretirement benefit plan obligation costs. For 2003, Exelon will use
an expected return on plan assets of 9.0%, down from 9.5%. The discount
rate assumption is now 6.75%, down from 7.35%. The estimated net impact
of these changes is a $125 million pre-tax increase in the expense
related to pension and postretirement benefits, approximately 24 cents
per share.
The 2003 earnings guidance does not include the potential impact of one-time
items, such as the cumulative effect of adopting SFAS No. 143 that is
anticipated to include a one-time gain of at least $1.5 billion.
Exelon expects that first quarter 2003 earnings will represent between 20% and
25% of the full year's earnings. In first quarter 2002, we had very mild
weather, which decreased earnings by 18 cents per share relative to normal
weather. With normal weather, management expects an improvement in
year-over-year first quarter earnings.
Other forward-looking matters
- -----------------------------
Exelon has initiated a new plan to develop a more fundamental and durable
productivity improvement program to expand on 2002's Cost Management Initiative.
This new initiative is called "The Exelon Way". The details on this program
intended to assist Exelon in growing its earnings despite the effect of lower
wholesale power prices will be released once completed. The plan is not expected
to have a significant effect on 2003 earnings, but to begin producing meaningful
results in 2004.
Exelon's capital budget is approximately $2 billion in 2003 with non-fuel
operating and maintenance expenditures in excess of $4 billion. Exelon is
attempting to reduce this total number by between 5% and 10% by 2004. The Board
of Directors adopted a long-term incentive compensation plan that includes goals
of reducing capital spending by $1 billion over the next four years. Management
estimates that 60% of its spending decreases will be in its regulated businesses
and 40% in the non-regulated businesses. Also, management anticipates generating
enough cash flow from operations to be able to fund its capital program, to fund
its dividend payments, to fund its pension funding requirements and to fund the
$600 million in transition bonds repayments. Management does not anticipate
needing external financing sources in 2003 for these purposes; however, Exelon
anticipates re-financing approximately $1.4 billion of debt in 2003.
Exelon intends to grow its dividend at a rate of approximately four to five
percent commensurate with its long-term earnings growth projection.
Exelon's Power Team is typically 80 to 95 percent hedged for near-term
transactions. Exelon believes it is at the higher end of that range for the
first quarter of 2003. Exelon currently tends to be more fully hedged in the
near term, such as first quarter 2003, as compared to more distant periods.
Exelon's goal is to secure its earnings while avoiding the downside risk, even
though this reduces the potential upside due to price changes.
Exelon has firm natural gas delivery contracts that are expected to provide a
stable supply to Exelon's New England assets and to minimize spark-spread risk.
Following Sithe's practices, Exelon is currently selling the energy generated by
these assets in the spot market. Exelon is planning to sell energy into the
market with six month to three-year sale contracts with this supply contract in
place.
ComEd Discussion
- ----------------
Illinois electric utilities are allowed to collect a competitive transition
charge (CTC) from customers who choose an alternate supplier of electric
generation service or choose the ComEd Purchase Power Option (PPO). This CTC was
intended to assist electric utilities, such as ComEd, in recovering stranded
costs that might not otherwise be recoverable in a fully competitive market. The
CTC rate represents the difference between the competitive price of delivered
energy (the sum of generation service at competitive prices and the regulated
price of energy delivery) and recoveries under historical bundled rates, reduced
by a mitigation factor. The CTC rate is updated annually. Over time, to
facilitate the transition to a competitive market, the mitigation factor
increases, thereby reducing the CTC rate. Under the current rate structure at
the end of 2006, ComEd will no longer collect CTCs from customers who elect to
take service from a supplier other than ComEd.
In 2001, ComEd collected $110 million of CTC revenue, while in 2002, CTC revenue
collected increased to $306 million due to the change in the competitive price
of delivered energy, primarily due to lower wholesale prices and more customers
choosing alternative energy suppliers or the ComEd PPO. Based on increasing
mitigation factors and our assumptions about the competitive price of delivered
energy and customers' choice of electric suppliers, we estimate that CTC revenue
will decrease to approximately $250 to $300 million by 2006. Under the statute
as it stands, in 2007 this revenue may drop to zero. At the same time, ComEd
will continue to sell electricity to its customers under a bundled rate. ComEd's
bundled rate is an all-inclusive rate that does not separately break out charges
for energy generation service commodity and energy delivery service, but charges
a single set of prices. Much like the CTC collections, this revenue stream is
authorized by the legislature through the transition period. After the
transition ends in 2006, ComEd's bundled rates may be reset through a
traditional or innovative regulator approval process, which may include
performance incentives to ComEd. At this point in time it is impossible to
predict the outcome of a potential regulatory proceeding to establish rates for
2007. It is also impossible to predict the impact to Exelon of a potential
reduction in CTC since many other factors will be changing by 2007, for example
market prices.
Exelon has completed the following four major steps to deal with this issue:
o The maturities of the ComEd transition bonds are scheduled so that most
will be repaid by the end of 2006. o The merger between Unicom and PECO
created a larger and more diverse income stream with new growth
opportunities when ComEd's transition revenues come to an end. o Exelon
established Exelon Generation as a separate legal entity so that it can
take advantage of higher wholesale prices when they occur. o Exelon
cooperated with other parties who wanted a two-year extension in the
bundled rate freeze that previously went into effect.
In order to continue to address this matter, Exelon is doing the following going
forward:
o Exelon is constantly working with Illinois state leadership and business
community leadership to facilitate the development of a competitive
electricity market while providing consumer protection and system
reliability.
o Exelon is pursuing measures that would provide greater productivity,
quality and innovation in our work practices (as previously described as
The Exelon Way).
o Exelon believes that the current wholesale power price market will remain
sluggish over the next several years, but will start moving up to $29 per
megawatt hour in the 2006 and 2007 period.
o Finally, Exelon continues to contemplate successful and skillful
acquisition(s) that will lessen the potential ComEd impact in 2007.
Exelon believes that no one of these factors will solve the 2007 challenge, but
that some combination of the four completed steps and the four components
currently being worked on, together with other things Exelon may do over the
next four years, will address the 2007 challenge.
This combined Form 8-K is being filed separately by Exelon Corporation,
Commonwealth Edison Company, PECO Energy Company and Exelon Generation Company,
LLC (Registrants). Information contained herein relating to any individual
registrant has been filed by such registrant on its own behalf. No registrant
makes any representation as to information relating to any other registrant.
Except for the historical information contained herein, certain of the matters
discussed in this Report are forward-looking statements that are subject to
risks and uncertainties. The factors that could cause actual results to differ
materially from the forward-looking statements made by a registrant include
those discussed herein as well as those listed in Note 8 of Notes to
Consolidated Financial Statements, those discussed in "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Outlook" in
Exelon Corporation's 2001 Annual Report, those discussed in "Risk Factors" in
PECO Energy Company's Registration Statement on Form S-3, Reg. No. 333-99361,
those discussed in "Risk Factors" and "Management's Discussion and Analysis of
Financial
Condition and Results of Operations" in Exelon Generation Company, LLC's
Registration Statement on Form S-4, Reg. No. 333-85496, those discussed in "Risk
Factors" in Commonwealth Edison Company's Registration Statement of Form S-3,
Reg. No. 333-99363 and other factors discussed in filings with the Securities
and Exchange Commission by the Registrants. Readers are cautioned not to place
undue reliance on these forward-looking statements, which apply only as of the
date of this Report. None of the Registrants undertake any obligation to
publicly release any revision to its forward-looking statements to reflect
events or circumstances after the date of this Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
EXELON CORPORATION
COMMONWEALTH EDISON COMPANY
PECO ENERGY COMPANY
EXELON GENERATION COMPANY, LLC
/S/ Robert S. Shapard
-----------------------
Robert S. Shapard
Executive Vice President and Chief Financial Officer
Exelon Corporation
January 30, 2003