ComEd 2006 Annual Report Download - page 122

The Registrants primarily use their capital resources, including cash, to fund capital requirements,
including construction expenditures, retire debt, pay dividends, fund pension obligations and invest in
new and existing ventures. The Registrants spend a significant amount of cash on construction projects
that have a long-term return on investment. Additionally, ComEd and PECO operate in rate-regulated
environments in which the amount of new investment recovery may be limited and where such recovery
takes place over an extended period of time. As a result of these factors, each of Exelon’s, ComEd’s and
PECO’s working capital, defined as current assets less current liabilities, is in a net deficit position.
ComEd intends to refinance maturing long-term debt during 2007. To manage cash flows as more fully
described below, ComEd did not pay a dividend during 2006. Future acquisitions that Exelon may
undertake may involve external debt financing or the issuance of additional Exelon common stock.
Cash Flows from Operating Activities
Generation’s cash flows from operating activities primarily result from the sale of electric energy to
wholesale customers, including ComEd and PECO. Generation’s future cash flows from operating
activities will be affected by future demand for and market prices of energy and its ability to continue to
produce and supply power at competitive costs as well as to obtain collections from customers.
ComEd’s and PECO’s cash flows from operating activities primarily result from sales of electricity and
gas to a stable and diverse base of retail customers and are weighted toward the third quarter of each
fiscal year. ComEd’s and PECO’s future cash flows will be affected by the economy, weather,
customer choice, future regulatory proceedings with respect to their rates and their ability to achieve
operating cost reductions. See Note 4 of the Combined Notes to Consolidated Financial Statements for
further discussion of regulatory and legal proceedings and proposed legislation.
Cash flows from operations have been a reliable, steady source of cash flow, sufficient to meet
operating and capital expenditures requirements. Taking into account the factors noted above, Exelon
also obtains cash from non-operating sources such as the proceeds from the debt issuance in 2005 to
fund Exelon’s $2 billion pension contribution (see Note 11 of the Combined Notes to Consolidated
Financial Statements). Operating cash flows after 2006 could be negatively affected by changes in the
rate regulatory environments of ComEd and PECO. ComEd is required, beginning in 2007, to purchase
energy in the wholesale energy markets in order to meet the retail energy needs of ComEd’s
customers because ComEd does not own any generation. If the price at which ComEd is allowed to
sell energy is below ComEd’s cost to procure and deliver electricity, there may be potential material
adverse consequences to ComEd and, possibly, Exelon. The ICC approved a “cap and deferral”
program, proposed by ComEd, to ease the impact of the expected increase in rates on residential
customers. The cap and deferral program, generally speaking, will limit the procurement costs that
ComEd can pass through to its customers for a specified period of time and allow ComEd to collect
any unrecovered procurement costs in later years. See Note 4 of the Combined Notes to the
Consolidated Financial Statements for further detail on the procurement case.
Generation’s sales to counterparties other than ComEd and PECO will increase due to the
expiration of the PPA with ComEd at the end of 2006. The bilateral contracts are subject to credit risk,
which relates to the ability of counterparties to meet their contractual payment obligations. Any failure
to collect these payments from counterparties could have a material impact on Exelon’s and
Generation’s results of operations, cash flows and financial position. As market prices rise above
contracted price levels, Generation is required to post collateral with purchasers; as market prices fall
below contracted price levels, counterparties are required to post collateral with Generation. Under the
Illinois auction rules and the supplier forward contracts that Generation entered into with ComEd and
Ameren, beginning in 2007, collateral postings will be one-sided from Generation only. That is, if
market prices fall below ComEd’s or Ameren’s contracted price levels, ComEd or Ameren are not
required to post collateral; however, if market prices rise above contracted price levels with ComEd or
Ameren, Generation is required to post collateral. See Note 9 of the Combined Notes to Consolidated
Financial Statements for further information regarding Generation’s collateral policy.
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