ComEd 2006 Annual Report Download - page 70

Outlook for 2007 and Beyond.
Exelon’s future financial results will be affected by a number of factors, including the following:
• If the price at which ComEd is allowed to sell electricity beginning in 2007 is set below
ComEd’s cost to procure and deliver electricity, there will be material adverse consequences to
ComEd, including possible bankruptcy, which could result in material adverse consequences to
Exelon and, in the event of a ComEd bankruptcy filing, possibly material adverse
consequences to Generation. The ICC’s unanimous approval of the reverse-auction process,
barring any adverse decision in the pending appeals or change in law, should provide ComEd
with stability and greater certainty that it will be able to procure electricity and pass through the
costs of that electricity to ComEd’s customers beginning in 2007 through a transparent market
mechanism in the reverse-auction competitive bidding process.
• PECO was subject to electric rate caps on its transmission and distribution rates through
December 31, 2006 and is subject to caps on its generation rates through December 31, 2010.
PECO’s transmission and distribution rates will continue in effect until PECO files a rate case
or there is some other specific regulatory action to adjust the rates. There are no current
proceedings to do so. PECO is, however, involved in proceedings involving annual changes in
its electric and gas universal service fund cost charges, its electric CTC/intangible transition
charge reconciliation mechanism, and its purchased gas cost rate, all of which are designed to
fully recover PECO’s applicable costs on a dollar-for-dollar basis.
• Effective January 1, 2007, in accordance with its 1998 restructuring settlement with the
PAPUC, PECO implemented an electric generation rate increase that will result in
approximately $190 million of additional operating revenues in 2007 as compared to 2006 and
a corresponding increase in purchased power from affiliate, in accordance with PECO’s PPA
with Generation, with no resulting impact on pre-tax operating income. The impact of this rate
increase on Exelon will be an increase in operating revenues and pre-tax operating income of
approximately $190 million. The impact on Generation will be an increase in operating
revenues from affiliates and pre-tax operating income of approximately $190 million.
• Generation is exposed to commodity price risk associated with the unhedged portion of its
electricity trading portfolio. Generation enters into derivative contracts, including forwards,
futures, swaps, and options, with approved counterparties to hedge this anticipated exposure.
Generation has hedges in place that significantly mitigate this risk for 2007 and 2008.
However, Generation is exposed to relatively greater commodity price risk in the subsequent
years for which a larger portion of its electricity portfolio may be unhedged. Generation has
been and will continue to be proactive in using hedging strategies to mitigate this risk in
subsequent years as well.
• The PPA between Generation and PECO expires at the end of 2010. Current market prices for
electricity have increased significantly over the past few years due to the rise in natural gas
and fuel prices. As a result, PECO customers’ generation rates are below current wholesale
energy market prices and Generation’s margins on sales in excess of ComEd’s and PECO’s
requirements have improved historically due to its significant capacity of low-cost nuclear
generating facilities. Generation’s ability to maintain those margins will depend on future fossil
fuel prices and its ability to obtain high capacity factors at its nuclear plants.
• Federal and state governing bodies have begun to introduce, and in some cases approve,
legislation mandating the future use of renewable and alternative fuel sources, such as wind,
solar, biomass and geothermal. The extent of the use of these renewable and alternative fuel
sources varies by state and could change. The future requirement to use these renewable and
alternative fuel sources for some portion of ComEd’s and PECO’s distribution sales could
result in increased fuel costs and capital expenditures.
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