Exelon 2003 Annual Report Download - page 28

26 Management’s Discussion and Analysis of Financial Condition and Results of Operations
EXELON CORPORATION AND SUBSIDIARY COMPANIES
and to our customers. Following several years of continued
reliability improvement, Energy Delivery’s performance
dipped slightly in 2003 due to Hurricane Isabel and also due
to a series of severe storms across Northern Illinois—two of
which were the worst since 1998. Generation’s nuclear fleet
achieved a 93.4% capacity factor in 2003 compared to 92.7%
in 2002 while reducing the costs of nuclear generation to 1.25
cents per kilowatthour.
Outlook for 2004 and Beyond. In the short term, our financial
results will be affected by a number of factors, including
weather conditions, wholesale market prices, successful im-
plementation of The Exelon Way and our ability to generate
electricity at low costs. If weather is warmer than normal in
the summer months or colder than normal in the winter
months, operating revenues at Energy Delivery generally will
be favorably affected. Operating revenues will also be favor-
ably affected by increases in wholesale market prices. In addi-
tion, we are required annually to assess the goodwill
recorded at ComEd to determine if it is impaired. Based on
certain anticipated reductions to cash flows subsequent to
the restructuring transition period (primarily competitive
transition charges that, under the current restructuring stat-
ute, will not be collected after 2006), we believe there is a
reasonable possibility that goodwill will be impaired at
ComEd in 2004 or later periods, and such impairment may be
significant. Under current accounting standards, a goodwill
impairment at ComEd may not affect Exelon’s consolidated
financial results.
Longer term, restructuring in the U.S. electric industry is
at a crossroads at both the Federal and state levels, with con-
tinuing debate at the FERC on regional transmission orga-
nization (RTO) and standard market platform issues and in
many states on the “post transition” format. Some states
abandoned failed transition plans (like California), some
states are adjusting current transition plans (like New Jersey
and Ohio), and the states of Illinois (by 2007) and Pennsylva-
nia (by 2011) are considering options to preserve choice for
large customers and rate stability for mass market custom-
ers, while ensuring the financial returns needed for continu-
ing investments in reliability. We will continue to be an
active participant in these policy debates, while continuing
to focus on improving operations, controlling costs and pro-
viding a fair return to our investors.
As we look towards the end of the restructuring tran-
sition periods and related rate caps or freezes in Illinois and
Pennsylvania, we will also continue to work with Federal and
state regulators, state and local governments, customer rep-
resentatives and other interested parties to develop appro-
priate processes for establishing future rates in restructured
electricity markets. We will strive to ensure that future rate
structures recognize the substantial improvements we have
made, and will continue to make, in our transmission and
distribution systems. We will also work to ensure that
ComEd’s and PECO’s rates adequately compensate our
suppliers, which could include Generation, for the costs
associated with procuring full-load following capacity en-
ergy supplies given Energy Delivery’s Provider of Last Resort
(POLR) obligations. As in the past, by working together with
all interested parties, we believe we can successfully meet
these objectives and obtain fair recovery of our costs for pro-
viding service to our customers. However, if we are un-
successful, our results of operations and cash flows could be
negatively affected after the transition periods.
While the U.S. economic recovery appears underway, our
current plans are based on moderate kilowatthour sales
growth (1% to 2%) and continued softness in wholesale
power markets. Successful implementation of The Exelon
Way is needed to offset labor and material cost escalation,
especially the double digit increases in health care costs.
Despite these challenges, our diverse mix of generation
(nuclear, coal, purchased power, natural gas, hydroelectric,
wind and other renewables) linked to a stable base of over
five million customers will provide a solid platform from
which we will strive to meet these challenges.
BUSINESS OUTLOOK AND THE CHALLENGES
IN MANAGING OUR BUSINESS
Substantially all of our businesses are in the electric gen-
eration, transmission and distribution industry in the United
States. That industry is in the midst of a fundamental and, at
this point, uncertain transition from a fully regulated in-
dustry offering bundled service to an industry with un-
bundled services, some of which are regulated and others of
which are priced in competitive markets. Our energy delivery
business remains highly regulated while our generation and
enterprises businesses operate in competitive environments.
All of our businesses are capital intensive.
The challenges affecting our businesses are discussed
below. There are several factors, such as weather, economic
activity and regulatory actions that affect our businesses in
different ways. Also, there are several factors that affect our
business as a whole, such as environmental compliance and
the ability to access capital on a cost-effective basis. Further
discussion of our liquidity and capital resources and related
challenges is included in the Liquidity and Capital Resources
section.
Energy Delivery
Our energy delivery business is comprised of two utility
transmission and distribution companies, ComEd and PECO,
which provide electricity and, in the case of PECO, natural
gas to customers in Illinois and Pennsylvania, respectively.
Energy Delivery focuses on providing safe and reliable serv-