COMMONWEALTH EDISON COMPANY (Dollars in millions except per share data, unless otherwise noted) Exelon Executive Overview Exelon is a utility services holding company engaged in the generation, delivery, and marketing of energy through Generation and the energy distribution and transmission businesses through ComEd, PECO, BGE, Pepco, DPL, and ACE. Exelon has eleven reportable segments consisting of Generation's five reportable segments (Mid-Atlantic, Midwest,New York ,ERCOT , and Other Power Regions), ComEd, PECO, BGE, Pepco, DPL, and ACE. See Note 1 - Significant Accounting Policies and Note 4 - Segment Information of the Combined Notes to Consolidated Financial Statements for additional information regarding Exelon's principal subsidiaries and reportable segments. Exelon's consolidated financial information includes the results of its eight separate operating subsidiary registrants, Generation, ComEd, PECO, BGE, PHI, Pepco, DPL, and ACE, which, along with Exelon, are collectively referred to as the Registrants. The following combined Management's Discussion and Analysis of Financial Condition and Results of Operations is separately filed byExelon, Generation , ComEd, PECO, BGE, PHI, Pepco, DPL, and ACE. However, none of the Registrants makes any representation as to information related solely to any of the other Registrants. COVID-19. The Registrants have taken steps to mitigate the potential risks posed by the global outbreak (pandemic) of COVID-19. The Registrants provide a critical service to our customers which means that it is paramount that we keep our employees who operate our businesses safe and minimize unnecessary risk of exposure to the virus. The Registrants have taken extra precautions for our employees who work in the field and for employees who continue to work in our facilities. We have implemented work from home policies where appropriate, and imposed travel limitations on our employees. In addition, the Registrants have updated existing business continuity plans in the context of this pandemic. The Registrants continue to implement strong physical and cyber-security measures to ensure that our systems remain functional in order to both serve our operational needs with a remote workforce and keep them running to ensure uninterrupted service to our customers. There have been no changes in internal control over financial reporting to date in 2020 as a result of COVID-19 that materially affected, or are reasonably likely to materially affect, any of the Registrants' internal control over financial reporting. See Item 4. Controls and Procedures for additional information. Unfavorable economic conditions due to COVID-19 have impacted the demand for electricity and natural gas at Generation and the Utility Registrants, which has resulted in a decrease in operating revenues. As a result of COVID-19, Generation temporarily suspended interruption of service for all retail residential customers for non-payment and temporarily ceased new late payment fees for all retail customers from March to May of 2020. Starting in March of 2020, the Utility Registrants also temporarily suspended customer disconnections for non-payment and temporarily ceased new late payment fees for all customers and restored service to customers upon request who were disconnected in the last twelve months. See Note 2 - Regulatory Matters of the Combined Notes to Consolidated Financial Statements for additional information on such measures at the Utility Registrants. At Generation, such measures resulted in an increase in credit loss expense. ComEd and ACE recorded regulatory assets for the incremental credit loss expense based on existing mechanisms. BGE, PECO, Pepco, and DPL recorded regulatory assets in the third quarter of 2020 for substantially all the incremental credit loss expense, including the expense recorded in the second quarter of 2020. See Note 2 - Regulatory Matters of the Combined Notes to Consolidated Financial Statements for additional information. 143
-------------------------------------------------------------------------------- Table of Contents Generation and the Utility Registrants have also incurred direct costs related to COVID-19 consisting primarily of costs to acquire personal protective equipment, costs for cleaning supplies and services, and costs to hire healthcare professionals to monitor the health of their employees. At Generation and PECO, such costs are recorded as Operating and maintenance expense and are excluded from Adjusted (non-GAAP) Operating Earnings. At ComEd, BGE, Pepco, DPL, and ACE, such costs are primarily recorded as regulatory assets. See Note 2 - Regulatory Matters of the Combined Notes to Consolidated Financial Statements for additional information. The regulatory assets recorded at BGE, Pepco, DPL, and ACE in the third quarter of 2020 include expense recorded in the second quarter of 2020. The estimated impact to Generation's Net income is approximately$45 million and$140 million for the three and nine months endedSeptember 30, 2020 , respectively. The estimated impact to the Utility Registrants' Net income is approximately$15 million and$65 million for the three and nine months endedSeptember 30, 2020 , respectively. In the fourth quarter of 2020, Generation estimates a decrease in Net income due to net reduction in load of$15 million to$25 million . Generation load forecasts are highly dependent on many factors including, but not limited to, the duration of remaining restrictions and the speed and strength of the economic recovery. To offset the unfavorable impacts from COVID-19, the Registrants identified and are pursuing approximately$250 million in cost savings across Generation and the Utility Registrants. The cost savings for the year are expected to be higher than originally anticipated. The Registrants rely on the capital markets for publicly offered debt as well as the commercial paper markets to meet their financial commitments and short-term liquidity needs. As a result of the disruptions in the commercial paper markets in March of 2020, Generation borrowed$1.5 billion on its revolving credit facility to refinance commercial paper, which Generation repaid onApril 3, 2020 . Generation also entered into two short-term loan agreements in March of 2020 for an aggregate of$500 million . OnApril 8, 2020 , Generation received approximately$500 million in cash after entering into an accounts receivable financing arrangement. OnApril 24, 2020 , Exelon Corporate entered into a credit agreement establishing a$550 million 364-day revolving credit facility to be used as an additional source of short-term liquidity. In addition, to date in 2020, the Registrants have issued long-term debt of$5.3 billion and have now completed their planned long-term debt issuances for the 2020 year. See Liquidity and Capital Resources, Note 12 - Debt and Credit Agreements, and Note 5 - Accounts Receivable of the Combined Notes to Consolidated Financial Statements for additional information. The Registrants assessed long-lived assets, goodwill, and investments for recoverability and there were no material impairment charges recorded to date in 2020 as a result of COVID-19. See Note 8 - Asset Impairments for additional information related to other impairment assessments in the third quarter of 2020. Certain assumptions are highly sensitive to changes. Changes in significant assumptions could potentially result in future impairments, which could be material. This is an evolving situation that could lead to extended disruption of economic activity in our markets. The Registrants will continue to monitor developments affecting our workforce, our customers, and our suppliers and we will take additional precautions that we determine are necessary in order to mitigate the impacts. The extent to which COVID-19 may impact the Registrants' ability to operate their generating and transmission and distribution assets, the ability to access capital markets, and results of operations, including demand for electricity and natural gas, will depend on the spread and proliferation of COVID-19 around the world and future developments, which are highly uncertain and cannot be predicted at this time. 144 -------------------------------------------------------------------------------- Table of Contents Financial Results of Operations GAAP Results of Operations. The following table sets forth Exelon's GAAP consolidated Net Income attributable to common shareholders by Registrant for the three and nine months endedSeptember 30, 2020 compared to the same period in 2019. For additional information regarding the financial results for the three and nine months endedSeptember 30, 2020 and 2019 see the discussions of Results of Operations by Registrant. Three Months Ended September 30, Favorable Nine Months Ended September 30, Favorable (unfavorable) (unfavorable) 2020 2019 variance 2020 2019 variance Exelon$ 501 $ 772 $ (271)$ 1,604 $ 2,164 $ (560) Generation 49 257 (208) 570 728 (158) ComEd 196 200 (4) 304 544 (240) PECO 138 140 (2) 317 410 (93) BGE 53 55 (2) 273 261 12 PHI 216 189 27 418 412 6 Pepco 118 98 20 227 217 10 DPL 27 33 (6) 91 116 (25) ACE 75 63 12 106 87 19 Other(a) (151) (69) (82) (278) (191) (87) __________ (a)Primarily includes eliminating and consolidating adjustments, Exelon's corporate operations, shared service entities and other financing and investing activities. Three Months EndedSeptember 30, 2020 Compared to Three Months EndedSeptember 30, 2019 . Net income attributable to common shareholders decreased by$271 million and diluted earnings per average common share decreased to$0.51 in 2020 from$0.79 in 2019 primarily due to: •Impairment of theNew England asset group; •One-time charges and accelerated depreciation and amortization associated with Generation's decisions in the third quarter of 2020 to early retire Byron and Dresden nuclear facilities in 2021 and Mystic Units 8 and 9 in 2024, partially offset by the absence of accelerated depreciation and amortization due to the early retirement of TMI inSeptember 2019 ; •Reduction in load due to COVID-19 at Generation; •COVID-19 direct costs; and •Higher storm costs related to theAugust 2020 storm at PECO, net of tax repairs, and at DPL. The decreases were partially offset by: •Higher mark-to-market gains; •Higher net unrealized gains on NDT funds; •Lower operating and maintenance expense at Generation, primarily due to lower contracting and travel costs; •Higher capacity revenue; •Regulatory rate increases at BGE, DPL, and ACE; and •Favorable weather conditions at PECO. Nine Months EndedSeptember 30, 2020 Compared to Nine Months EndedSeptember 30, 2019 . Net income attributable to common shareholders decreased by$560 million and diluted earnings per average common share decreased to$1.64 in 2020 from$2.22 in 2019 primarily due to: 145 -------------------------------------------------------------------------------- Table of Contents •Impairment of theNew England asset group; •One-time charges and accelerated depreciation and amortization associated with Generation's decisions in the third quarter of 2020 to early retire Byron and Dresden nuclear facilities in 2021 and Mystic Units 8 and 9 in 2024, partially offset by the absence of accelerated depreciation and amortization due to the early retirement of TMI inSeptember 2019 ; •Payments that ComEd will make under the Deferred Prosecution Agreement. See Note 14 - Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements for additional information; •Lower net unrealized and realized gains on NDT funds; •Lower capacity revenue; •Higher nuclear outage days; •Reduction in load due to COVID-19 at Generation; •COVID-19 direct costs; •Lower allowed electric distribution ROE at ComEd due to a decrease in treasury rates; •Higher storm costs related to theJune 2020 andAugust 2020 storms at PECO, net of tax repairs, and related to theAugust 2020 storm at DPL; •Unfavorable weather conditions at PECO, DPL Delaware, and ACE; and •A net increase in depreciation and amortization expense due to ongoing capital expenditures at PECO, BGE, Pepco, DPL, and ACE, partially offset at Generation due to the impact of extending the operating license at Peach Bottom. The decreases were partially offset by: •Higher mark-to-market gains; •Lower operating and maintenance expense at Generation, primarily due to previous cost management programs, lower contracting costs, and lower travel costs; •Lower nuclear fuel costs; •The approval of the New Jersey ZEC program in the second quarter of 2019; •An income tax settlement at Generation; and •Regulatory rate increases at BGE, DPL, and ACE. Adjusted (non-GAAP) Operating Earnings. In addition to net income, Exelon evaluates its operating performance using the measure of Adjusted (non-GAAP) operating earnings because management believes it represents earnings directly related to the ongoing operations of the business. Adjusted (non-GAAP) operating earnings exclude certain costs, expenses, gains and losses, and other specified items. This information is intended to enhance an investor's overall understanding of year-to-year operating results and provide an indication of Exelon's baseline operating performance excluding items that are considered by management to be not directly related to the ongoing operations of the business. In addition, this information is among the primary indicators management uses as a basis for evaluating performance, allocating resources, setting incentive compensation targets, and planning and forecasting of future periods. Adjusted (non-GAAP) operating earnings is not a presentation defined under GAAP and may not be comparable to other companies' presentations or deemed more useful than the GAAP information provided elsewhere in this report. 146 -------------------------------------------------------------------------------- Table of Contents The following tables provide a reconciliation between net income attributable to common shareholders as determined in accordance with GAAP and adjusted (non-GAAP) operating earnings for the three and nine months endedSeptember 30, 2020 compared to the same period in 2019. Three Months Ended September 30, 2020 2019 Earnings per Earnings per (In millions, except per share data) Diluted Share Diluted Share
Net Income Attributable to Common Shareholders
0.51$ 772 $ 0.79 Mark-to-Market Impact of Economic Hedging Activities (net of taxes of$62 and$2 , respectively) (183) (0.19) (2) - Unrealized Gains Related toNDT Fund Investments (net of taxes of$161 and$34 , respectively)(a) (172) (0.18) (39) (0.04) Asset Impairments (net of taxes of$126 and$53 , respectively)(b) 375 0.38 113 0.12 Plant Retirements and Divestitures (net of taxes of$111 and$40 , respectively)(c) 329 0.34 119 0.12 Cost Management Program (net of taxes of$5 and$3 , respectively)(d) 15 0.02 14 0.01 Change in Environmental Liabilities (net of taxes of$6 and$5 , respectively) 17 0.02 18 0.02 COVID-19 Direct Costs (net of taxes of$3 )(e) 10 0.01 - - Asset Retirement Obligation (net of taxes of$1 and$9 , respectively)(f) 3 - (84) (0.09) Acquisition Related Costs (net of taxes of$1 )(g) 2 - - - Income Tax-Related Adjustments (entire amount represents tax expense)(h) 62 0.06 13 0.01 Noncontrolling Interests (net of taxes of$12 and$3 , respectively)(i) 57 0.06 (24) (0.02)
Adjusted (non-GAAP) Operating Earnings
1.04$ 900 $ 0.92 147
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Table of Contents
Nine Months Ended
2020 2019
Earnings per Earnings per
(In millions, except per share data) Diluted Share Diluted Share
Net Income Attributable to Common Shareholders $ 1,604 $ 1.64 $ 2,164 $ 2.22
Mark-to-Market Impact of Economic Hedging
Activities (net of taxes of $112 and $31 ,
respectively) (329) (0.34) 97 0.10
Unrealized (Gains) Losses Related to NDT Fund
Investments (net of taxes of $31 and $167 ,
respectively)(a) 8 0.01 (181) (0.19)
Asset Impairments (net of taxes of $134 and
$54 , respectively)(b) 396 0.40 119 0.12
Plant Retirements and Divestitures (net of
taxes of $117 and $9 , respectively)(c) 348 0.36 114 0.12
Cost Management Program (net of taxes of $11
and $10 , respectively)(d) 34 0.03 31 0.03
Litigation Settlement Gain (net of taxes of $7 ) - - (19) (0.02)
Change in Environmental Liabilities (net of
taxes of $6 and $5 , respectively) 18 0.02 18 0.02
COVID-19 Direct Costs (net of taxes of $13 )(e) 37 0.04 - -
Deferred Prosecution Agreement Payments (net of
taxes of $0 )(j) 200 0.20 - -
Asset Retirement Obligation (net of taxes of $1
and $9 , respectively)(f) 3 - (84) (0.09)
Acquisition Related Costs (net of tax of $1 )(g) 2 - - -
Income Tax-Related Adjustments (entire amount
represents tax expense)(h) 66 0.07 13 0.01
Noncontrolling Interests (net of taxes of $2
and $18 , respectively)(i) 17 0.02 58 0.06
Adjusted (non-GAAP) Operating Earnings $ 2,403 $ 2.46 $ 2,329 $ 2.39
__________
Note:
Amounts may not sum due to rounding.
Unless otherwise noted, the income tax impact of each reconciling item between
GAAP Net Income and Adjusted (non-GAAP) Operating Earnings is based on the
marginal statutory federal and state income tax rates for each Registrant,
taking into account whether the income or expense item is taxable or deductible,
respectively, in whole or in part. For all items except the unrealized gains and
losses related to NDT fund investments, the marginal statutory income tax rates
for 2020 and 2019 ranged from 26.0% to 29.0%. Under IRS regulations, NDT fund
investment returns are taxed at different rates for investments if they are in
qualified or non-qualified funds. The effective tax rates for the unrealized
gains and losses related to NDT fund investments were 48.3% and 47.1% for the
three months ended September 30, 2020 and 2019, respectively. The effective tax
rates for the unrealized gains and losses related to NDT fund investments were
134.1% and 48.1% for the nine months ended September 30, 2020 and 2019,
respectively.
(a)Reflects the impact of net unrealized gains on Generation's NDT fund
investments for Non-Regulatory and Regulatory Agreement Units. The impacts of
the Regulatory Agreement Units, including the associated income taxes, are
contractually eliminated, resulting in no earnings impact.
(b)In 2020, primarily reflects an impairment in the New England asset group. In
2019, primarily reflects the impairment of equity method investments in certain
distributed energy companies. The impact of such impairment net of
noncontrolling interest is $0.02 .
(c)In 2020, primarily reflects one-time charges and accelerated depreciation and
amortization associated with Generation's decisions in the third quarter of 2020
to early retire Byron and Dresden nuclear facilities in 2021 and Mystic Units 8
and 9 in 2024. In 2019, primarily reflects accelerated depreciation and
amortization expenses associated with the early retirement of the TMI nuclear
facility and certain fossil sites, a charge associated with a remeasurement of
the TMI ARO and the loss on sale of Oyster Creek to Holtec .
(d)Primarily represents reorganization and severance costs related to cost
management programs.
(e)Represents direct costs related to COVID-19 consisting primarily of costs to
acquire personal protective equipment, costs for cleaning supplies and services,
and costs to hire healthcare professionals to monitor the health of employees.
(f)In 2019, reflects a benefit related to Generation's annual nuclear ARO update
for non-regulatory units.
(g)Reflects costs related to the acquisition of EDF's interest in CENG.
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Table of Contents (h)Primarily reflects the adjustment to deferred income taxes due to changes in forecasted apportionment. (i)Represents elimination from Generation's results of the noncontrolling interests related to certain exclusion items. In 2020, primarily related to unrealized gains and losses on NDT fund investments for CENG units. In 2019, primarily related to the impact of the impairment of equity investments in distributed energy companies, partially offset by the impact of Generation's annual nuclear ARO update and unrealized gains on NDT fund investments for CENG units. (j)Reflects the payments that ComEd will make under the Deferred Prosecution Agreement. See Note 14 - Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements for additional information. Significant 2020 Transactions and Developments Early Retirement of Generation Facilities InAugust 2020 , Generation announced that it intends to retire theByron Generating Station inSeptember 2021 ,Dresden Generating Station inNovember 2021 , and Mystic Units 8 and 9 at the expiration of the cost of service commitment inMay 2024 . As a result, in the third quarter of 2020, Exelon and Generation recognized a$500 million impairment of itsNew England asset group and one-time non-cash charges for Byron, Dresden, and Mystic related to materials and supplies inventory reserve adjustments, employee-related costs, and construction work-in-progress impairments, among other items. In addition, there will be ongoing annual financial impacts stemming from shortening the expected economic useful lives of these facilities, primarily related to accelerated depreciation of plant assets (including any ARC) and accelerated amortization of nuclear fuel. Such ongoing charges are excluded from Adjusted (non-GAAP) Operating Earnings. The following table summarizes the incremental expense recorded in the third quarter of 2020 and the estimated amounts of incremental expense expected to be incurred for full year 2020 and through the retirement dates.
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