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 5 - 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. 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, 2021 compared to the same period in 2020. For additional information regarding the financial results for the three and nine months endedSeptember 30, 2021 and 2020 see the discussions of Results of Operations by Registrant. Three Months Ended September Favorable Nine Months Ended September Favorable 30, (unfavorable) 30, (unfavorable) 2021 2020 variance 2021 2020 variance Exelon$ 1,203 $ 501 $ 702$ 1,315 $ 1,604 $ (289) Generation 607 49 558 (247) 570 (817) ComEd 220 196 24 609 304 305 PECO 111 138 (27) 383 317 66 BGE 36 53 (17) 290 273 17 PHI 266 216 50 535 418 117 Pepco 130 118 12 264 227 37 DPL 50 27 23 135 91 44 ACE 90 75 15 141 106 35 Other(a) (37) (151) 114 (255) (278) 23 __________ (a)Primarily includes eliminating and consolidating adjustments, Exelon's corporate operations, shared service entities and other financing and investing activities. Three Months EndedSeptember 30, 2021 Compared to Three Months EndedSeptember 30, 2020 . Net income attributable to common shareholders increased by$702 million and diluted earnings per average common share increased to$1.23 in 2021 from$0.51 in 2020 primarily due to: 150 -------------------------------------------------------------------------------- Table of Contents •Absence of an impairment in theNew England asset group; •Absence of one time charges recorded in the third quarter of 2020 associated with Generation's decision to early retire theByron and Dresden nuclear facilities and Mystic Units 8 and 9, and the reversal of one-time charges resulting from the reversal of the previous decision to early retireByron and Dresden onSeptember 15, 2021 ; •Higher mark-to-market gains; •Higher New York ZEC revenues due to higher generation and an increase in ZEC prices; •Higher electric distribution earnings from higher rate base and higher allowed ROE due to an increase in treasury rates at ComEd; and •The favorable impacts of the multi-year plan at BGE and regulatory rate increases at DPL and Pepco. The increases were partially offset by: •Lower net unrealized and realized gains on NDT funds; •Decommissioning-related activities that were not offset for theByron units beginning in the second quarter of 2021 throughSeptember 15, 2021 . With Generation'sSeptember 15, 2021 reversal of the previous decision to retireByron , Generation resumed contractual offset forByron as of that date; •Accelerated depreciation and amortization associated with Generation's previous decision in the third quarter of 2020 to early retireByron and Dresden nuclear facilities in 2021, a decision which was reversed onSeptember 15, 2021 , and Generation's decision in the third quarter of 2020 to early retire Mystic Units 8 and 9 in 2024; and •Higher net unrealized and realized losses on equity investments. Nine Months EndedSeptember 30, 2021 Compared to Nine Months EndedSeptember 30, 2020 . Net income attributable to common shareholders decreased by$289 million and diluted earnings per average common share decreased to$1.34 in 2021 from$1.64 in 2020 primarily due to: •Impacts of theFebruary 2021 extreme cold weather event; •Accelerated depreciation and amortization associated with Generation's previous decision in the third quarter of 2020 to early retireByron and Dresden nuclear facilities in 2021, a decision which was reversed onSeptember 15, 2021 , and Generation's decision in the third quarter of 2020 to early retire Mystic Units 8 and 9 in 2024; •Decommissioning-related activities that were not offset for theByron units beginning in the second quarter of 2021 throughSeptember 15, 2021 . With Generation'sSeptember 15, 2021 reversal of the previous decision to retireByron , Generation resumed contractual offset forByron as of that date; •Impairments at Generation of theNew England asset group, the Albany Green Energy biomass facility, and a wind project, partially offset by the absence of an impairment of theNew England asset group in the third quarter of 2020; and •The absence of a prior year one-time tax settlement. The decreases were partially offset by: •Higher mark-to-market gains; •Higher net unrealized and realized gains on NDT funds; 151 -------------------------------------------------------------------------------- Table of Contents •Absence of one time charges recorded in the third quarter of 2020 associated with Generation's decision to early retire theByron and Dresden nuclear facilities and Mystic generating station assets, and the reversal of one-time charges; •Lower nuclear outage days; •Higher New York ZEC revenues due to higher generation and an increase in ZEC prices; •Lower operating and maintenance expense at ComEd due to the payments that ComEd made in 2020 under the Deferred Prosecution Agreement; •Higher electric distribution earnings from higher rate base and higher allowed ROE due to an increase in treasury rates at ComEd; •The favorable impacts of the multi-year plan at BGE and regulatory rate increases at Pepco, DPL, and ACE; •Favorable weather conditions at PECO and DPL'sDelaware service territory; •Favorable volume at PECO; and •Lower storm costs at PECO and DPL due to the absence of theJune 2020 andAugust 2020 storms, respectively. 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. 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, 2021 compared to the same period in 2020. 152
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Three Months Ended
2021 2020
Earnings per Earnings per
(In millions, except per share data) Diluted Share Diluted Share
Net Income Attributable to Common Shareholders $ 1,203 $ 1.23 $ 501 $ 0.51
Mark-to-Market Impact of Economic Hedging
Activities (net of taxes of $192 and $62 ,
respectively) (559) (0.57) (183) (0.19)
Unrealized (Gains) Losses Related to NDT Fund
Investments (net of taxes of $70 and $161 ,
respectively)(a) 55 0.06 (172) (0.18)
Asset Impairments (net of taxes of $11 and
$126 , respectively)(b) 33 0.03 375 0.38
Plant Retirements and Divestitures (net of
taxes of $71 and $111 , respectively)(c) 211 0.22 329 0.34
Cost Management Program (net of taxes of $1 and
$5 , respectively)(d) 6 0.01 15 0.02
Change in Environmental Liabilities (net of
taxes of $1 and $6 , respectively) 4 - 17 0.02
COVID-19 Direct Costs (net of taxes of $1 and
$3 , respectively)(e) 7 0.01 10 0.01
ERP System Implementation Costs (net of taxes
$1 )(h) 4 - - -
Planned Separation Costs (net of taxes of
$10 )(i) 27 0.03 - -
Costs Related to Suspension of Contractual
Offset (net of taxes of $33 )(j) 107 0.11 - -
Asset Retirement Obligation (net of taxes of
$12 and $1 , respectively)(k) (35) (0.04) 3 -
Acquisition Related Costs (net of taxes of $2
and $1 , respectively)(g) 7 0.01 2 -
Income Tax-Related Adjustments (entire amount
represents tax expense)(l) 19 0.02 62 0.06
Noncontrolling Interests (net of taxes of $5
and $12 , respectively)(m) (17) (0.02) 57 0.06
Adjusted (non-GAAP) Operating Earnings $ 1,070 $ 1.09 $ 1,017 $ 1.04
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Nine Months Ended
2021 2020
Earnings per Earnings per
(In millions, except per share data) Diluted Share Diluted Share
Net Income Attributable to Common Shareholders $ 1,315 $ 1.34 $ 1,604 $ 1.64
Mark-to-Market Impact of Economic Hedging
Activities (net of taxes of $317 and $112 ,
respectively) (924) (0.94) (329) (0.34)
Unrealized (Gains) Losses Related to NDT Fund
Investments (net of taxes of $24 and $31 ,
respectively)(a) (32) (0.03) 8 0.01
Asset Impairments (net of taxes of $135 and
$134 , respectively)(b) 401 0.41 396 0.40
Plant Retirements and Divestitures (net of taxes
of $290 and $117 , respectively)(c) 865 0.88 348 0.36
Cost Management Program (net of taxes of $2 and
$11 , respectively)(d) 10 0.01 34 0.03
Change in Environmental Liabilities (net of
taxes of $2 and $6 , respectively) 6 0.01 18 0.02
COVID-19 Direct Costs (net of taxes of $9 and
$13 , respectively)(e) 24 0.02 37 0.04
Deferred Prosecution Agreement Payments (net of
taxes of $0 )(f) - - 200 0.20
ERP System Implementation Costs (net of taxes of
$2 )(h) 10 0.01 - -
Planned Separation Costs (net of taxes of
$16 )(i) 46 0.05 - -
Costs Related to Suspension of Contractual
Offset (net of taxes of $45 )(j) 148 0.15 - -
Asset Retirement Obligation (net of taxes of $12
and $1 , respectively)(k)) (35) (0.04) 3 -
Acquisition Related Costs (net of taxes of $5
and $1 , respectively)(g) 15 0.02 2 -
Income Tax-Related Adjustments (entire amount
represents tax expense)(l) 15 0.02 66 0.07
Noncontrolling Interests (net of taxes of $2 and
$2 , respectively)(m) 16 0.02 17 0.02
Adjusted (non-GAAP) Operating Earnings $ 1,879 $ 1.92 $ 2,403 $ 2.46
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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 2021 and 2020 ranged from 25.0% 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 56.2% and 48.3% for the
three months ended September 30, 2021 and 2020, respectively. The effective tax
rates for the unrealized gains and losses related to NDT fund investments were
42.4% and 134.1% for the nine months ended September 30, 2021 and 2020,
respectively.
(a)Reflects the impact of net unrealized gains and losses on Generation's NDT
fund investments for Non-Regulatory Agreement Units.
(b)In 2021, reflects an impairment in the New England asset group, an impairment
recorded as a result of the agreement to sell the Albany Green Energy biomass
facility, and an impairment of a wind project at Generation. In 2020, reflects
an impairment at ComEd related to the acquisition of transmission assets and an
impairment in the New England asset group in the third quarter of 2020.
(c)In 2021, primarily reflects accelerated depreciation and amortization
associated with Generation's decisions to early retire Byron , Dresden, and
Mystic Units 8 and 9, partially offset by reversal of one-time charges resulting
from the reversal of the previous decision to retire Byron and Dresden on
September 15, 2021 and a gain on sale of Generation's solar business.
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Depreciation for Byron and Dresden was adjusted beginning September 15, 2021 to
reflect the extended useful life estimates. In 2020, primarily reflects one-time
charges and accelerated depreciation and amortization expenses 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.
(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)Reflects the payments made by ComEd under the Deferred Prosecution Agreement,
which ComEd entered in July 2020 with the U.S. Attorney's Office for the
Northern District of Illinois .
(g)Reflects costs related to the acquisition of EDF's interest in CENG, which
was completed in the third quarter of 2021.
(h)Reflects costs related to a multi-year Enterprise Resource Program (ERP)
system implementation.
(i)Represents costs related to the planned separation primarily comprised of
system-related costs, third-party costs paid to advisors, consultants, lawyers,
and other experts assisting in the planned separation, and employee-related
severance costs.
(j)Decommissioning-related activities for the former ComEd and PECO units
(Regulatory Agreement Units), net of applicable taxes, including realized and
unrealized gains and losses on the NDT funds, depreciation of the ARC, and
accretion of the decommissioning obligation, are generally offset within
Exelon's and Generation's consolidated statements of operations. These costs
reflect the impact of suspension of contractual offset for the Byron units
beginning in the second quarter of 2021 through September 15, 2021 . With
Generation's September 15, 2021 reversal of the previous decision to retire
Byron , Generation resumed contractual offset for Byron as of that date.
(k)For Generation, reflects an adjustment to the nuclear asset obligation for
the Non-Regulatory Agreement Units resulting from the annual update in the third
quarter of 2021.
(l)Primarily reflects the adjustment to deferred income taxes due to changes in
forecasted apportionment.
(m)Represents elimination from Generation's results of the noncontrolling
interests related to certain exclusion items, primarily related to unrealized
gains and losses on NDT fund investments for CENG units prior to Generation's
acquisition of EDF's interest in CENG on August 6, 2021 and the noncontrolling
interest portion of a wind project impairment.
Significant 2021 Transactions and Developments
Planned Separation
On February 21, 2021 , Exelon's Board of Directors approved a plan to separate
the Utility Registrants and Generation, creating two publicly traded companies
with the resources necessary to best serve customers and sustain long-term
investment and operating excellence. The separation gives each company the
financial and strategic independence to focus on its specific customer needs,
while executing its core business strategy.
On February 25, 2021 , Exelon and Generation filed applications with FERC , NYPSC,
and NRC seeking approvals for the separation of Generation. On March 25, 2021 ,
Exelon filed a request for a private letter ruling with the IRS to confirm the
tax-free treatment of the planned separation, which was received on September
23, 2021 . On August 24, 2021 , Exelon and Generation received approval from FERC
for the planned separation. Exelon and Generation expect a decision from the NRC
in the fourth quarter of 2021 and have requested a decision from the NYPSC
before the end of 2021. Exelon and Generation cannot predict if the remaining
applications will be approved as filed.
In connection with the planned separation, Exelon incurred transaction costs of
approximately $36 million and $64 million on a pre-tax basis for the three and
nine months ended September 30, 2021 , respectively, which are excluded from
Adjusted (non-GAAP) Operating Earnings. The transaction costs are primarily
comprised of system-related costs, third-party costs paid to advisors,
consultants, lawyers, and other experts assisting in the planned separation, and
employee-related severance costs.
There can be no assurance that any separation transaction will ultimately occur
or, if one does occur, of its terms or timing. See Note 20 - Planned Separation
of the Combined Notes to Consolidated Financial Statements for additional
information.
CENG Put Option
EDF had the option to sell its 49.99% equity interest in CENG to Generation
exercisable beginning on January 1, 2016 and thereafter until June 30, 2022 . On
November 20, 2019 , Generation received notice of EDF's intention to exercise the
put option and sell its 49.99% equity interest in CENG to Generation and the put
automatically exercised on January 19, 2020 at the end of the sixty-day advance
notice period. On August 6, 2021 , Generation and EDF entered into a settlement
agreement pursuant to which Generation, through a wholly owned subsidiary,
purchased EDF's equity interest in CENG for a net purchase price of $885
million , which includes, among other things, an adjustment for EDF's share of
the balance of the preferred distribution payable by CENG to
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Generation. The difference between the net purchase price and EDF's
noncontrolling interest as of the closing date was recorded to Common Stock in
Exelon's Consolidated Balance Sheet and Membership Interest in Generation's
Consolidated Balance Sheet.
In connection with the settlement agreement, on
See Note 2 - Mergers, Acquisitions, and Dispositions and Note 13 - Debt and Credit Agreements of the Combined Notes to Consolidated Financial Statements for additional information.
Clean Energy Law OnSeptember 15, 2021 , the Illinois Public Act 102-0662 was signed into law by the Governor ofIllinois ("Clean Energy Law"). The Clean Energy Law is designed to achieve 100% carbon-free power by 2045 to enable the state's transition to a clean energy economy. The Clean Energy Law establishes decarbonization requirements forIllinois as well as programs to support the retention and development of emissions-free sources of electricity. Among other things, the Clean Energy Law authorizes the IPA to procure up to 54.5 million CMCs from qualifying nuclear plants for a five-year period beginning onJune 1, 2022 throughMay 31, 2027 . CMCs are credits for the carbon-free attributes of eligible nuclear power plants in PJM. TheByron , Dresden, andBraidwood nuclear plants located inIllinois will be eligible to participate in the CMC procurement process and, if awarded contracts, would be committed to operate throughMay 31, 2027 . Selected generators will byDecember 3, 2021 contract directly with ComEd for the procurement of the CMCs based upon the number of MWhs produced annually by the eligible facilities, subject to specified caps and minimum performance requirements. ComEd is required to purchase CMCs from eligible nuclear facilities and all its costs of doing so will be recovered through a new rider. Following enactment of the Clean Energy Law, Generation announced onSeptember 15, 2021 , that it has reversed its previous decision to retireByron and Dresden given the opportunity for additional revenue. In addition, Generation no longer considers theBraidwood orLaSalle nuclear plants to be at risk for premature retirement. See Note 7 - Early Plant Retirements for additional information and Early Retirement of Generation Facilities below. The Clean Energy Law also contains requirements associated with ComEd's transition away from the performance-based electric distribution formula rate. The law authorizing that rate setting process sunsets at the end of 2022. The Clean Energy Law, and tariffs adopted under it, governs both the remaining reconciliations of rates set under that process and requires ComEd to file in 2023 its choice of either a general rate case or a four-year multi-year plan to set rates that take effect in 2024. If ComEd elects to file a multi-year plan, that plan would set rates for 2024 - 2027, based on forecasted revenue requirements and an ICC determined rate of return on rate base, including the cost of common equity. See Note 3 - Regulatory Matters for additional information and other features of the Clean Energy Law. Early Retirement of Generation Facilities InAugust 2020 , Generation announced that it intended 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, Exelon and Generation recognized certain one-time charges in the third and fourth quarters of 2020. Further, there were 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. Also, as a result, in the third quarter of 2020, Exelon and Generation recognized a$500 million pre-tax impairment for theNew England asset group. In the second quarter of 2021, an incremental decline in value resulted in an additional pre-tax impairment charge of$350 million for theNew England asset group. Further, in the second quarter and third quarter of 2021, Exelon and Generation recorded a pre-tax charge of$53 million and$140 million , respectively for decommissioning-related activities that were not offset for theByron units due to the inability to recognize a regulatory asset at ComEd. All of the charges above were excluded from Exelon's and Generation's Adjusted (non-GAAP) Operating Earnings. 156
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Table of Contents OnSeptember 15, 2021 , Generation reversed its previous decision to early retireByron and Dresden and updated the expected economic useful life for both facilities to 2044 and 2046 for Byron Units 1 and 2, respectively, and to 2029 and 2031 for Dresden Units 2 and 3, respectively. Depreciation was therefore adjusted beginningSeptember 15, 2021 , to reflect these extended useful life estimates. In addition, in the third quarter of 2021, Exelon and Generation reversed approximately$81 million of severance benefit costs and$13 million of other one-time charges initially recorded in the third and fourth quarters of 2020 associated with the early retirements, which were excluded from Exelon's and Generation's Adjusted (non-GAAP) Operating Earnings. The following table summarizes the incremental expense forByron , Dresden, and Mystic Units 8 and 9 and the reversal of one-time charges forByron and Dresden recorded in the three and nine months endedSeptember 30, 2021 . For Mystic Units 8 and 9, the projected amounts for the remainder of 2021 and through the retirement date of 2024 are not expected to be material.
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