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 six months endedJune 30, 2021 compared to the same period in 2020. For additional information regarding the financial results for the three and six months endedJune 30, 2021 and 2020 see the discussions of Results of Operations by Registrant. Three Months Ended June 30, Favorable Six Months Ended June 30, Favorable (unfavorable) (unfavorable) 2021 2020 variance 2021 2020 variance Exelon $ 401$ 521 $ (120)$ 112 $ 1,103 $ (991) Generation (61) 476 (537) (854) 521 (1,375) ComEd 192 (61) 253 390 107 283 PECO 104 39 65 271 178 93 BGE 45 39 6 254 219 35 PHI 141 94 47 269 202 67 Pepco 75 57 18 134 109 25 DPL 30 19 11 86 64 22 ACE 37 18 19 51 31 20 Other(a) (20) (66) 46 (218) (124) (94) __________ (a)Primarily includes eliminating and consolidating adjustments, Exelon's corporate operations, shared service entities and other financing and investing activities. Three Months EndedJune 30, 2021 Compared to Three Months EndedJune 30, 2020 . Net income attributable to common shareholders decreased by$120 million and diluted earnings per average common share decreased to$0.41 in 2021 from$0.53 in 2020 primarily due to: 146
-------------------------------------------------------------------------------- Table of Contents •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; •Impairments of theNew England asset group and the Albany Green Energy biomass facility at Generation; and •Lower net unrealized and realized gains on NDT funds. The decreases were partially offset by: •Higher mark-to-market gains; •Higher net unrealized and realized gains on equity investments; •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 DPL and ACE; •Favorable volume at PECO and ACE; and •Lower storm costs at PECO due to the absence of theJune 2020 storms. Six Months EndedJune 30, 2021 Compared to Six Months EndedJune 30, 2020 . Net income attributable to common shareholders decreased by$991 million and diluted earnings per average common share decreased to$0.11 in 2021 from$1.13 in 2020 primarily due to: •Impacts of theFebruary 2021 extreme cold weather event; •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; •Impairments of theNew England asset group and the Albany Green Energy biomass facility at Generation; 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; 147 -------------------------------------------------------------------------------- Table of Contents •Higher net unrealized and realized gains on equity investments; •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 DPL and ACE; •Favorable weather conditions at PECO, DPL'sDelaware service territory, and ACE; •Favorable volume at PECO and ACE; and •Lower storm costs at PECO due to the absence of theJune 2020 storms. 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 six months endedJune 30, 2021 compared to the same period in 2020. 148
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Three Months Ended June 30,
2021 2020
Earnings per Earnings per
(In millions, except per share data) Diluted Share Diluted Share
Net Income Attributable to Common Shareholders $ 401 $ 0.41 $ 521 $ 0.53
Mark-to-Market Impact of Economic Hedging
Activities (net of taxes of $79 and $18 ,
respectively) (231) (0.24) (51) (0.05)
Unrealized Gains Related to NDT Fund
Investments (net of taxes of $134 and $275 ,
respectively)(a) (130) (0.13) (305) (0.31)
Asset Impairments (net of taxes of $124 and
$7 , respectively)(b) 368 0.38 19 0.02
Plant Retirements and Divestitures (net of
taxes of $116 and $2 , respectively)(c) 344 0.35 7 0.01
Cost Management Program (net of taxes of $1
and $3 , respectively)(d) 2 - 6 0.01
Change in Environmental Liabilities (net of
taxes of $0 ) - - 1 -
COVID-19 Direct Costs (net of taxes of $3 and
$10 , respectively)(e) 9 0.01 27 0.03
Deferred Prosecution Agreement Payments (net
of taxes of $0 )(f) - - 200 0.20
Acquisition Related Costs (net of taxes of
$1 )(g) 2 - - -
ERP System Implementation Costs (net of taxes
$1 )(h) 2 - - -
Planned Separation Costs (net of taxes of
$7 )(i) 13 0.01 - -
Costs Related to Suspension of Contractual
Offset (net of taxes of $12 )(j) 41 0.04 - -
Income Tax-Related Adjustments (entire amount
represents tax expense) (2) - 5 0.01
Noncontrolling Interests (net of taxes of $8
and $20 , respectively)(k) 50 0.05 104 0.11
Adjusted (non-GAAP) Operating Earnings $ 869 $ 0.89 $ 536 $ 0.55
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Six Months Ended June 30,
2021 2020
Earnings per Earnings per
(In millions, except per share data) Diluted Share Diluted Share
Net Income Attributable to Common Shareholders
0.11$ 1,103 $ 1.13 Mark-to-Market Impact of Economic Hedging Activities (net of taxes of$125 and$50 , respectively) (366) (0.37) (146) (0.15) Unrealized (Gains) Losses Related toNDT Fund Investments (net of taxes of$94 and$130 , respectively)(a) (87) (0.09) 180 0.18 Asset Impairments (net of taxes of$124 and$7 , respectively)(b) 368 0.38 21 0.02 Plant Retirements and Divestitures (net of taxes of$219 and$6 , respectively)(c) 654 0.67 20 0.02 Cost Management Program (net of taxes of$1 and$6 , respectively)(d) 4 - 17 0.02 Change in Environmental Liabilities (net of taxes of$1 and$0 , respectively) 2 - 1 - COVID-19 Direct Costs (net of taxes of$7 and$10 , respectively)(e) 18 0.02 27 0.03 Deferred Prosecution Agreement Payments (net of taxes of$0 )(f) - - 200 0.20 Acquisition Related Costs (net of tax of$3 )(g) 7 0.01 - - ERP System Implementation Costs (net of taxes of$1 )(h) 7 0.01 - - Planned Separation Costs (net of taxes of$7 )(i) 21 0.02 - - Costs Related to Suspension of Contractual Offset (net of taxes of$12 )(j) 41 0.04 - - Income Tax-Related Adjustments (entire amount represents tax expense) (4) - 4 - Noncontrolling Interests (net of taxes of$3 and$10 , respectively)(k) 33 0.03 (40) (0.04)
Adjusted (non-GAAP) Operating Earnings
0.83$ 1,387 $ 1.42 __________ 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%. UnderIRS 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 50.6% and 47.4% for the three months endedJune 30, 2021 and 2020, respectively. The effective tax rates for the unrealized gains and losses related to NDT fund investments were 51.7% and 41.9% for the six months endedJune 30, 2021 and 2020, respectively. (a)Reflects the impact of net unrealized gains on Generation's NDT fund investments for Non-Regulatory Agreement Units. (b)In 2021, reflects an impairment in theNew England asset group and an impairment recorded as a result of the agreement to sell the Albany Green Energy biomass facility. In 2020, reflects an impairment at ComEd related to the acquisition of transmission assets and the impairment of certain wind assets at Generation. (c)In 2021, primarily reflects accelerated depreciation and amortization associated with Generation's decision 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 a gain on sale of Generation's solar business. In 2020, primarily reflects accelerated depreciation and amortization expenses associated with the early retirement of certain fossil sites. (d)Primarily represents reorganization 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 inJuly 2020 with theU.S. Attorney's Office for the Northern District of Illinois . 150 -------------------------------------------------------------------------------- Table of Contents (g)Reflects costs related to the acquisition of EDF's interest in CENG. (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 in the second quarter of 2021. (k)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. Significant 2021 Transactions and Developments Planned Separation OnFebruary 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. OnFebruary 25, 2021 , Exelon and Generation filed applications with theFERC , NYPSC, and NRC seeking approvals for the separation of Generation. OnMarch 25, 2021 , Exelon filed a request for a private letter ruling with theIRS to confirm the tax-free treatment of the planned separation. Exelon and Generation expect a decision from theIRS in the third quarter of 2021, theFERC in the second half of 2021, 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 applications will be approved as filed. In connection with the planned separation, Exelon incurred transaction costs of approximately$19 million and$28 million on a pre-tax basis for the three and six months endedJune 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. Impacts of theFebruary 2021 Extreme Cold Weather Event andTexas -based Generating Assets Outages Beginning onFebruary 15, 2021 , Generation'sTexas -based generating assets within theERCOT market, specifically Colorado Bend II, Wolf Hollow II, and Handley, experienced outages as a result of extreme cold weather conditions. In addition, those weather conditions drove increased demand for service, dramatically increased wholesale power prices, and also increased gas prices in certain regions. The estimated impact to Exelon's and Generation's Net income for the six months endedJune 30, 2021 arising from these market and weather conditions was a reduction of approximately$880 million . The estimated impact to Exelon's and Generation's Net income for the three months endedJune 30, 2021 was not material. The six months ended estimated impact includes certain charges associated with the natural gas business that may be reduced through waivers and/or recoveries from customers. Therefore, such charges are not included in the estimated full year earnings impact. Exelon and Generation estimate a reduction in Net income of approximately$670 million to$820 million for the full year 2021. The ultimate impact to Exelon's and Generation's consolidated financial statements may be affected by a number of factors, including final settlement data, the impacts of customer and counterparty credit losses, any state or federal solutions to address the financial challenges caused by the event, and related litigation and contract disputes. See Note 3 - Regulatory Matters and Note 15 - Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements for additional information. Exelon expects to offset between$410 million and$490 million of this impact for the full year 2021 primarily at Generation through a combination of enhanced revenue opportunities, deferral of selected non-essential maintenance, and primarily one-time cost savings. 151
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Table of Contents Agreement for the Sale of a Generation Biomass Facility OnApril 28, 2021 , Generation and ReGenerate entered into a purchase agreement, under which ReGenerate agreed to purchase Generation's interest in theAlbany Green Energy biomass facility. As a result, in the second quarter of 2021, Exelon and Generation recorded a pre-tax impairment charge of$140 million which is excluded from Exelon's and Generation's Adjusted (non-GAAP) Operating Earnings. The sale was completed onJune 30, 2021 for a net purchase price of$36 million . See Note 2 - Mergers, Acquisitions, and Dispositions of the Combined Notes to Consolidated Financial Statements for additional information. 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, there are 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. See Note 9 - Asset Impairments of the Combined Notes to Consolidated Financial Statements for additional information. Further, in the second quarter of 2021, Exelon and Generation recorded a pre-tax charge of$53 million for decommissioning-related activities that were not offset for the Byron units due to the inability to recognize a regulatory asset at ComEd. In the event Byron retires inSeptember 2021 as previously announced, the full year impact is estimated to be in the range of$450 million to$600 million , depending on future market returns. See Note 7 - Early Plant Retirements and Note 8 - Nuclear Decommissioning of the Combined Notes to Consolidated Financial Statements for additional information. All of the charges above are excluded from Exelon's and Generation's Adjusted (non-GAAP) Operating Earnings. The following table summarizes the incremental expense recorded in the three and six months endedJune 30, 2021 and the estimated amounts of incremental expense expected to be incurred for the full year 2021 and through the retirement dates.
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