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June 13, 2003


The opinion of the court was delivered by: Ruben Castillo, District Judge.


Plaintiff Nicholas Stavros filed this securities class action lawsuit against Defendants Exelon Corporation ("Exelon"), Corbin A. McNeill, Jr. ("McNeill"), John W. Rowe ("Rowe") and Ruth Ann Gillis ("Gillis") (collectively "Defendants"), claiming violations of § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Securities Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5, as well as violations of § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), against McNeill, Rowe and Gillis ("Individual Defendants").*fn1 Defendants now move to dismiss Plaintiffs' consolidated amended class action complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) and for failure to plead securities fraud with particularity under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act ("PSLRA"). For the reasons set out herein, the Court grants Defendants' motion to dismiss. (R. 17-1.)


I. The Parties

The putative class includes all persons who purchased Exelon common stock between April 24, 2001, when Exelon issued a press release announcing its first quarter results and that it was on track to meet its target earnings per share ("EPS") of $4.50, and September 27, 2001, when Exelon issued a press release announcing a disappointing third quarter and revising its EPS target downward to $4.30-$4.45.

Defendant Exelon, the parent company of PECO Energy Company ("PECO") and Commonwealth Edison Company ("ComEd"), is headquartered in Chicago, Illinois and was formed by the October 2000 merger of PECO and ComEd's holding company, Unicom. In January 2001, Exelon restructured its merged operations into three segments: (1) Energy Delivery, the traditional regulated retail electricity distribution business of ComEd and PECO; (2) Generation, the electric generating facilities and Power Team, Generation's wholesale power marketing business; and (3) Enterprises, a collection of nonregulated businesses weighted toward the telecommunications industry.

During the class period, Defendants McNeill, Rowe and Gillis held high-level positions with Exelon. McNeill served as President of Generation and as Co-Chief Executive Officer ("Co-CEO") and Chairman of the Board of Directors of Exelon. Rowe was President and Co-CEO of Exelon and also had ultimate responsibility over Enterprises. Gillis served as Senior Vice President and Chief Financial Officer ("CFO") of Exelon.

II. The Claims

Plaintiffs' § 10(b) and Rule 10b-5 allegations against Defendants stem primarily from two bases: (1) misrepresentations regarding Exelon's ability to meet its 2001 EPS projection of $4.50; and (2) violations of Generally Accepted Accounting Principles ("GAAP"). The factual allegations underlying these claims are set forth below.

A. 2001 EPS Projections

Exelon's EPS projection of $4.50 initially was announced at a November 15, 2000 investor conference in New York. Using slides, which were filed with the SEC that same day as exhibits to a Form 8-K, Individual Defendants and then-CEO of Enterprises Michael Egan discussed Exelon's integrated strategy involving its three business segments. Defendants portrayed Energy Delivery as a "significant and steady source of earnings," Generation as the "primary growth vehicle in the nearterm," and Enterprises as "position[ed] to provide longer term growth prospects." (R. 18-1, Defs.' Exs., Vol 1, Ex. B, Nov. 15, 2000 8-K.) Enterprises was projected to report a loss of $15 million in 2001 with earnings before interest and taxes ("EBIT") of $60 million, approximately 1.7% of Exelon's total projected EBIT. Exelon elaborated on its current and future performance in subsequent filings with the SEC, including a March 2001 Form 8-K that detailed the risks that could affect the company's results. See infra discussion of March 2001 Form 8-K.

Plaintiffs allege that Defendants made several materially false and misleading statements during the class period regarding Exelon's ability to meet its 2001 EPS target. The statements can be grouped into four categories: (1) statements announcing Exelon's first quarter 2001 results, (R. 14, Am.Compl.¶¶ 63-68); (2) statements made during the second quarter 2001, (id. at ¶¶ 69-73); (3) statements announcing the second quarter 2001 results, (id. at ¶¶ 74-80); and (4) statements made during the third quarter, (id. at ¶¶ 81-82).

1. Statements Announcing First Quarter 2001 Results

On April 24, 2001, the first day of the class period, Exelon issued a press release announcing its results for the first quarter of 2001. The press release was also filed with the SEC in a Form 8-K that same day. Exelon reported a "strong first full quarter since the completion of its merger" with earnings of $1.23 per share. (R. 18-1, Defs.' Exs., Vol 1, Ex. E, Apr. 24, 2001 8-K.) McNeill stated that Exelon was "clearly on track to meet [its] 2001 earnings target of $4.50 per share." (Id.) The press release also noted that Exelon's EBIT were $941 million, three-fourth's of which were contributed by Energy Delivery with the balance contributed by Generation, offset by a loss in Enterprises. Regarding the performance of Enterprises, the apparent focus of this suit,*fn2 the press release stated that "Enterprises' operations were negatively impacted by higher gas prices at Exelon Energy" but that "Enterprise companies performed in accordance with their business plans." (Id.) The release also identified matters discussed therein as forward-looking and contained cautionary information.*fn3 Soon after the issuance of the press release, on May 2, 2001, a credit ratings agency upgraded Exelon's credit rating. On May 8, 2001, Exelon issued $500 million in senior unsecured notes; Generation also issued $700 million in senior unsecured notes on June 14, 2001.

Plaintiffs further allege that Exelon made materially false and misleading statements regarding its first quarter 2001 earnings in its Form 10-Q filed with the SEC on May 15, 2001. The Form 10-Q reflected EBIT of $293 million for Generation resulting from "higher margins on market and affiliate wholesale energy sales, coupled with decreased operating costs at the nuclear plants." (Id., Ex. G, First Quarter 2001 10-Q.) Enterprises recorded negative EBIT of $31 million. The Form 10-Q also contained some cautionary language and incorporated by reference risk factors discussed in other SEC filings.

Plaintiffs allege that statements discussing first quarter 2001 earnings were false and misleading, allege Plaintiffs, because of declining wholesale energy prices and problems at Enterprises. Therefore, Plaintiffs contend that Defendants' statements reaffirming the EPS target of $4.50 per share lacked any reasonable basis.

2. Statements During the Second Quarter 2001

In a May 31, 2001 interview to the Wall Street Transcript Corporation, Rowe repeated Exelon's earnings commitment of $4.50 per share and stated that the company believed it had "a strong capability of meeting [its commitments]" and that it was working hard "not only to meet them but to beat them." (R. 14, Am. Compl.¶ 69.) Regarding an economic slowdown, Rowe emphasized that all utilities are affected by a slowdown, but that Exelon was less affected than most because of its relatively low-cost generation base; nevertheless, Exelon would keep a "close weather eye on the economy." (Id.) Rowe also emphasized that Exelon had a very good first quarter in spite of the shaky economic conditions and that the company was optimistic about having a good year even in an uncertain economy.

Rowe also represented that Exelon was on track to meet or beat its 2001 EPS target at a June 13, 2001 conference; his statements were included in a press release filed as a Form 8-K. (R. 18-1, Defs.' Exs., Vol 1, Ex. M, June 13, 2001 8-K.) Rowe attributed the company's success to better-than-anticipated value-creating opportunities in the first quarter, fueled by high gas prices and Power Team's increasing market savvy. When asked about the effects of an excess supply of generation on earnings and profitability, Rowe cited the "the resilience of an earnings protection afforded by Exelon's low cost nuclear production (less than 2.2 cents/kilowatthour), the expertise and market reach of Power Team and the heavy demand generated from ComEd and PECO's combined customer base of 5 million." (Id.) Rowe continued to describe Generation as Exelon's "near-term growth vehicle" and Enterprises as a "platform for future growth," recognizing that a downturn in the telecommunications market was impacting EIS*fn4 profit margins. (Id.) The June 13, 2001 Form 8-K identified some of the matters discussed therein as forwardlooking statements that could be affected by the following factors: "future events affecting the demand for, and the supply of, energy, including weather and economic conditions and the availability of generating units, and economic, business, competitive and regulatory and other factors discussed in Exelon's other filings with the Securities and Exchange Commission." (Id.)

Rowe's statements during the second quarter were materially false and misleading, Plaintiffs allege, because of a number of factors, including unfavorable weather, declining wholesale energy prices, the economic slump, the decline of the telecommunications market, and Exelon's failure to write down to market value its investment in telecommunications company Corvis.

3. Statements Announcing Second Quarter 2001 Results

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