Exelon Corporation — 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. This is an annual filing, not a standalone fourth-quarter report. The combined filing covers Exelon and its principal subsidiaries: Exelon Generation, Commonwealth Edison (ComEd), and PECO.
Business context and results
Exelon combines competitive electricity generation and wholesale marketing, primarily through Generation, with regulated electricity delivery in northern Illinois through ComEd and regulated electricity and natural gas delivery in southeastern Pennsylvania through PECO. Generation owned 24,850 MW of capacity and controlled another 6,153 MW through long-term contracts at year-end. Nuclear plants supplied 81% of Generation’s electric supply in 2009.
| Exelon consolidated ($ millions, except per-share data) | 2009 | 2008 | Change |
|---|---|---|---|
| Operating revenue | $17,318 | $18,859 | Down 8.2% |
| Operating income | $4,750 | $5,299 | Down 10.4% |
| Operating margin | 27.4% | 28.1% | Down 0.7 percentage points |
| Net income | $2,707 | $2,737 | Down 1.1% |
| Diluted EPS | $4.09 | $4.13 | Down $0.04 |
| Cash from operating activities | $6,094 | $6,551 | Down $457 |
| Capital expenditures | $3,273 | $3,117 | Up $156 |
| Cash and cash equivalents at year-end | $2,010 | $1,271 | Up $739 |
Exelon reported total assets of $49.2 billion and shareholders’ equity of $12.6 billion at year-end. Long-term debt, including debt to financing trusts, was $11.4 billion; current liabilities included $639 million of long-term debt due within one year, $415 million of PECO transition-trust debt due within one year, and $155 million of short-term borrowings. The filing reports $6.7 billion of available capacity under revolving credit agreements, against $7.3 billion of total commitments. Exelon’s quarterly dividend was $0.525 per share throughout 2009, or $2.10 per share for the year.
| Segment net income ($ millions) | 2009 | 2008 | Change |
|---|---|---|---|
| Generation | $2,122 | $2,278 | Down $156 |
| ComEd | $374 | $201 | Up $173 |
| PECO | $353 | $325 | Up $28 |
Material changes versus 2008
- Generation weakened: Revenue fell 9.8% to $9.7 billion and operating income fell $699 million to $3.3 billion. Lower wholesale market prices, reduced mark-to-market hedge gains, adverse portfolio conditions, higher nuclear fuel costs, and a $223 million impairment of the Handley and Mountain Creek plants weighed on results. Lower Illinois rate-relief costs and improved nuclear trust investment performance partly offset the decline.
- Regulated businesses improved net income despite lower sales: ComEd net income rose to $374 million, supported by higher distribution rates, lower operating costs and tax-related benefits, although retail deliveries fell 5.6%. PECO net income rose to $353 million, helped by higher gas distribution rates and lower uncollectible-account expense; retail electric deliveries fell 3.3%.
- Cash flow and pension funding: Operating cash flow decreased to $6.1 billion. Exelon made a $350 million discretionary pension contribution in September; the reported unfunded pension and postretirement balance declined to $5.83 billion from $6.38 billion, mainly due to improved asset returns and the contribution.
- Nuclear trust performance rebounded: Exelon recorded $256 million of realized and unrealized gains in 2009 on relevant non-regulatory-agreement nuclear decommissioning trust investments, compared with $308 million of losses in 2008.
Outlook, risks, contingencies and unusual items
- Management outlook: Management described weak economic conditions, lower electricity demand and depressed wholesale power prices as continuing challenges. No specific consolidated earnings guidance for 2010 is provided in the supplied filing text. Management expected cost savings to help offset rising pension, benefit and inflation costs.
- Generation hedging and investment: Expected generation was 91%–94% hedged for 2010, 69%–72% for 2011 and 37%–40% for 2012, leaving greater exposure further out. Planned nuclear uprates target 1,300–1,500 MW of added capacity over eight years, with estimated investment of about $3.5 billion. Generation had not decided to build the proposed Texas nuclear plant and shifted to seeking an early site permit.
- Retirements and impairment: Generation announced the planned May 2011 retirement of four fossil units at Cromby and Eddystone, citing economics. It recorded $24 million of exit-related charges and $32 million of accelerated depreciation in 2009; further accelerated depreciation was expected. PJM raised possible transmission reliability concerns, and Generation said it could continue operating affected units beyond the planned date if required, subject to permits and adequate cost-based compensation.
- Rate and procurement transition: PECO’s electric generation rate caps and full-requirements power purchase agreement with Generation were scheduled to end December 31, 2010. PECO had procured about 50% of estimated residential supply needs for 2011; those procurements indicated an average residential price increase of about 4% versus current prices, but the final change was not yet known. Proposed Pennsylvania rate relief, rate-cap extensions or generation taxes remained risks.
- Environmental exposure: A draft New Jersey permit for Oyster Creek proposed cooling towers within seven years. Generation estimated retrofit costs of $700–$800 million and said it would close the plant if final requirements mandated the towers. The filing also describes environmental remediation reserves of $175 million at Exelon and possible additional costs not presently determinable.
- Tax dispute: The IRS challenged Exelon and ComEd’s tax treatment of the 1999 fossil-plant sale. A successful challenge could result in up to $1.1 billion of tax and interest cash outflow, excluding penalties; potential after-tax interest expense was estimated at up to $300 million, and a separate IRS penalty claim could produce a $196 million after-tax charge. Resolution timing and outcome were uncertain.
- Other significant exposures: Generation reported an estimated $45 million NRC decommissioning funding shortfall at year-end under its remediation plan and anticipated using financial assurance rather than cash contributions. The DOE had not begun accepting spent nuclear fuel; the company assumed acceptance would start in 2020. Exelon also identified market-price, counterparty, nuclear operations, credit-rating, pension, regulatory and climate-policy risks.
- Accounting and unusual items: The 2009 results included a $223 million Generation plant impairment, $117 million of debt-extinguishment losses across Exelon and Generation, and an $83 million noncash gain from state tax-rate reassessment and ComEd tax-position remeasurement. PECO’s up-to-$225 million receivables-sale arrangement was expected to be accounted for as a secured borrowing starting in 2010.
Most important facts for investors to verify
- Whether lower wholesale power prices and Generation’s declining hedge coverage materially affect 2010–2012 earnings and cash flows.
- The final costs, timing and reliability consequences of the Cromby and Eddystone retirements, and whether any units must remain operating.
- PECO’s final post-cap electric supply costs, customer rate changes and the status of proposed Pennsylvania legislative or regulatory actions.
- Progress and funding for the nuclear uprate program, Oyster Creek permitting, spent-fuel storage and decommissioning obligations.
- The status and potential financial impact of the 1999 fossil-asset tax dispute and other significant tax positions.
- Whether pension contributions, credit-facility renewal and liquidity remain manageable under prolonged weak markets; also verify the reported debt maturity schedule and collateral requirements.