Business context and reporting period
Exelon Corporation’s combined Form 10-K covers the fiscal year ended December 31, 2015, with comparative results for 2014 and 2013. Exelon combines competitive generation and power marketing (Generation) with regulated electricity and gas delivery businesses (ComEd, PECO and BGE). The filing is combined, but each registrant reports separately.
Financial performance and condition
Unless noted, amounts are in millions of dollars. Exelon’s 2015 results were:
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Operating revenue | $29,447 | $27,429 | +$2,018 (7.4%) |
| Operating income | $4,409 | $3,096 | +$1,313 |
| Operating margin | 15.0% | 11.3% | +3.7 percentage points |
| Net income attributable to common shareholders | $2,269 | $1,623 | +$646 (39.8%) |
| Diluted EPS | $2.54 | $1.88 | +$0.66 |
| Adjusted operating earnings (non-GAAP) | $2,227; $2.49/share | $2,068; $2.39/share | +$159; +$0.10/share |
| Cash from operating activities | $7,616 | $4,457 | +$3,159 |
| Capital expenditures | $7,624 | $6,077 | +$1,547 |
Revenue net of purchased power and fuel expense, a non-GAAP operating measure, was $16,363, up $1,937 (13.4%). Operating cash flow less capital expenditures was approximately negative $8 million; this simple measure excludes other investing cash flows.
At year-end, cash and cash equivalents were $6,502, current assets $15,334 and current liabilities $9,118 (current ratio approximately 1.68). Long-term debt, including debt to financing trusts, was $24,286; adding short-term borrowings of $533 and current long-term debt of $1,500 gives approximately $26.3 billion of reported debt. Aggregate credit facilities were $8.4 billion, with approximately $6.9 billion available and no facility borrowings. Nuclear decommissioning trust funds were $10,342; the nuclear decommissioning asset retirement obligation was approximately $8.2 billion.
Selected subsidiary results: Generation revenue/net income attributable to membership interest were $19,135/$1,372 (2014: $17,393/$835); ComEd $4,905/$426 (2014: $4,564/$408); PECO $3,032/$378 (2014: $3,094/$352); BGE $3,135/$275 (2014: $3,165/$198). Utility procurement revenues and expenses are largely pass-through, so revenue alone does not indicate utility margin.
Material changes versus the prior comparable period
- Generation’s revenue net of purchased power and fuel expense increased $1,646, with the comparison affected by full-year CENG consolidation in 2015 versus consolidation beginning April 1, 2014. The increase also reflected more favorable hedge mark-to-market results ($257 million gain in 2015 versus a $591 million loss in 2014), lower replacement-power costs, higher capacity revenue and Integrys results. Lower realized energy prices and asset sales partly offset gains.
- Operating and maintenance expense fell $246, primarily because 2014 included $663 million of Generation long-lived asset impairments versus $12 million in 2015. This benefit was partly offset by higher Generation labor, contracting and materials costs, including CENG, and more nuclear refueling outage days.
- 2014 included $437 million of asset-sale gains and a $289 million gain on consolidation/acquisition; these did not recur at comparable levels in 2015. Conversely, 2015 common-shareholder income benefited from more favorable operating results. The effective tax rate rose to 32.2% from 26.8%.
- Operating cash flow rose substantially, in part because cash collateral movements improved by $2,066 versus 2014, when Exelon posted significant collateral. Treat this as a potentially volatile cash-flow driver, not solely recurring operating improvement.
Guidance, outlook, risks and unusual items
- Management projected 2016 capital expenditures of approximately $7.6 billion: Generation $3.6 billion, ComEd $2.425 billion, PECO $675 million and BGE $825 million. The utilities expected to invest approximately $18 billion over five years, with an estimated $8 billion increase in rate base by the end of 2020.
- A company-wide cost program targets $350 million of O&M and capital savings, with about 35% of run-rate savings expected by year-end 2016 and full realization in 2018; management estimated an EPS benefit of $0.13–$0.18 from 2018 onward. Exelon’s board approved a policy to raise the dividend 2.5% annually for three years, beginning with the June 2016 dividend; future declarations remain subject to board approval.
- The proposed all-cash Pepco Holdings (PHI) acquisition was expected to close in the first quarter of 2016, subject to outstanding approvals, notably a DC Public Service Commission decision and pending Maryland appeals. The approximately $6.9 billion purchase consideration is being financed with debt, equity units, common stock, asset-sale proceeds and cash. Exelon estimated $430 million or more in net-present-value direct merger benefits/commitments, largely expected to be charged to earnings at closing, plus $53 million for charitable contributions. Failure to complete the deal could trigger a $180 million termination fee and up to $40 million of PHI expenses under specified circumstances.
- Wholesale power prices, weak demand, renewable and other subsidized generation, and market-design changes could pressure Generation’s margins and raise early-retirement risk. Generation hedged 90%–93% of expected output for 2016, 60%–63% for 2017 and 28%–31% for 2018. Quad Cities, Clinton and Ginna were identified as the plants at greatest economic risk; management deferred closure decisions. Oyster Creek is scheduled to cease generation by the end of 2019.
- Exelon cited possible adverse IRS outcomes in its 1999 like-kind exchange litigation. The filing gives differing exposure measures: up to $760 million net of a deposit in one discussion and up to $860 million of tax and after-tax interest in a potential 2016 adverse-decision scenario elsewhere; penalties were asserted separately. The Tax Court trial occurred in 2015 and an appeal could take years.
- Other material exposures include nuclear safety and decommissioning, SNF storage and delayed DOE disposal, environmental remediation, pension/OPEB assumptions, credit/collateral needs, and regulatory cost recovery. Generation’s nuclear fleet capacity factor was 93.7% versus 94.3% in 2014. Management reported effective internal control over financial reporting; the auditor issued an unqualified opinion.
Most important facts an investor should verify
- Whether PHI merger approvals were obtained, whether closing occurred, and the final financing, integration charges and customer commitments.
- The quality and repeatability of 2015 earnings growth, particularly the effects of CENG consolidation, hedge mark-to-market gains, tax items and absent 2014 impairments or one-time gains.
- Generation’s forward power-price exposure, hedge coverage, capacity-market outcomes and any decisions or new financial impacts concerning Quad Cities, Clinton or Ginna.
- Resolution and cash timing of the like-kind exchange tax litigation, reconciling the filing’s $760 million and $860 million exposure estimates.
- Whether operating cash flow, capital spending, debt levels, credit availability and dividend plans remain consistent with management’s stated priorities and outlook.