Business context and reporting period
Exelon Corporation’s Form 10-K covers the fiscal year ended December 31, 2012. Exelon combines competitive power generation and energy supply through Generation with regulated electric and gas delivery through ComEd, PECO and BGE. The Constellation merger closed March 12, 2012; 2012 consolidated results include Constellation and BGE only from that date, making comparisons with 2011 materially affected by the partial-year acquisition.
Financial and operating highlights
| Metric | 2012 | 2011 |
|---|---|---|
| Operating revenue | $23.489 billion | $19.063 billion |
| Operating income | $2.380 billion | $4.479 billion |
| Net income attributable to common stock | $1.160 billion | $2.495 billion |
| Diluted EPS | $1.42 | $3.75 |
| Cash flow from operating activities | $6.131 billion | $4.853 billion |
| Cash flow used in investing activities | $4.576 billion | $4.603 billion |
| Cash flow used in financing activities | $1.085 billion | $846 million |
- Exelon reported adjusted operating earnings, a non-GAAP measure, of $2.330 billion, or $2.85 per diluted share, versus $2.763 billion, or $4.16 per diluted share, in 2011. The filing cautions that this measure may not be comparable across companies.
- Cash and cash equivalents were $1.486 billion at year-end. Long-term debt, including debt to financing trusts, was $18.346 billion. Credit facilities totaled $8.3 billion, with approximately $6.5 billion available; there were no year-end borrowings under those facilities.
- 2012 capital expenditures were $5.871 billion in the filing’s capital-expenditure table; projected 2013 capital expenditures were $5.525 billion. Exelon separately reported $5.789 billion of capital expenditures in its cash-flow statement, reflecting differences in presentation and non-cash activity.
- Operating revenue net of purchased power and fuel, a non-GAAP measure, increased $1.536 billion to $13.332 billion, largely reflecting acquired operations. Generation’s figure rose $518 million to $7.376 billion, while its Midwest region declined $549 million.
- Generation’s operated nuclear fleet capacity factor was 92.7%, compared with 93.3% in 2011; production cost increased to $19.50/MWh from $18.86/MWh.
Material changes versus the prior comparable period
- Reported revenue increased primarily because of the Constellation merger and inclusion of BGE. Despite higher revenue, operating income and net income declined substantially. Exelon attributed the earnings reduction to higher operating costs, acquired energy-contract amortization, merger-related charges, a generating-station sale loss and increased interest expense.
- Generation recorded $1.098 billion of pre-tax amortization of acquired energy contracts. A $272 million pre-tax loss was recorded on the sale of three Maryland generating stations, completed November 30, 2012 for approximately $371 million in net proceeds.
- Operating and maintenance expense increased $2.777 billion company-wide, including the acquired businesses, $226 million of merger and integration costs, $216 million of Maryland merger commitments and $195 million related to a FERC settlement. Exelon reported total 2012 merger and integration costs of $746 million and estimated approximately $135 million of additional costs in 2013–2014.
- Operating cash flow rose despite lower net income, with pension and other postretirement contributions falling to $462 million from $2.360 billion in 2011.
- Exelon’s common dividend remained $0.525 per quarter through the first quarter of 2013. In February 2013, the board approved a policy contemplating $0.31 per quarter beginning in the second quarter, subject to board approval.
Outlook, management commentary, risks and contingencies
- Management cited low natural-gas and power prices, subdued demand, energy-efficiency programs and subsidized generation as pressures on Generation’s realized prices and margins. Hedging covered 94%–97% of expected generation for 2013, 62%–65% for 2014 and 27%–30% for 2015 across major segments.
- Management expected ComEd load to be essentially flat in 2013, with PECO and BGE forecasting declines of 0.5% and 2.0%, respectively. The filing states that weather, economic conditions, customer switching and regulatory outcomes may affect results.
- Exelon expected to invest up to $701 million in equity in the Antelope Valley solar project through 2013; full commercial operation was expected by the end of the third quarter of 2013. The project has a 25-year power purchase agreement. Nuclear uprate plans were deferred or cancelled in part due to market conditions; remaining potential uprates were estimated at 1,125–1,200 MW, with approximately $3.4 billion of overnight cost in 2013 dollars.
- The filing identifies nuclear safety, license renewals, spent-fuel disposal, decommissioning funding, environmental regulation, storm damage, credit and collateral requirements, and rate recovery as material risks. Generation’s nuclear decommissioning asset retirement obligation was $4.7 billion; NDT funds were approximately $7.2 billion. DOE spent-fuel acceptance was assumed to begin in 2025, and Generation estimated a potential approximately $1.0 billion one-time SNF fee, including interest, before first delivery.
- A January 2013 federal appeals decision changed management’s assessment of the IRS challenge to Exelon’s 1999 like-kind-exchange tax position. Exelon expected a first-quarter 2013 non-cash charge of approximately $270 million; potential tax and after-tax interest cash outflow could reach $860 million, excluding penalties, and the IRS’s asserted penalty could result in an additional $86 million after-tax charge if upheld. Exelon stated it intended to litigate.
- BGE’s requested rate increases of $131 million for electric distribution and $45 million for gas distribution were pending; management could not predict the amount regulators would approve. BGE was prohibited from paying common dividends through 2014.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and no material weaknesses.
Important facts for investors to verify
- Separate the merger’s partial-year contribution from underlying operating performance; verify pro forma comparisons and the final purchase-price allocation.
- Reconcile GAAP earnings to adjusted operating earnings, focusing on acquired-contract amortization, merger expenses, the station-sale loss and hedge mark-to-market effects.
- Track the dividend reduction, 2013 cash flow and capital-spending plans, available credit and debt maturities, and Generation’s collateral exposure under stressed prices or a credit downgrade.
- Monitor the like-kind-exchange litigation, the anticipated 2013 tax charge and potential cash exposure, as well as BGE’s rate case and dividend restrictions.
- Confirm progress and economics of Antelope Valley, nuclear uprates and utility grid-modernization projects, including regulatory cost recovery and project milestones.