EXELON CORP annual report, FY2010

Business context and reporting period

Exelon Corporation’s combined Form 10-K covers the fiscal year ended December 31, 2010; it is an annual filing, not a standalone fourth-quarter report. Exelon operates competitive generation through Exelon Generation and regulated electricity delivery through ComEd in northern Illinois and electricity and gas delivery through PECO in southeastern Pennsylvania.

The filing includes separate financial statements for Exelon, Generation, ComEd and PECO. The figures below refer to Exelon consolidated results unless otherwise specified.

Financial results and liquidity

• Revenue increased 7.7%, while net income fell 5.3% and diluted EPS fell 5.4%. Calculated operating margin was approximately 25.4%, down from 27.4%; net margin was approximately 13.7%, down from 15.6%.
• Operating cash flow less capital expenditures was approximately $1.918 billion, versus $2.821 billion in 2009. Exelon ended 2010 with $1.612 billion in cash, compared with $2.010 billion a year earlier.
• At year-end, current assets were $6.398 billion and current liabilities $4.240 billion, a calculated current ratio of approximately 1.51. The balance sheet showed $11.614 billion of long-term debt, $599 million due within one year, $390 million of financing-trust debt and $225 million of short-term notes payable under an accounts-receivable arrangement.
• Credit facilities totaled $7.365 billion, with $6.947 billion available at year-end. Exelon’s common dividend was $2.10 per share for 2010, unchanged from 2009.
• Fourth-quarter revenue was $4.494 billion and net income $524 million, versus $4.116 billion and $581 million, respectively, in fourth-quarter 2009.

Material changes versus the prior year

• Management cited higher capacity pricing, favorable weather in utility territories and lower Illinois settlement costs as offsets to unfavorable market and portfolio conditions, higher nuclear fuel costs, reduced hedge mark-to-market gains and a $57 million impairment of sulfur dioxide allowances.
• Generation revenue rose to $10.025 billion from $9.703 billion, but operating income declined to $3.046 billion from $3.295 billion and net income to $1.972 billion from $2.122 billion. Nuclear fleet capacity factor was 93.9%, versus 93.6%; production cost increased to $17.31 per MWh from $16.07.
• ComEd operating income increased to $1.056 billion from $843 million, but net income declined to $337 million from $374 million, principally reflecting tax-related remeasurement and interest effects. PECO net income declined to $324 million from $353 million, with increased operating expenses and depreciation partly offset by higher electric revenue net of purchased power.
• Exelon acquired John Deere Renewables for approximately $893 million in cash, adding 735 MW of operating wind capacity. Total consideration recorded was $925 million, including contingent consideration.
• PECO completed recovery of its stranded costs as its electric rate-cap transition ended December 31, 2010. Beginning in 2011, it moved to competitive procurement for default-service electricity.

Outlook, management commentary and key risks

• Management projected flat ComEd and PECO load demand in 2011. Generation’s expected generation was hedged 90%–93% for 2011, 67%–70% for 2012 and 32%–35% for 2013, leaving greater exposure to future wholesale prices in later years. Management identified low natural-gas prices, weak economic growth, weather and subsidized renewable supply as potential pressures on wholesale prices.
• Management estimated 2011 capital expenditures of about $4.043 billion: $2.562 billion at Generation, $1.015 billion at ComEd and $448 million at PECO. Generation’s nuclear-uprate program targets 1,300–1,500 MW of added capacity over eight years, with estimated investment of approximately $3.65 billion; 101 MW had been added by year-end 2010.
• Exelon contributed $2.1 billion to its pension plans in January 2011, representing all currently planned 2011 qualified-plan contributions. Management estimated funded status could rise from 71% at year-end 2010 to 89% at year-end 2011, subject to investment returns and actuarial valuations. The filing states that approximately $850 million of the contribution was expected to be funded by accelerated tax benefits.
• Exelon expected to refinance approximately $6.4 billion of credit facilities in the first half of 2011. ComEd separately issued $600 million of bonds in January 2011 as interim liquidity for the pension contribution.
• PECO’s approved rate settlements provide annual revenue increases of $225 million for electric distribution and $20 million for gas distribution, effective January 1, 2011. The filing estimates an increase of 5.1% in the average residential electric bill and 1% in the average residential gas bill. ComEd’s $326 million requested annual delivery-revenue increase remained under review; management said the court ruling on depreciation could reduce the request by approximately $85 million.
• Generation plans to cease operations at Oyster Creek by December 31, 2019, ahead of its current 2029 license expiration. The filing estimates $25–$30 million of additional annual operating expense in 2011–2015, plus retention-related costs. Four fossil units were also scheduled for retirement in stages from 2011 through 2012, subject to transmission upgrades.
• Material contingencies include unresolved IRS litigation over the 1999 like-kind exchange. The filing estimates potential tax and interest cash outflow of up to $830 million, excluding penalties, and a possible after-tax interest charge of up to $230 million; a further $86 million after-tax penalty is possible if the IRS prevails on its penalty claim. A separate preliminary IRS settlement was expected to result in approximately $300 million of tax and interest assessments in 2011 and approximately $270 million of additional refunds during 2011–2014; Exelon paid $302 million to the IRS in December 2010 to limit interest accrual.
• Other material exposures include nuclear decommissioning and spent-fuel obligations, environmental remediation, changing emissions and water rules, pension and postretirement assumptions, contested utility rate recovery, wholesale-market and counterparty risks, and potential credit-rating-related collateral demands. The filing assumes DOE spent-fuel acceptance could begin in 2020; Generation’s recorded spent-nuclear-fuel obligation was $1.018 billion.
• Management reported effective internal control over financial reporting, and the independent auditor issued unqualified opinions on the financial statements and internal controls. No standalone 2011 EPS guidance is stated in the provided filing text.

Important facts for investors to verify

• Reconcile the decline in operating cash flow and the impact of the January 2011 pension contribution on liquidity, borrowing and future pension expense.
• Track wholesale power prices, hedge coverage and realized Generation margins, especially for 2012–2013 and after PECO’s supply contract with Generation expired.
• Confirm the outcome and timing of ComEd’s rate case and appeal, including any refund exposure and recovery of smart-meter costs.
• Monitor the IRS like-kind-exchange litigation and the final terms, cash timing and accounting effects of the preliminary tax settlement.
• Assess execution, financing and returns for the Exelon Wind acquisition, nuclear uprates and utility grid and smart-meter investments.
• Review updated costs, funding status and regulatory requirements for nuclear decommissioning, spent fuel and environmental matters, including the Oyster Creek closure plan.