Exelon Corporation 2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014. The filing is a combined annual report for Exelon and subsidiaries Generation, ComEd, PECO and BGE; 2014 results include CENG from April 1, when Generation assumed operational control. Accordingly, some comparisons with 2013 are not like-for-like.
Business context
Exelon combines competitive power generation and energy marketing through Generation with regulated electric and gas delivery through ComEd, PECO and BGE. Generation’s fleet is predominantly nuclear; the utilities serve customers in Illinois, southeastern Pennsylvania and Maryland.
Financial performance and liquidity
| Exelon consolidated, $ millions except per-share data | 2014 | 2013 | Change |
|---|---|---|---|
| Operating revenue | $27,429 | $24,888 | +10.2% |
| Operating income | $3,096 | $3,669 | -15.6% |
| Net income | $1,820 | $1,729 | +5.3% |
| Net income attributable to common shareholders | $1,623 | $1,719 | -5.6% |
| Diluted EPS | $1.88 | $2.00 | -6.0% |
| Adjusted operating earnings, non-GAAP | $2,068 | $2,149 | -3.8% |
| Cash from operations | $4,457 | $6,343 | -29.7% |
| Capital expenditures | $6,077 | $5,395 | +12.6% |
Revenue net of purchased power and fuel expense, a non-GAAP operating measure, was $14,426 million versus $14,164 million, up $262 million. At Generation, this measure was $7,468 million versus $7,433 million. Generation’s 2014 operating income fell to $1,176 million from $1,677 million, and net income attributable to its membership interest fell to $835 million from $1,070 million.
Cash from operations fell despite higher net income, reflecting, among other factors, $1,478 million of net counterparty collateral payments versus $215 million received in 2013, higher pension and postretirement contributions, and working-capital movements. Year-end cash and cash equivalents were $1,878 million, compared with $1,609 million. Long-term debt, including debt to financing trusts, was $20,010 million; the balance sheet also reported $1,802 million of long-term debt due within one year and $460 million of short-term borrowings.
At year-end, revolving credit facilities had $8.5 billion of aggregate commitments and $7.3 billion available; there were no borrowings under those facilities. Exelon’s quarterly common dividend was $0.31 per share throughout 2014, or $1.24 for the year.
Material changes and unusual items
- Consolidating CENG added its assets and liabilities, including a $1,760 million nuclear decommissioning obligation, and produced a $261 million gain. CENG also introduced a material noncontrolling interest.
- Generation acquired Integrys Energy Services for $332 million and recorded a $28 million bargain-purchase gain.
- Generation recorded $663 million of long-lived asset impairment charges, including charges on assets held for sale, Upstream properties and wind projects. It also recorded $437 million of gains on asset sales.
- Generation’s economic hedges produced $591 million of mark-to-market losses in 2014, compared with $504 million of gains in 2013. These timing-sensitive amounts contributed to the gap between GAAP and adjusted earnings.
- The effective income tax rate for Exelon was 26.8%, down from 37.6% in 2013. Management cited tax settlements and other tax items; results also included the CENG consolidation and divestitures.
Outlook, commentary and risks
Management expected the PHI all-cash acquisition to close in the second or third quarter of 2015, subject to remaining regulatory approvals and other conditions. The stated financing plan included approximately $3.5 billion of debt, up to $1.0 billion of cash from asset sales and the remainder from equity issuance, including mandatory convertible securities. Exelon had reduced its bridge facility to $3.2 billion. The filing estimated approximately $650 million of additional PHI acquisition and integration expenses, of which about $100 million was expected to be capitalized, excluding direct customer-related investments.
Management projected 2015 capital expenditures of $7.2 billion for Exelon, including $3.625 billion for Generation, $2.2 billion for ComEd, $550 million for PECO and $700 million for BGE. The utilities planned approximately $16 billion of investment over five years. Generation reported that major-segment generation was hedged 93%–96% for 2015, 61%–64% for 2016 and 31%–34% for 2017. Management described continued pressure from low wholesale power prices, aggressive retail competition and market design changes; it also highlighted nuclear fleet reliability, regulated investment and operational discipline.
- Market and commodity exposure: Low gas and power prices, weak demand, subsidized generation, weather, unhedged positions and counterparty or fuel-supply failures could pressure Generation’s margins and cash flows.
- Merger and financing: PHI approvals, integration, financing costs and potential termination fees remained uncertain. The filing disclosed a possible reverse termination fee of up to $180 million in specified circumstances.
- Tax dispute: If the IRS prevails on the 1999 like-kind exchange position, potential tax and after-tax interest, excluding penalties, could reach $810 million as of year-end; approximately $310 million relates to ComEd under Exelon’s hold-harmless arrangement. A separate potential after-tax penalty charge was estimated at $90 million.
- Nuclear and environmental matters: Exelon reported a $7.0 billion nuclear decommissioning ARO and $10.5 billion in decommissioning trust funds. Future funding, spent-fuel disposal, license renewals, environmental requirements and site remediation remain significant uncertainties. The filing estimated $325–$350 million of Generation capital spending and $75 million of operating expense for 2015–2019 related to NRC Fukushima-related actions.
- Regulatory and legal matters: BGE faced FERC transmission-return complaints; requested ROE reductions could mean about $11 million of annual revenue reduction and estimated refunds of roughly $13 million and $14 million for the two complaint periods. ComEd’s EIMA rate formula and FutureGen obligations, and BGE’s regulatory cost recovery, also warrant monitoring.
Most important facts for investors to verify
- How much of the 2014 earnings change reflects ongoing operations versus CENG consolidation, asset-sale gains, impairment charges, hedge mark-to-market movements and tax items.
- The final PHI approval status, consideration, financing mix, customer commitments, integration costs and any effect on Exelon’s credit metrics or dividend capacity.
- Generation’s realized and forward power economics, hedge coverage, collateral requirements and cash generation after the unusually large 2014 collateral outflow.
- Whether decommissioning trust returns and future contributions are sufficient for nuclear obligations, including the impact of revised cost estimates and license assumptions.
- The ultimate outcomes and financial exposure for the IRS like-kind exchange case, BGE’s FERC ROE complaints, and material environmental or other contingencies.
The filing states that management considered internal control over financial reporting effective at December 31, 2014; the independent auditor issued unqualified opinions on the financial statements and internal controls.