Exelon Corporation 2011 Form 10-K Summary
Business context and reporting period
This combined Form 10-K, filed February 9, 2012, reports the fiscal year ended December 31, 2011, with 2010 comparisons. It covers Exelon Corporation and its principal subsidiaries: Exelon Generation, a competitive power generator and energy supplier; ComEd, an Illinois electric transmission and distribution utility; and PECO, a Pennsylvania electric and gas utility. The filing includes quarterly data, but the financial results below are primarily annual, not a standalone fourth-quarter report.
Key financial metrics
| Exelon consolidated | 2011 | 2010 | Change |
|---|---|---|---|
| Operating revenue | $18.924 billion | $18.644 billion | Up $280 million |
| Operating income | $4.480 billion | $4.726 billion | Down $246 million |
| Net income | $2.495 billion | $2.563 billion | Down $68 million |
| Diluted GAAP EPS | $3.75 | $3.87 | Down $0.12 |
| Adjusted operating earnings, non-GAAP | $2.763 billion; $4.16 per diluted share | $2.689 billion; $4.06 per diluted share | Up $74 million; $0.10 per share |
| Cash flow from operations | $4.853 billion | $5.244 billion | Down $391 million |
| Capital expenditures | $4.042 billion | $3.326 billion | Up $716 million |
Operating margin was approximately 23.7% in 2011 versus 25.3% in 2010; net margin was approximately 13.2% versus 13.7%, respectively. These percentages are calculated from reported revenue and income.
- Fourth quarter: Revenue was $3.991 billion versus $4.494 billion in Q4 2010; operating income was $1.062 billion versus $939 million; net income was $606 million versus $524 million; diluted EPS was $0.91 versus $0.79.
- Cash flow and investment: Operating cash flow was reduced in part by $2.360 billion of pension and other postretirement contributions, including a $2.1 billion pension contribution in January 2011. Investing cash flow was an outflow of $4.603 billion; financing cash flow was an outflow of $846 million.
- Debt and liquidity: At year-end, reported long-term debt, including debt to financing trusts, was $12.189 billion, compared with $12.004 billion in 2010. The balance sheet also reported $828 million of long-term debt due within one year, $163 million of short-term borrowings and $225 million of short-term notes payable under PECO’s receivables agreement. Cash and cash equivalents were $1.016 billion, down from $1.612 billion. The registrants had $7.7 billion of aggregate credit commitments, of which $6.8 billion was available; no borrowings were outstanding under those credit facilities. Exelon reported a current ratio of approximately 1.10, calculated from current assets of $5.489 billion and current liabilities of $4.989 billion.
- Dividend: Exelon paid $2.10 per share in 2011, or $0.525 quarterly. A $0.525 second-quarter 2012 dividend was declared subject to the pending merger arrangements.
- Business segments: Generation net income was $1.771 billion, down $201 million; ComEd net income was $416 million, up $79 million; and PECO net income was $389 million, up $65 million.
Material changes versus the prior year
- Revenue rose modestly, but operating income and GAAP net income declined. Exelon cited Generation’s $288 million mark-to-market loss on hedging activities, weaker Midwest realized margins and higher operating and maintenance costs, including nuclear refueling costs.
- Generation’s revenue net of purchased power and fuel expense increased in the Mid-Atlantic after its PECO full-requirements PPA expired, but fell in the Midwest, largely due to lower margins on volumes previously sold under ComEd auction contracts. Stronger South and West results partly offset these pressures.
- PECO revenue fell by $1.799 billion, principally because the transition period and associated CTC recoveries ended in 2010; purchased power costs and CTC amortization also declined. PECO net income nevertheless increased, supported by new distribution rates and lower interest and income tax expense.
- ComEd net income increased with new distribution rates and EIMA-related revenue, partly offset by higher storm, labor and maintenance costs. Retail customers selecting competitive suppliers increased substantially at both ComEd and PECO; supply costs are generally passed through without utility markup.
- Operating cash flow declined despite higher non-cash operating adjustments, largely reflecting increased pension and postretirement contributions and other working-capital and collateral movements.
Outlook, management commentary, risks and unusual items
- Guidance and investment: The filing does not provide a clear company-wide 2012 earnings-per-share guidance range. Management expected the proposed Constellation merger to be approximately break-even to adjusted earnings in 2012 and accretive in 2013. Antelope Valley was also expected to become earnings- and cash-flow-accretive beginning in 2013. Estimated 2012 capital expenditures were $5.582 billion: Generation $3.768 billion, ComEd $1.330 billion and PECO $436 million.
- Market exposure: Management identified low natural gas and wholesale power prices, weak electricity demand, weather, growth in subsidized renewable generation and regulatory change as potential pressures on Generation. Expected generation was 88%–91% hedged for 2012, 61%–64% for 2013 and 32%–35% for 2014, leaving greater exposure further out.
- Pending merger: Exelon agreed to acquire Constellation in a stock-for-stock transaction at an exchange ratio of 0.930 Exelon shares per Constellation share. Shareholders and several regulators had approved it, but FERC, the NRC and Maryland approvals remained outstanding as of the filing. Proposed conditions included divestiture of three PJM plants totaling 2,648 MW and more than $1 billion of proposed investment and benefits in Maryland. The filing also notes a non-public FERC investigation of certain Constellation trading activity, merger litigation subject to settlement approval, estimated transaction costs of about $150 million and anticipated integration costs of about $500 million. Termination fees could be $800 million payable by Exelon or $200 million payable by Constellation in specified circumstances.
- Regulatory and legal uncertainty: Illinois EIMA provides for a ten-year, approximately $2.6 billion ComEd infrastructure investment program and formula-rate cost recovery, subject to ICC review, performance requirements and early-termination provisions. ComEd’s 2007 rate-case remand could result in refunds; its request for ICC relief from liability for 2011 storm outages affecting more than 900,000 customers remained unresolved. The 2010 ComEd rate order was also under appeal.
- Environmental and nuclear risks: The D.C. Circuit stayed CSAPR on December 30, 2011, leaving CAIR in effect pending review. The MATS rule may require upgrades at co-owned Conemaugh. NRC follow-up to Fukushima, including seismic and flooding reassessments, could require additional spending; the specific requirements and costs were not yet clear. Generation’s Oyster Creek unit is scheduled to cease operations by December 31, 2019. DOE acceptance of spent nuclear fuel was assumed to begin in 2020, but timing remains uncertain; the reported spent-fuel obligation was $1.019 billion.
- Tax and other unusual items: The IRS dispute over the 1999 fossil-plant sale remains material. A fully successful IRS challenge to the like-kind exchange position could require up to $860 million of tax and interest, including $550 million at ComEd, and potentially up to $260 million of after-tax interest expense; Exelon expected to litigate in 2012. Other notable items included a $36 million Wolf Hollow bargain-purchase gain, a $6 million PPA settlement gain and a $46 million net tax and interest benefit from nuclear decommissioning trust fund tax rulings.
- Other exposures: Exelon reported a $3.7 billion nuclear decommissioning ARO and $6.5 billion in nuclear decommissioning trust investments. Environmental remediation reserves totaled $224 million. Capital-market disruption, credit downgrades and collateral calls are risks; a Generation downgrade below investment grade could have required approximately $1.819 billion of incremental collateral at year-end.
Management reported effective internal control over financial reporting, and the independent auditor issued an unqualified opinion on the consolidated financial statements.
Important facts for investors to verify
- Progress and final terms for Constellation merger approvals, required divestitures, Maryland commitments, FERC investigation and any remaining litigation.
- Whether lower power prices and hedge settlements affect Generation’s margins, cash flows and hedge coverage after 2012.
- ICC outcomes on ComEd’s EIMA formula rates, reliability and customer-service commitments, storm claims, and possible refunds from the 2007 rate-case remand.
- Resolution and cash timing of the IRS like-kind exchange dispute, including potential tax, interest and penalty exposure.
- Cost and schedule effects of NRC post-Fukushima requirements, nuclear uprates, spent-fuel storage and decommissioning-fund adequacy.
- Actual 2012 capital spending, pension contributions, cash generation, available liquidity and dividend capacity relative to the filing’s estimates.