Business Context and Reporting Period
This Form 8-K, dated May 30, 2012, reports on Exelon Corporation and its subsidiary Commonwealth Edison Company (ComEd). The filing addresses a final Order issued by the Illinois Commerce Commission (ICC) regarding ComEd's 2011 formula rate proceeding under the Electric Infrastructure Modernization Act (EIMA). The Order establishes the formula for future rate calculations and initial rates effective within 30 days of the Order date.
Key Financial Metrics and Impacts
The filing details significant financial adjustments resulting from the ICC Order:
- Revenue Requirement Reduction: The Order reduces the annual revenue requirement by $168 million, which is approximately $110 million more than the $59 million reduction ComEd had proposed.
- Regulatory Asset Adjustment: ComEd expects to record a reduction of revenue of approximately $100 million pre-tax in the second quarter of 2012 to decrease a previously recorded regulatory asset of $118 million.
- Earnings Impact: Management preliminarily determined that GAAP and adjusted (non-GAAP) operating earnings will be reduced by approximately $0.16 per Exelon share in 2012. Future impacts are estimated at $0.08-$0.10 per share annually for 2013 and 2014.
- Goodwill Impairment Risk: The company is assessing a potential impairment of ComEd's goodwill, which could result in a non-cash charge to expense in the second quarter of 2012.
Material Changes Versus Prior Period
The primary material change is the ICC's determination to reduce the annual revenue requirement by $168 million, significantly exceeding ComEd's own proposal. Key components of this incremental reduction include:
- Approximately $50 million reflecting costs to be recovered through alternative tariffs or delayed via reconciliation.
- Approximately $35 million reflecting the disallowance of return on ComEd's pension asset, a decision contrary to the ICC's three most recent ComEd rate orders.
- Approximately $10 million for incentive compensation adjustments.
- Approximately $15 million for cash working capital, operating reserves, and technical items.
Guidance, Outlook, and Risks
Exelon will provide consolidated earnings guidance for 2012, incorporating the impacts of the Order, at its Analyst Day meeting on June 7, 2012. The filing highlights several risks and contingencies:
- Regulatory Dispute: ComEd believes the prohibition of return on its pension asset is contrary to the EIMA and is reviewing all options.
- Impairment Contingency: A potential goodwill impairment could materially affect future results of operations and cash flows, though it would not impact adjusted non-GAAP operating earnings.
- Forward-Looking Statements: Actual results may differ materially due to risks discussed in the company's 2011 Form 10-K and First Quarter 2012 Form 10-Q.
Investor Verification Checklist
- Verify the final consolidated earnings guidance for 2012 released at the June 7, 2012 Analyst Day.
- Confirm whether a goodwill impairment charge is recorded in the second quarter of 2012 and its specific magnitude.
- Monitor ComEd's legal or regulatory response to the disallowance of return on pension assets.
- Review the timing of cash flow impacts related to the $50 million in costs shifted to alternative recovery mechanisms.