EXELON CORP annual report, FY2013

Exelon Corporation: FY2013 Form 10-K

Reporting period: Year ended December 31, 2013. Although the request identifies 2013 Q4, this filing reports full-year results, not standalone fourth-quarter results. The combined filing covers Exelon and its subsidiaries Generation, ComEd, PECO and BGE. Comparisons with 2012 are affected by the March 12, 2012 Constellation merger: Exelon’s and Generation’s 2012 results include the acquired businesses only from the merger date.

Financial performance and position

Metric	FY2013	FY2012
Operating revenue	$24.888 billion	$23.489 billion
Operating income	$3.656 billion	$2.380 billion
Net income attributable to common shareholders	$1.719 billion	$1.160 billion
Diluted EPS	$2.00	$1.42
Adjusted operating earnings, non-GAAP	$2.149 billion; $2.50 per diluted share	$2.330 billion; $2.85 per diluted share
Cash from operating activities	$6.343 billion	$6.131 billion
Capital expenditures	$5.395 billion	$5.789 billion

• Revenue net of purchased power and fuel, a non-GAAP operating measure, increased $832 million to $14.164 billion. Generation’s electric revenue net of purchased power and fuel fell $565 million, largely due to lower realized energy prices and load; utility results and lower amortization of acquired energy-contract intangibles partly offset this weakness.
• Net cash used in investing activities was $5.394 billion; net cash used in financing activities was $826 million. Cash and cash equivalents were $1.609 billion at year-end, including VIE cash.
• At December 31, long-term debt was $18.271 billion, excluding current maturities and debt of variable-interest entities. The filing reports $8.4 billion of aggregate credit commitments, $6.6 billion available, and no borrowings under the credit facilities at year-end. The reported current assets and liabilities were $10.137 billion and $7.728 billion, respectively.
• Generation’s net income attributable to its membership interest was $1.070 billion versus $562 million. ComEd’s net income declined to $249 million from $379 million; PECO’s rose to $395 million from $381 million; BGE’s common-shareholder income was $197 million versus a $9 million loss.

Material changes and notable items

• Reported Exelon net income and operating income increased year over year, but adjusted operating earnings declined about 8%. The reported comparison includes a full year of Constellation and BGE in 2013 but only post-merger results in 2012.
• Exelon reduced its quarterly common dividend from $0.525 to $0.31 beginning in the second quarter of 2013, citing low forward energy prices and weaker financial expectations. The annualized rate became $1.24; the 2013 per-share total was $1.46. The board declared a $0.31 first-quarter 2014 dividend, subject to its ongoing declaration process.
• Generation’s nuclear fleet capacity factor was 94.1%, up from 92.7%; nuclear production cost rose to $19.83/MWh from $19.50/MWh. Generation hedged 92%–95% of expected output for 2014, 62%–65% for 2015 and 30%–33% for 2016.
• Generation cancelled several nuclear uprate projects as market conditions and estimated modification costs made them uneconomic, recording approximately $111 million of pre-tax operating and maintenance charges and $8 million of interest expense. Exelon also recorded $174 million of 2013 long-lived asset impairment and related charges, primarily for uprates and wind assets.
• The company recorded a noncash charge related to the 1999 like-kind-exchange tax position. If the IRS prevails, potential tax and after-tax interest cash outflow could be as much as $840 million, excluding potential penalties; the filing also describes a potential $87 million after-tax penalty charge. Exelon filed a Tax Court petition in December 2013.

Outlook, risks and contingencies

• Management expects approximately $5.475 billion of 2014 capital expenditures. Exelon also described approximately $15 billion of planned utility investment over five years. The utility estimates include $1.775 billion for ComEd, $625 million for PECO and approximately $600 million for BGE; Generation estimated $2.4 billion.
• Management cited continued pressure on competitive-generation economics from low natural-gas and power prices, sluggish demand, subsidized renewable generation and market design. ComEd projected 2014 load down 0.2%; PECO and BGE projected increases of 0.3% and 0.6%, respectively.
• The planned CENG operating-control transaction with EDF was expected to close early in the second quarter of 2014, subject to approvals and closing conditions. Terms include a $400 million Generation loan to CENG and preferred distributions; the put option could lead Generation to acquire EDF’s 49.99% interest. Consolidation could produce a material accounting gain or loss, and Generation’s nuclear-incident indemnity would be guaranteed by Exelon.
• Generation’s nuclear decommissioning asset retirement obligation was approximately $4.9 billion; nuclear decommissioning trust assets were approximately $8.1 billion. The DOE’s delayed spent-fuel disposal program creates continuing storage and funding exposure; the recorded spent nuclear fuel obligation was $1.021 billion.
• Other significant exposures include the outcome of tax and regulatory proceedings; potential environmental remediation and nuclear regulatory costs; nuclear safety, outage and license-renewal risks; commodity, counterparty and credit risk; pension and postretirement obligations; and possible impairment of generation assets. The filing states that the DOE’s earliest estimated date to begin accepting spent nuclear fuel was 2025.
• A February 5, 2014 winter storm interrupted service to nearly 715,000 PECO customers. PECO estimated first-quarter 2014 incremental operating and maintenance expense of $60–$80 million and capital expenditures of $30–$40 million.
• Management reported that cash flows were expected to meet operating, financing and capital requirements. All five registrants reported effective internal control over financial reporting, and the independent auditor issued unqualified opinions on their financial statements.

Important facts for investors to verify

• Separate underlying operating trends from merger-related comparability effects, non-GAAP adjustments and acquired-contract amortization; confirm the reconciliation of adjusted earnings to GAAP net income.
• Track Generation’s realized power margins, hedging coverage beyond 2015, capacity-market rules and decisions on economically challenged plants.
• Review the status and financial implications of the CENG agreements, including regulatory approvals, the $400 million loan, put-option terms and any future consolidation accounting.
• Monitor the like-kind-exchange litigation and potential cash exposure, as well as material rate, transmission, environmental and nuclear proceedings.
• Assess whether the reduced dividend is sustainable alongside planned capital spending, debt service, pension funding and subsidiary dividend restrictions, including BGE’s prohibition on common dividends through 2014.