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TheStreet Open House

Exelon Announces Fourth Quarter And Full Year 2012 Results; Introduces 2013 Guidance; Declares First Quarter Dividend And Sets Revised Dividend Policy

2013 Earnings Outlook

Exelon introduced a guidance range for 2013 adjusted (non-GAAP) operating earnings of $2.35 to $2.65 per share. Operating earnings guidance is based on the assumption of normal weather.

The outlook for 2013 adjusted (non-GAAP) operating earnings for Exelon and its subsidiaries excludes the following items:

  • Mark-to-market adjustments from economic hedging activities;
  • Financial impacts associated with the planned retirement of fossil generating units and the sale in the fourth quarter of 2012 of three generating stations as required by the merger;
  • Certain costs incurred related to the Constellation merger and integration initiatives;
  • Non-cash amortization of intangible assets, net, related to commodity contracts recorded at fair value at the merger date;
  • Non-cash amortization of certain debt recorded at fair value at the merger date expected to be retired in 2013;
  • Significant impairments of assets, including goodwill;
  • Other unusual items; and
  • Significant changes to GAAP.

Fourth Quarter and Recent Highlights

  • Nuclear Operations: Generation’s nuclear fleet, including its owned output from the Salem Generating Station, produced 34,882 gigawatt-hours (GWh) in the fourth quarter of 2012, compared with 34,893 GWh in the fourth quarter of 2011. The output data excludes the units owned by Constellation Energy Nuclear Group LLC (CENG). Excluding Salem and the units owned by CENG, the Exelon-operated nuclear plants achieved a 93.0 percent capacity factor for both the fourth quarter of 2012 and fourth quarter of 2011. The number of planned refueling outage days totaled 113 in the fourth quarter of 2012 versus 103 days in the fourth quarter of 2011. The number of non-refueling outage days at the Exelon-operated plants totaled one day in the fourth quarter of 2012, compared with 11 days in the fourth quarter of 2011.
  • Fossil and Renewables Operations: The equivalent demand forced outage rate for Generation’s fossil fleet was 1.5 percent in the fourth quarter of 2012, compared with 1.6 percent in the fourth quarter of 2011. The 2012 results include former Constellation plants, exclusive of the Maryland Clean Coal plants that were sold on Dec. 3, 2012, whereas 2011 data includes only legacy Exelon plants. The equivalent availability factor for the hydroelectric facilities was 95.0 percent in the fourth quarter of 2012, compared with 95.9 percent in the fourth quarter of 2011. The energy capture for the wind fleet was 92.2 percent in the fourth quarter of 2012, compared with 94.8 percent in the fourth quarter of 2011.
  • ComEd Distribution Formula Rate Cases: On Oct. 3, 2012, the Illinois Commerce Commission (ICC) issued its final Order on Remand (Rehearing Order) in ComEd's expedited rehearing of specific items pursuant to the Electric Infrastructure Modernization Act (EIMA). The Rehearing Order (which covered docket 11-0721) addressed three key conclusions reached in the ICC's May Order: (1) ComEd's pension asset recovery; (2) the rate of interest to affix to over- or under-recovered costs; and (3) the use of a year-end or an "average year" rate base in determining ComEd's reconciliation revenue requirement. In the Rehearing Order, the ICC adopted ComEd's position on the return on its pension asset. As a result, ComEd recorded in the fourth quarter an increase in revenue of approximately $135 million pre-tax in 2012 consistent with the terms of the Rehearing Order.On Dec. 19, 2012, the ICC ruled on ComEd’s formula rate (docket 12-0321) setting rates for 2013 based on (1) 2011 actual costs updated for 2012 plant additions and the associated depreciation and accumulated deferred income taxes and (2) reconciling the revenue requirements underlying the rates in effect in 2011 with 2011 actual costs and factoring in the ROE Collar. The ICC approved a $72.6 million increase over the rates approved in docket 11-0721 on re-hearing. ComEd had requested an increase of $74.2 million. The contested items from docket 11-0721 on re-hearing, such as use of average vs. year-end rate base and the interest rate on the reconciliation, are currently under appeal with the court and are not included in the approved amount.
  • Credit Facility Synergies: On Dec. 31, 2012, Exelon achieved targeted credit facility reductions and associated synergies with the termination of the $1.5 billion legacy Constellation revolver. Cost effective liquidity was established earlier in 2012 for all operating companies through 2017. The ComEd $1 billion facility was established in March 2012. Via the “Amend and Extend” program executed in August 2012, facilities were refinanced at BGE ($600 million), Exelon Corp ($500 million), Generation ($5.3 billion) and PECO ($600 million),
  • Pension Funding Strategy: Exelon executed a lump sum buyout offering for terminated vested employees in the largest pension plans (approximately 7,500 former employees). This transaction involved using $260 million of pension trust assets to buyout terminated vested employees and permanently settling the associated obligation. Exelon’s gross pension liability was reduced by $425 million, resulting in a $165 million improvement in the funded status of the pension plans at year end. The lump sum buyout option was an incremental step in Exelon’s ongoing effort to manage benefit costs and de-risk the pension plans over time.
  • ComEd Like-Kind-Exchange: As previously disclosed, in 1999 ComEd deferred $1.2 billion of gain on the sale of its fossil generating facilities by acquiring like-kind property in a purchase leaseback transaction. In a recent decision, a court disallowed deductions stemming from a lease-in, lease-out transaction. This decision has caused Exelon to assess whether it is more likely than not that it will prevail in litigation with the IRS concerning the purchase leaseback transaction. As a result of the assessment, Exelon expects to record in the first quarter of 2013 a non-cash charge to earnings of approximately $270 million, which represents the full amount of interest expense (after-tax) and incremental state tax expense that would be payable if Exelon is unsuccessful in litigation. Of this amount, approximately $185 million will be recorded at ComEd and the balance at Exelon. These charges to expense will not be reflected in adjusted (non-GAAP) operating earnings. Exelon intends to hold ComEd harmless from any unfavorable impacts of the after-tax interest amounts on ComEd’s equity. For additional information, please see the Form 8-K that Exelon filed on January 31, 2013.
  • Renewable Fleet: Four wind construction projects (totaling 273 megawatts (MW)) achieved commercial operation in the fourth quarter: Harvest II (59 MW in Huron County, Mich.) on Nov. 1, 2012; Beebe (82 MW in Gratiot, Mich.) on Dec. 18, 2012; Whitetail (92 MW in Webb, Texas) on Dec. 21, 2012; and High Mesa (40 MW in Twin Falls County, Idaho) on Dec. 27, 2012. In addition, the first block (31 MW) of the Antelope Valley Solar Ranch Project became operational in December 2012. The remaining phases of the project are on track to be completed by the original planned commercial operation date of December 2013.
  • Fossil Fleet Sales and Retirements: Exelon Power finalized the sale of its three Maryland power plants (2,648 MW of installed capacity) to Raven Power Holdings LLC on Dec. 3, 2012. The sale fulfills Exelon’s commitment to divest the plants as a part of its merger with Constellation. Exelon Power also completed the sale of its ownership stake in ACE Cogeneration, a 102-MW coal facility in Trona, Calif., to DCO Energy on Nov. 6, 2012. In addition to the asset sales, Exelon Power informed PJM on Oct. 31, 2012, of its intent to retire Schuylkill Unit 1 in Philadelphia and Riverside Unit 6 in Baltimore County. Schuylkill Unit 1 was deactivated on Jan. 1, 2013. Riverside 6 will be deactivated by Jun. 1, 2014.
  • Hedging Update: Exelon’s hedging program involves the hedging of commodity risk for Exelon’s expected generation, typically on a ratable basis over a three-year period. Expected generation represents the amount of energy estimated to be generated or purchased through owned or contracted-for capacity. The proportion of expected generation hedged as of Dec. 31, 2012, is 94 percent to 97 percent for 2013, 62 percent to 65 percent for 2014, and 27 percent to 30 percent for 2015. The primary objective of Exelon’s hedging program is to manage market risks and protect the value of its generation and its investment-grade balance sheet while preserving its ability to participate in improving long-term market fundamentals.

Operating Company Results

Generation consists of owned and contracted electric generating facilities and wholesale and retail customer supply of electric and natural gas products and services, including renewable energy products, risk management services and natural gas exploration and production activities.

Fourth quarter 2012 GAAP net income was $137 million, compared with $446 million in the fourth quarter of 2011. Adjusted (non-GAAP) operating earnings for the fourth quarter of 2011 and 2012 do not include various items (after tax) that were included in reported GAAP earnings. A reconciliation of Adjusted (non-GAAP) Operating Earnings to GAAP Net Income is in the table below:

         
($ millions)   4Q12   4Q11
Generation Adjusted (non-GAAP) Operating Earnings   $283   $359
Mark-to-Market Impact of Economic Hedging Activities $145 $45
Unrealized Gains Related to NDT Fund Investments $2 $46
Plant Retirements and Divestitures $(38) $(4)
Constellation Merger and Integration Costs $(35) $(6)
Non-Cash Remeasurement of Deferred Income Taxes $(9) $6
Amortization of Commodity Contract Intangibles $(211) -
Amortization of Fair Value of Certain Debt $3 -
Asset Retirement Obligation $5 -
Midwest Generation Bankruptcy Charges   $(8)   -
Generation GAAP Net Income   $137   $446
 

Generation’s Adjusted (non-GAAP) Operating Earnings in the fourth quarter of 2012 decreased $76 million compared with the same quarter in 2011. This decrease primarily reflected:

  • Lower energy margins at Generation, resulting from decreased capacity pricing related to RPM for the PJM market, higher nuclear fuel costs and lower realized market prices for the sale of energy across all regions;
  • Higher operating and maintenance expenses;
  • Higher depreciation and amortization expense due to ongoing capital expenditures; and
  • Higher interest due to higher outstanding debt balance.

These items were partially offset by contribution to Generation’s energy margins from the addition of Constellation Energy to Generation’s operations.

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