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EXC > SEC Filings for EXC > Form 10-K on 14-Feb-2014All Recent SEC Filings

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Form 10-K for EXELON CORP


14-Feb-2014

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Exelon

Executive Overview

Exelon, a utility services holding company, operates through the following principal subsidiaries:

Generation, whose integrated business consists of owned, contracted and investments in electric generating facilities managed through customer supply of electric and natural gas products and services, including renewable energy products, risk management services and natural gas exploration and production activities.

ComEd, whose business consists of the purchase and regulated retail sale of electricity and the provision of distribution and transmission services in northern Illinois, including the City of Chicago.

PECO, whose business consists of the purchase and regulated retail sale of electricity and the provision of distribution and transmission services in southeastern Pennsylvania, including the City of Philadelphia, and the purchase and regulated retail sale of natural gas and the provision of distribution services in the Pennsylvania counties surrounding the City of Philadelphia.

BGE, whose business consists of the purchase and regulated retail sale of electricity and the provision of distribution and transmission services in central Maryland, including the City of Baltimore, and the purchase and regulated retail sale of natural gas and the provision of distribution services in central Maryland, including the City of Baltimore.

Exelon has nine reportable segments consisting of Generation's six power marketing reportable segments (Mid-Atlantic, Midwest, New England, New York, ERCOT and Other Regions in Generation), ComEd, PECO and BGE. See Note 24 of the Combined Notes to Consolidated Financial Statements for additional information regarding Exelon's reportable segments.

Through its business services subsidiary BSC, Exelon provides its operating subsidiaries with a variety of support services at cost. The costs of these services are directly charged or allocated to the applicable operating segments. Additionally, the results of Exelon's corporate operations include costs for corporate governance and interest costs and income from various investment and financing activities.

Exelon's consolidated financial information includes the results of its four separate operating subsidiary registrants, Generation, ComEd, PECO and BGE, which, along with Exelon, are collectively referred to as the Registrants. The following combined Management's Discussion and Analysis of Financial Condition and Results of Operations is separately filed by Exelon, Generation, ComEd, PECO and BGE. However, none of the Registrants makes any representation as to information related solely to any of the other Registrants.

Financial Results. The following consolidated financial results reflect the results of Exelon for year ended December 31, 2013 compared to the same period in 2012. The 2012 financial results only include the operations of Constellation and BGE from the date of the merger with Constellation (the Merger), March 12, 2012, through December 31, 2012. All amounts presented below are before the impact of income taxes, except as noted.

Results in 2013 were unfavorably impacted at Generation by continuing declines in realized power and gas prices, in part driven by the abundance of natural gas supply, continued sluggish demand and subsidized renewable generation; only partially offset by improved returns at the utilities, and the


realization of additional post-merger synergies and operational excellence across all businesses. Generation's financial results continue to be challenged by low natural gas prices, and by the impacts of excess generation from subsidized renewable energy, flat load growth and distorted market designs, especially in its Midwest markets.

                                                                       The Years Ended December 31,                                              Favorable
                                                                            2013                                                 2012          (Unfavorable)
                                     Generation         ComEd         PECO           BGE          Other          Exelon         Exelon           Variance
Operating revenues                  $     15,630       $ 4,464       $ 3,100       $ 3,065       $ (1,371 )     $ 24,888       $ 23,489       $         1,399
Purchased power and fuel                   8,197         1,174         1,300         1,421         (1,368 )       10,724         10,157                  (567 )

Revenue net of purchased power
and fuel (a)                               7,433         3,290         1,800         1,644             (3 )       14,164         13,332                   832

Other operating expenses
Operating and maintenance                  4,534         1,368           748           634            (14 )        7,270          7,961                   691
Depreciation and amortization                856           669           228           348             52          2,153          1,881                  (272 )
Taxes other than income                      389           299           158           213             36          1,095          1,019                   (76 )

Total other operating expenses             5,779         2,336         1,134         1,195             74         10,518         10,861                   343
Equity in earnings/(losses) of
unconsolidated affiliates                     10            -             -             -              -              10            (91 )                 101

Operating income                           1,664           954           666           449            (77 )        3,656          2,380                 1,276

Other income and (deductions)
Interest expense, net                       (357 )        (579 )        (115 )        (122 )         (183 )       (1,356 )         (928 )                (428 )
Other, net                                   368            26             6            17             56            473            346                   127

Total other income and
(deductions)                                  11          (553 )        (109 )        (105 )         (127 )         (883 )         (582 )                (301 )

Income (loss) before income
taxes                                      1,675           401           557           344           (204 )        2,773          1,798                   975
Income taxes                                 615           152           162           134            (19 )        1,044            627                  (417 )

Net income (loss)                          1,060           249           395           210           (185 )        1,729          1,171                   558

Net (loss) income attributable
to noncontrolling interests,
preferred security dividends and
preference stock dividends                   (10 )          -              7            13             -              10             11                     1

Net income (loss) on common
stock                               $      1,070       $   249       $   388       $   197       $   (185 )     $  1,719       $  1,160       $           559

(a) The Registrants' evaluate operating performance using the measure of revenue net of purchased power and fuel expense. The Registrants' believe that revenue net of purchased power and fuel expense is a useful measurement because it provides information that can be used to evaluate its operational performance. Revenue net of purchased power and fuel expense is not a presentation defined under GAAP and may not be comparable to other companies' presentations or deemed more useful than the GAAP information provided elsewhere in this report.

Exelon's net income on common stock was $1,719 million for the year ended December 31, 2013 as compared to $1,160 million for the year ended December 31, 2012, and diluted earnings per average common share were $ 2.00 for the year ended December 31, 2013 as compared to $1.42 for the year ended December 31, 2012.

Operating revenues net of purchased power and fuel expense, which is a non-GAAP measure discussed below, increased by $832 million as compared to 2012. The year-over-year increase in operating revenue net of purchased power and fuel expense reflects the inclusion of Constellation and BGE's results for the full period in 2013 and was primarily due to the following favorable factors:

Decrease in Generation's amortization expense for the acquired energy contracts recorded at fair value at the merger date of $610 million;



Increase in BGE's revenue net of purchased power and fuel expense of $278 million, primarily as a result of the inclusion of BGE's results for the full period in 2013, accrual of the residential customer rate credit that was a condition of the MDPSC's approval of Exelon's merger with Constellation in 2012, and the impact of the MDPSC approved electric and natural gas distribution rate increases that became effective February 23, 2013;

Increase in Generation's revenue net of purchased power and fuel of $159 million on other activities, including proprietary trading, retail gas, energy efficiency, energy management and demand response, upstream natural gas and the design and construction of customer sited solar facilities, primarily due to the addition of Constellation; and

Increase in ComEd's revenue net of purchased power expense of $154 million primarily due to increased distribution revenue due to recovery of increased costs and capital investment and higher allowed ROE pursuant to the formula rate under EIMA and the enactment of Senate Bill 9.

The year-over-year increase in operating revenue net of purchased power and fuel expense was partially offset by the following unfavorable factors:

Decrease in Generation's electric revenue net of purchased power and fuel expense of $565 million primarily due to lower realized energy prices, lower load volume and increased nuclear fuel expense, partially offset by higher capacity revenue, increased nuclear volumes, and lower energy supply costs as a result of the integration of the energy generation and load serving businesses following the merger;

Reduced revenue net of purchased power and fuel at Generation of $136 million in 2013 associated with the Maryland Clean Coal assets that were sold in November 2012 and lost compensation on the reliability-must-run program with PJM for retired fossil generating assets that expired on May 31, 2012; and

Decrease in PECO's revenue net of purchased power and fuel expense of $11 million primarily due to the decrease in effective rates due to increased usage per customer across all customer classes, decreased cost recovery for energy efficiency and demand response programs, decreased gross receipts tax revenue, and the customer refund in 2013 of the tax cash benefit related to gas property distribution repairs.

Operating and maintenance expense decreased by $691 million as compared to 2012 primarily due to the following favorable factors:

Decrease in operating and maintenance expense associated with the generating assets retired or divested during 2012 of $442 million;

Costs incurred in March 2012 of $216 million and $195 million as part of the Maryland order approving the merger and a settlement with the FERC, respectively;

Decrease in Constellation merger and integration costs of $201 million in 2013; and

Decrease in uncollectible accounts expense of $58 million at ComEd resulting from the timing of regulatory cost recovery and customers purchasing electricity from competitive electric generation suppliers.

The year-over-year decrease in operating and maintenance expense was partially offset by the following unfavorable factors:

Increase in labor, other benefits, contracting and materials costs of $298 million, primarily due to the addition of BGE and Constellation for the full period in 2013; and

Long-lived asset impairments and related charges of $174 million in 2013, primarily related to Generation's cancellation of nuclear uprate projects and the impairment of certain wind generating assets.


Depreciation and amortization expense increased by $272 million primarily due to the addition of BGE and Constellation for the full period in 2013, BGE's and Constellation's plant balances in 2012, ongoing capital expenditures across the operating companies, the completion of wind and solar facilities placed into service in the second half of 2012 and in 2013 at Generation, and increased regulatory asset amortization related to higher MGP remediation expenditures and higher costs for energy efficiency and demand response programs at ComEd and BGE, respectively.

The favorable increase in Equity in earnings/loss of unconsolidated affiliates of $101 million was primarily due to higher net income from Generation's equity investment in CENG in 2013 compared to the same period in 2012 and lower amortization of the basis difference of Generation's ownership interest in CENG recorded at fair value in connection with the merger.

Interest expense increased by $428 million primarily due to an increase in interest expense at ComEd related to the remeasurement of Exelon's like-kind exchange tax position in the first quarter of 2013, an increase in debt obligations as a result of the merger and an increase in project financing at Generation in 2013.

Exelon's effective income tax rates for the years ended December 31, 2013 and 2012 were 37.6% and 34.9%, respectively. See Note 14 of the Combined Notes to Consolidated Financial Statements for additional information regarding the components of the effective income tax rates.

For further detail regarding the financial results for the years ended December 31, 2013 and 2012, including explanation of the non-GAAP measure revenue net of purchased power and fuel expense, see the discussions of Results of Operations by Segment below.

Adjusted (non-GAAP) Operating Earnings

Exelon's adjusted (non-GAAP) operating earnings for the year ended December 31, 2013 were $2,149 million, or $2.50 per diluted share, compared with adjusted (non-GAAP) operating earnings of $2,330 million, or $2.85 per diluted share, for the same period in 2012. In addition to net income, Exelon evaluates its operating performance using the measure of adjusted (non-GAAP) operating earnings because management believes it represents earnings directly related to the ongoing operations of the business. Adjusted (non-GAAP) operating earnings exclude certain costs, expenses, gains and losses and other specified items. This information is intended to enhance an investor's overall understanding of year-to-year operating results and provide an indication of Exelon's baseline operating performance excluding items that are considered by management to be not directly related to the ongoing operations of the business. In addition, this information is among the primary indicators management uses as a basis for evaluating performance, allocating resources, setting incentive compensation targets and planning and forecasting of future periods. Adjusted (non-GAAP) operating earnings is not a presentation defined under GAAP and may not be comparable to other companies' presentations or deemed more useful than the GAAP information provided elsewhere in this report.


The following table provides a reconciliation between net income as determined in accordance with GAAP and adjusted (non-GAAP) operating earnings for the year ended December 31, 2013 as compared to 2012:

                                                                                     December 31,
                                                                          2013                         2012
                                                                               Earnings                     Earnings
                                                                                 per                          per
                                                                               Diluted                      Diluted
(All amounts after tax; in millions, except per share amounts)                  Share                        Share
Net Income                                                       $ 1,719      $     2.00      $ 1,160      $     1.42
Mark-to-Market Impact of Economic Hedging Activities (a)            (310 )         (0.35 )       (310 )         (0.38 )
Unrealized Net Gains Related to NDT Fund Investments (b)             (78 )         (0.09 )        (56 )         (0.07 )
Plant Retirements and Divestitures (c)                               (13 )         (0.02 )        236            0.29
Asset Retirement Obligation (d)                                        7            0.01            1              -
Merger and Integration Costs (e)                                      87            0.08          257            0.31
Other Acquisition Costs (f)                                           -               -             3              -
Reassessment of State Deferred Income Taxes (g)                        4              -          (117 )         (0.14 )
Amortization of Commodity Contract Intangibles (h)                   347            0.41          758            0.93
Amortization of the Fair Value of Certain Debt (i)                    (7 )         (0.01 )         (9 )         (0.01 )
Remeasurement of Like-Kind Exchange Tax Position (j)                 267            0.31           -               -
Long-Lived Asset Impairment (k)                                      110            0.14           -               -
Maryland Commitments (l)                                              -               -           227            0.28
FERC Settlement (m)                                                   -               -           172            0.21
Midwest Generation Bankruptcy Charges (n)                             16            0.02            8            0.01

Adjusted (non-GAAP) Operating Earnings                           $ 2,149      $     2.50      $ 2,330      $     2.85

(a) Reflects the impact of (gains) losses for the years ended December 31, 2013 and 2012, respectively, on Generation's economic hedging activities (net of taxes of $201 million and $200 million, respectively). In order to better align the impacts of economic hedging with the underlying business activity
(e.g. the sale of power and/or the use of fuel), these unrealized (gains) losses are excluded from operating earnings until the transactions are realized. See Note 12-Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements for additional detail related to Generation's hedging activities.

(b) Reflects the impact of unrealized gains for the years ended December 31, 2013 and 2012, respectively, on Generation's NDT fund investments for Non-Regulatory Agreement Units (net of taxes of $(144) million and $(132) million, respectively). See Note 15-Nuclear Decommissioning of the Combined Notes to Consolidated Financial Statements for additional detail related to Generation's NDT fund investments.

(c) Reflects the impacts associated with the sale or retirement of generating stations in the years ended December 31, 2013 and 2012 (net of taxes of $4 million and $106 million, respectively). See "Results of Operations-Generation" for additional detail related to the generating unit retirements.

(d) Primarily reflects the impact of an increase in Generation's asset retirement obligation for asbestos at retired fossil plants for the year ended December 31, 2013 (net of taxes of $(5) million). Primarily reflects the impact of an increase in Generation's decommissioning obligation for spent nuclear fuel at retired nuclear units for the year ended December 31, 2012 (net of taxes of $(1) million).

(e) Reflects certain costs incurred in the years ended December 31, 2013 and 2012 (net of taxes of $33 million and $161 million, respectively) associated with the merger, including employee-related expenses (e.g. severance, retirement, relocation and retention bonuses) integration initiatives, certain pre-acquisition contingencies, and CENG transaction costs, partially offset in 2013 by a one-time benefit pursuant to the BGE 2012 electric and gas distribution rate case order for the recovery of previously incurred integration costs. See Note 4-Merger and Acquisitions of the Combined Notes to the Consolidated Financial Statements for additional information.

(f) Reflects certain costs incurred in the year ended 2012 associated with various acquisitions (net of taxes of $2 million).

(g) Reflects the non-cash impacts of the remeasurement of state deferred income taxes, primarily as a result of changes in forecasted apportionment in 2013 and as a result of the merger in 2012. See Note 14-Income Taxes of the Combined Notes to the Consolidated Financial Statements for additional information.

(h) Reflects the non-cash impact for the years ended December 31, 2013 and 2012 (net of taxes of $219 million and $491 million, respectively) of the amortization of intangible assets, net, related to commodity contracts recorded at fair value at the Constellation merger date. See Note 4-Merger and Acquisitions of the Combined Notes to the Consolidated Financial Statements for additional information.



(i) Reflects the non-cash amortization of certain debt for the years ended December 31, 2013 and 2012 (net of taxes of $5 million and $6 million, respectively) recorded at fair value at the Constellation merger date which was retired in the second quarter of 2013. See Note 4-Merger and Acquisitions of the Combined Notes to Consolidated Financial Statements for additional information.

(j) Reflects a non-cash charge to earnings for the year ended December 31, 2013 (net of taxes of $102 million) resulting from the first quarter 2013 remeasurement of a like-kind exchange tax position taken on ComEd's 1999 sale of fossil generating assets. See Note 14 of the Combined Notes to the Consolidated Financial statements for additional information.

(k) Reflects 2013 impairment and related charges to earnings for the year ended December 31, 2013 (net of taxes of $69 million) primarily related to Generation's cancellation of nuclear uprate projects and the impairment of certain wind generating assets.

(l) Reflects costs incurred for the year ended December 31, 2012 associated with the Constellation merger (net of taxes of $101 million) as part of the Maryland order approving the merger transaction. See Note 4 of the Combined Notes to Consolidated Financial Statements for additional information.

(m) Reflects costs incurred for the year ended December 31, 2012 (net of taxes of $23 million) as part of a settlement with the FERC to resolve a dispute related to Constellation's pre-merger hedging and risk management transactions. See Note 14 of the Combined Notes to Consolidated Financial Statements for additional information.

(n) Reflects costs incurred to establish estimated liabilities for the years ended December 31, 2013 and December 31, 2012 (net of taxes of $10 million and $5 million, respectively) pursuant to the Midwest Generation bankruptcy, primarily related to lease payments under a coal rail car lease and estimated payments for asbestos-related personal injury claims.

As discussed above, Exelon has incurred and will continue to incur costs associated with the Constellation merger, including meeting the various commitments set forth by regulators and agreed-upon with other interested parties as part of the merger approval process, and integrating the former Constellation businesses into Exelon.

For the year ended December 31, 2013, expense has been recognized for costs incurred to achieve the merger, prior to consideration of regulatory accounting treatment, as follows:

                                                                       Pre-tax Expense
                                                            Twelve Months Ended December 31, 2013
Merger and Integration Costs:           Generation (a)          ComEd          PECO         BGE (a)         Exelon (a)
Employee-Related (b)                                 48              4             3               1                 58
Other (c)                                            58             12             6               5                 84

Total                                  $            106        $    16        $    9       $       6       $        142


                                                                       Pre-tax Expense
                                                            Twelve Months Ended December 31, 2012
Merger and Integration Costs:             Generation            ComEd          PECO         BGE (a)         Exelon (a)
Maryland Commitments                                 35             -             -              139                328
Employee-Related (b)                                138             24            11              24                207
Other (c)                                           167             17             6               7                211
Transaction (d)                        $             -         $    -         $   -        $      -        $         58

Total                                  $            340        $    41        $   17       $     170       $        804

(a) For Exelon, Generation and BGE, includes the operations of the acquired businesses from the date of the merger March 12, 2012 through the year ended December 31, 2013.

(b) Costs primarily for employee severance, pension and OPEB expense and retention bonuses. ComEd established regulatory assets of $2 million and $21 million for the years ended December 31, 2013 and December 31, 2012, respectively. BGE established regulatory assets of $0 million and $22 million for the years ended December 31, 2013 and December 31, 2012, respectively. The majority of these costs are expected to be recovered over a five-year period.

(c) Costs to integrate Constellation processes and systems into Exelon and to terminate certain Constellation debt agreements. ComEd established a regulatory asset of $9 million and $15 million for the years ended December 31, 2013 and December 31, 2012, respectively, for certain other merger and integration costs. BGE established a regulatory asset of $12 million and $0 million for the years ended December 31, 2013 and December 31, 2012, respectively, for certain other merger and integration costs.

(d) External, third-party costs paid to advisors, consultants, lawyers and other experts to assist in the due diligence and regulatory approval processes and in the closing of the transaction.


As of December 31, 2013, Exelon expects to incur total additional Constellation merger-related expenses in 2014 and 2015 of approximately $34 million.

Pursuant to the conditions set forth by the MDPSC in its approval of the merger transaction, Exelon committed to provide a package of benefits to BGE customers, and make certain investments in the City of Baltimore and the State of Maryland, resulting in an estimated direct investment in the State of Maryland of approximately $1 billion. The direct investment includes $95 million to $120 million for the requirement to cause construction of a headquarters building in Baltimore for Generation's competitive energy businesses. On March 20, 2013, Generation signed a twenty-year lease agreement that is contingent upon the developer obtaining financing for the construction of the building. Once required approvals are received and financing condition is satisfied, construction of the building will commence. The building is expected to be ready . . .

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