01—Abstract
Summary
Summary of the 10-K filed February 6, 2009. Cited figures are marked; the original filing is the authoritative source.
Exelon's FY2008 10-K reports net income of $2,737 milliona (diluted EPS $4.13), flat versus 2007, as higher realized Generation margins, mark-to-market gains and ComEd rate increases offset large non-operating losses on nuclear decommissioning trust funds, a higher bad-debt reserve, and lower PECO earnings.
Operating revenues were roughly flat at $18.9 billion, and operating income rose to $5.3 billionb. Balance sheet strain increased: pension obligations jumped as plan assets fell about 26% in 2008, adding roughly $3.9 billion to the unfunded status, and total debt rose sharply as the company prepared to fund its proposed acquisition of NRG Energy. The defining item for investors is the all-stock exchange offer for NRG (0.485 Exelon shares per NRG share, about $6.2 billion equity value), which NRG's board opposes.
If completed, Exelon's indebtedness would rise from about $13.2 billionc to roughly $21.2 billion pro forma, and the company expects to refinance roughly $8.6 billion of NRG obligations. S&P cut Exelon's senior unsecured rating to BBB- in October 2008, and Moody's and S&P have placed ratings on review or watch for possible downgrade. Required regulatory approvals (FERC, NRC, HSR, and several state commissions) remain pending, and Exelon proposes to divest about 2,400 MW of Texas plants and about 1,000 MW in PJM East.
The company also faces several notable risks: a potential impairment of ComEd goodwill (about $2.6 billiond) if market multiples keep falling, possible IRS challenges to a 1999 fossil-asset sale deferral that could require up to about $1 billion in cash, and an underfunded NRC decommissioning trust position of roughly $185 million across six units. The Pennsylvania rate cap expires December 31, 2010, which carries political and rate-mitigation risk for PECO and Generation. Exelon suspended share repurchases indefinitely in favor of preserving balance sheet capacity, though its dividend was raised to $0.525 per quarter.
02—Key points
Key Highlights
- Net income of $2.737 billion and diluted EPS of $4.13, essentially flat with 2007 ($4.05), with the 2008 result helped by higher Generation realized margins and mark-to-market gains.
- Proposed NRG Energy acquisition via a $6.2 billion all-stock exchange offer (0.485 Exelon shares per NRG share); NRG opposes the deal, and the offer was extended to February 25, 2009.
- Pro forma indebtedness would rise to about $21.2 billion from $13.2 billion at year-end 2008, with roughly $8.6 billion of NRG refinancing and related payments.
- Pension and postretirement plan assets fell about 26% in 2008, increasing the unfunded status by about $3.9 billion and raising expected 2009 pension costs to roughly $425 million from $240 million.
- Credit ratings pressure: S&P lowered Exelon to BBB- senior unsecured after the NRG announcement, with Moody's and S&P reviewing ratings for possible downgrade; a downgrade below investment grade would trigger collateral requirements.
- Nuclear fleet remained strong, with a 93.9% capacity factor, but nuclear decommissioning trust funds posted large unrealized losses (about $1.3 billion across regulated and unregulated units), and six units were underfunded by about $185 million relative to NRC minimums.
- Share repurchases were deferred indefinitely (a $1.5 billion program was authorized in September 2008), while the quarterly dividend was increased to $0.525 per share.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 6, 2009Financial Statements
| Revenue | $18.86B |
| Operating Expenses | $13.56B |
| Operating Income | $5.30B |
| Interest Expense | $699.00M |
| Net Income | $2.74B |
| EPS (Basic) | $4.16 |
| EPS (Diluted) | $4.13 |
| Shares Outstanding (Basic) | 658.00M |
| Shares Outstanding (Diluted) | 662.00M |
05—Questions
Frequently Asked Questions
Why is Exelon trying to acquire NRG Energy, and what is the status of the offer?
Exelon proposes to combine with NRG through an all-stock exchange offer valued at about $6.2 billion, creating a larger generation company with more capacity and expected synergies. NRG shareholders tendered about 45.6% of shares by the initial deadline, and Exelon extended the offer to February 25, 2009. NRG's board remains opposed, so a negotiated deal is not assured, and the transaction still needs FERC, NRC, Hart-Scott-Rodino and several state approvals.
How would the NRG deal affect Exelon's debt and credit ratings?
Pro forma debt is expected to reach about $21.2 billion, up from about $13.2 billion at year-end 2008, because Exelon must refinance roughly $8.6 billion of NRG obligations, including $4.7 billion of senior notes subject to a 101% repurchase right and a $2.65 billion term loan that accelerates on closing. S&P has already lowered Exelon's senior unsecured rating to BBB-, and management has said it intends to keep the parent investment grade, potentially through equity issuance, asset sales or lower dividends.
What are the biggest earnings and balance sheet risks heading into 2009?
Key risks include a potential ComEd goodwill impairment (about $2.6 billion of goodwill remains, and the earnings multiple used in the valuation fell from 8.6x to 7.5x), a possible $1 billion cash outflow if the IRS prevails on the 1999 fossil-sale tax deferral, a pension funding increase with minimum contributions of about $1.6 billion over 2010-2011, and possible impairment of Generation's Texas plants if divestiture values fall. Lower power prices and weaker demand also pressure Generation and the utilities.
How exposed is Exelon to Pennsylvania rate-cap expiration and legislative risk?
PECO's generation rate cap expires December 31, 2010, after which PECO must buy power at market prices, and Generation's PPA with PECO ends at the same time, which could significantly change Generation's margins from 2011. Pennsylvania officials have floated rate-cap extensions, deferrals, a generation tax and utility contributions potentially worth billions of dollars statewide. Management cannot predict the outcome, and any such measures could materially affect PECO and Generation results.
Is the dividend safe, and what is the capital return policy?
Exelon declared a quarterly dividend of $0.525 per share in January 2009, up from $0.50 in 2008, under a value-return policy that targets modest dividend growth. Share repurchases under the $1.5 billion authorization have been deferred indefinitely, citing economic uncertainty, the NRG opportunity and maintenance capital needs. ComEd paid no dividend in 2008, 2007 or 2006, although its board declared a $0.472 dividend in January 2009.
06—Continue