8-KOther Events

EXELON CORP 8-K Report, Corporate Update (Jan 31, 2013)

Filed January 31, 2013For Securities:EXC

Summary

Exelon Corporation (EXC) filed an 8-K on January 31, 2013, to disclose a significant accounting change related to a deferred tax gain from a 1999 sale of generating facilities. The IRS has challenged this transaction, asserting it is a "listed transaction" similar to a Sale-In, Lease-Out (SILO) and disallowing the deferred gain. Despite Exelon's belief in the validity of its transaction, a recent unfavorable court decision in a similar case (_Consolidated Edison v. United States_) has led the company to conclude it no longer meets the "more likely than not" standard for prevailing in litigation. Consequently, Exelon expects to record a non-cash charge to earnings of approximately $270 million in the first quarter of 2013. This charge primarily represents after-tax interest and incremental state tax expenses associated with the disputed tax position. This charge will not impact Exelon's adjusted (non-GAAP) operating earnings. The company intends to vigorously litigate the issue, which could take three to five years, and will continue to accrue interest. Additionally, Exelon will hold Commonwealth Edison Company (ComEd) harmless from any unfavorable impacts on ComEd's equity related to these interest charges. ComEd will also assess potential goodwill impairment in Q1 2013.

Key Highlights

  • 1Exelon expects to record a non-cash charge of approximately $270 million in Q1 2013 related to a disputed tax gain from a 1999 asset sale.
  • 2The charge is due to the IRS challenging the like-kind exchange treatment of the 1999 transaction, classifying it as a potentially abusive tax shelter.
  • 3A recent unfavorable court ruling in a similar tax case (_Consolidated Edison_) prompted Exelon to reassess its litigation prospects.
  • 4The company believes it has a strong case but now concludes it does not meet the accounting threshold of 'more likely than not' to prevail.
  • 5The $270 million charge excludes penalties and represents interest expense and incremental state taxes, and will not affect adjusted (non-GAAP) operating earnings.
  • 6Exelon intends to litigate the matter, potentially for 3-5 years, and will hold ComEd harmless from associated interest impacts.
  • 7ComEd will also evaluate potential goodwill impairment in Q1 2013 due to this reassessment.

Frequently Asked Questions

The charge is due to a tax dispute with the IRS regarding a $1.2 billion gain deferred from a 1999 sale of generating facilities. The IRS considers the transaction a tax shelter, and following an unfavorable court ruling in a similar case, Exelon has concluded it no longer meets the accounting standard to be 'more likely than not' to win the dispute.

No, the approximately $270 million charge is considered a non-cash item and represents interest and tax expenses that will not be reflected in Exelon's adjusted (non-GAAP) operating earnings. It is a charge against GAAP earnings only.

Exelon intends to vigorously litigate the issue through the U.S. Tax Court, where decisions are not bound by the specific appellate court ruling that influenced this accounting assessment. The litigation process could take three to five years.

As of March 31, 2013, if the IRS challenge is fully successful, the potential tax and after-tax interest, excluding penalties, that could become payable is up to $860 million. Of this, approximately $260 million is attributable to ComEd and the remainder to Exelon. Exelon also believes it's unlikely an $86 million penalty assertion will be sustained.