Exelon Corporation — Q2 2014 Form 10-Q
Business context and period. This unaudited combined filing covers Exelon Corporation and its subsidiaries for the quarter and six months ended June 30, 2014, compared with the same 2013 periods. Exelon operates competitive power generation through Generation and regulated electric and gas delivery through ComEd, PECO and BGE. On April 1, 2014, Generation assumed operational control of CENG’s nuclear fleet and began consolidating CENG.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $6.024B | $6.141B | $13.261B | $12.223B |
| Operating income | $829M | $1.005B | $992M | $1.513B |
| Net income attributable to common shareholders | $522M | $490M | $612M | $486M |
| Diluted EPS | $0.60 | $0.57 | $0.71 | $0.57 |
| Operating cash flow | Not stated separately | Not stated separately | $1.751B | $2.338B |
Q2 operating revenue decreased about 2%, while common-shareholder net income increased about 7%. For the first half, revenue increased about 8% and common-shareholder net income increased about 26%, but operating income declined about 34%. GAAP operating margin was approximately 13.8% for Q2 versus 16.4%; for the first half it was approximately 7.5% versus 12.4%.
First-half capital expenditures were $2.501B, exceeding operating cash flow by about $750M. Cash and cash equivalents were $1.362B at June 30, down from $1.609B at year-end 2013. Current assets were $9.823B and current liabilities $8.567B. Balance-sheet debt, including debt due within one year and debt to financing trusts, totaled approximately $21.4B, versus approximately $20.1B at December 31, 2013. Exelon reported $6.5B of available capacity under credit facilities; ComEd had $498M and BGE $70M of commercial paper outstanding.
Material changes and unusual items
- CENG consolidation: Exelon recognized a $261M pretax gain upon consolidation, including fair-value remeasurement and settlement of prior transactions. CENG added $98M of operating revenue and $76M of net income before eliminations and non-controlling-interest adjustments in the three months ended June 30. The gain is nonrecurring; valuations, particularly nuclear asset-retirement obligations, were preliminary.
- Generation hedging: Economic hedging produced $14M of mark-to-market losses in Q2 2014 versus $428M of gains in Q2 2013, and $744M of losses in the first half versus $25M of gains. Exelon’s adjusted (non-GAAP) operating earnings were $440M, or $0.51 per diluted share, in Q2, compared with $454M, or $0.53; first-half adjusted earnings were $970M, or $1.12 per share, compared with $1.056B, or $1.23.
- Impairments and costs: Generation recorded an $86M impairment on 12 wind projects; Exelon recorded a further $24M impairment on leased Georgia generating stations. Q2 merger, integration and PHI acquisition expenses were reported, with Exelon estimating additional PHI acquisition and integration costs over the next five years.
- Operating factors: Generation cited lower realized energy prices, higher replacement-power and fuel costs during first-quarter extreme cold, lower generation volumes excluding CENG, and more nuclear refueling outage days. ComEd, PECO and BGE benefited from regulated distribution rate increases and/or cost recovery. PECO incurred significant first-half storm costs.
Outlook, risks and contingencies
Exelon expected approximately $5.775B of 2014 capital expenditures. Management described a five-year utility investment program of approximately $15B and emphasized maintaining investment-grade credit metrics and a sustainable dividend. The board declared a third-quarter dividend of $0.31 per share. Generation’s expected-generation hedge coverage was 92%–95% for 2014, 75%–78% for 2015 and 46%–49% for 2016. These are exposure and investment disclosures, not earnings guidance; the filing text does not provide a clear quantified 2014 EPS outlook.
Exelon agreed to acquire Pepco Holdings for $27.25 per share in cash, with closing anticipated in the second or third quarter of 2015, subject to shareholder and regulatory approvals. The company planned a mix of debt, asset-sale proceeds and equity financing; its $7.2B bridge facility had been reduced to $4.2B following equity issuances. Exelon also agreed to sell Generation’s 67% economic interest in Safe Harbor for approximately $613M; closing was expected in Q3 2014, with an estimated $332M pretax gain.
Material exposures include commodity-price and derivative valuation volatility, collateral requirements (including potential $2.0B additional Generation collateral upon a downgrade below investment grade), nuclear operating and decommissioning obligations, environmental compliance and remediation, and unresolved regulatory and legal matters. Notable matters include the BGE transmission return-on-equity complaint, ComEd’s possible refund exposure and rate proceedings, the PHI merger approvals and litigation, tax disputes including the like-kind exchange position, and environmental claims for which some loss ranges cannot be estimated. Exelon disclosed a potential tax and after-tax interest liability of up to $830M in a fully successful IRS challenge to the like-kind exchange position, exclusive of penalties.
Important facts for investors to verify
- How much first-half earnings and operating cash flow reflect CENG consolidation, the $261M gain, derivative marks and other nonrecurring items.
- Generation’s future hedge positions, realized power and fuel prices, and collateral needs under adverse market or credit scenarios.
- PHI merger approval status, financing mix, expected transaction costs, termination provisions and timing; also confirm completion and proceeds from the Safe Harbor sale.
- Updates to CENG purchase-accounting estimates, nuclear decommissioning liabilities, and significant regulatory, tax, environmental and litigation contingencies.
- Whether 2014 capital spending, pension and postretirement contributions, and dividend payments remain supportable from cash generation and available financing.