Exelon Corporation — Q2 2012 Form 10-Q
Business context and reporting period. This combined quarterly filing covers the three and six months ended June 30, 2012. Exelon operates competitive generation and regulated electric and gas utilities (ComEd, PECO and BGE). Exelon completed its merger with Constellation on March 12, 2012; 2012 consolidated results include the acquired businesses only from that date, limiting direct comparison with 2011.
Key financial metrics
Amounts are in millions of dollars except per-share data. Q2 and six-month comparisons are with the corresponding 2011 periods.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $5,954 | $4,496 | $10,640 | $9,451 |
| Operating income | $714 | $1,034 | $1,073 | $2,236 |
| Operating margin | 12.0% | 23.0% | 10.1% | 23.7% |
| Net income | $289 | $621 | $490 | $1,290 |
| Net income attributable to common stock | $286 | $620 | $486 | $1,288 |
| Diluted EPS | $0.33 | $0.93 | $0.62 | $1.94 |
| Adjusted operating earnings, non-GAAP | $522 | $697 | $1,125 | $1,476 |
| Adjusted diluted EPS, non-GAAP | $0.61 | $1.05 | $1.44 | $2.22 |
Operating margin is operating income divided by operating revenue. Adjusted operating earnings exclude specified items, including hedging mark-to-market effects, merger costs and acquired-contract amortization; they are not GAAP measures.
- Cash flow and investment: Six-month operating cash flow was $2,729, versus $1,013 in 2011. Capital expenditures were $2,816, versus $1,985. Cash and cash equivalents were $1,349 at June 30, up from $1,016 at year-end 2011.
- Debt and liquidity: Balance-sheet debt components total approximately $18.8 billion, excluding short-term borrowings and notes; short-term borrowings were $376 and PECO accounts-receivable-agreement notes were $225. Exelon reported $10.7 billion in aggregate credit commitments and $8.0 billion available, with no borrowings under those credit facilities. Credit-facility availability is not the same as unrestricted cash.
- Equity and dividend: Exelon had 853.6 million common shares outstanding at June 30, versus 663 million at December 31, 2011, primarily reflecting merger-related share issuance. The quarterly common dividend was $0.53 per share, unchanged year over year.
Material changes versus the prior period
- Reported revenue rose, largely reflecting the inclusion of Constellation and BGE. Despite that, Q2 net income fell 53% and six-month net income fell 62%; reported diluted EPS also declined materially. The merger increased the share count, and the periods are not fully comparable.
- Generation’s results included newly consolidated businesses, but were pressured by lower realized power and capacity prices in the Midwest and Mid-Atlantic, higher costs, acquired energy-contract amortization, and a $57 million Q2 equity loss in unconsolidated affiliates, primarily CENG-related.
- Q2 economic-hedging activity generated $200 million of Generation mark-to-market gains, compared with $124 million of losses in Q2 2011. These volatile items are excluded from adjusted operating earnings.
- ComEd’s Q2 results were affected by an approximately $100 million pre-tax revenue reduction following the ICC’s 2012 formula-rate order. PECO cited unfavorable weather and lower load. BGE’s six-month results included a $113 million customer rate credit required by merger approval.
Outlook, management commentary and risks
- Merger and divestiture: Management projected approximately $550 million of additional merger-related costs, primarily in 2012–2013, with about $450 million expected to be expensed and $100 million capitalized. Following quarter-end, Generation agreed to sell three Maryland generating stations for approximately $400 million; Exelon expected to record an estimated $275 million pre-tax loss in Q3. The sale was subject to regulatory approvals.
- Merger commitments: Maryland approval includes a customer investment fund, charitable contributions, generation-development commitments of up to $625 million, and a Baltimore headquarters project estimated at $95–$120 million. BGE is restricted from paying common dividends through 2014 and must meet specified capital and operating expenditure requirements.
- Operations and investment: Projected 2012 capital expenditures were $6.226 billion. Generation’s expected-generation hedge coverage was 99%–102% for 2012, 79%–82% for 2013 and 46%–49% for 2014. Lower gas and wholesale power prices and sluggish demand were identified as pressures; ComEd and BGE expected relatively flat 2012 load, while PECO projected a 2% decline.
- Regulatory uncertainty: ComEd’s rate order reduced its annual revenue requirement by $168 million; rehearings and rate reconciliation proceedings remained pending. A Maryland-directed 20-year contract for a proposed 700 MW gas plant was under review and could materially affect BGE and Exelon depending on its final terms and cost recovery.
- Contingencies: Exelon disclosed potential tax and interest payments of up to $860 million, plus up to $260 million of after-tax interest expense and an $86 million penalty, if the IRS prevails in the disputed like-kind-exchange tax matter. ComEd’s storm-related customer-damage proceedings could be material, but possible damages could not be reasonably estimated. Environmental remediation reserves and asbestos claims also remain relevant.
- Collateral and market risk: Generation estimated that a downgrade below investment grade could require $2.375 billion of additional collateral. The filing also discusses commodity-price, counterparty, regulatory, environmental, nuclear, pension and capital-market risks. Management stated that nuclear-safety compliance costs over the next five years were not expected to be significant, while noting that requirements remained unsettled.
- Guidance: The filing provides no specific full-year 2012 EPS guidance. Exelon stated that it anticipated the merger would be accretive to earnings per share in 2013; this was an expectation based on preliminary estimates, not a guarantee.
Important facts for investors to verify
- How much of the reported earnings decline reflects recurring operating performance versus merger accounting, one-time costs, hedging volatility and the enlarged share count.
- Final sale proceeds, approvals and the actual Q3 loss on the Maryland generating-station divestiture.
- Outcomes of ComEd rate rehearings and Maryland regulatory proceedings, including the proposed generation contract and BGE rate case.
- Resolution and potential cash and earnings effects of the IRS tax dispute, storm claims and environmental contingencies.
- Debt, credit-facility availability, collateral demands and capital-spending needs, especially if power prices or credit ratings weaken.