Business context and reporting period
Exelon Corporation filed this combined, unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. Its principal businesses are competitive power generation through Exelon Generation and regulated electricity and gas delivery through Commonwealth Edison (ComEd) and PECO. Unless noted, financial amounts below are in millions of dollars.
Key financial metrics
| Exelon consolidated | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | $5,295 | $5,291 | $14,933 | $14,150 |
| Operating income | $1,181 | $1,366 | $3,417 | $3,786 |
| Net income | $601 | $845 | $1,889 | $2,039 |
| Diluted EPS | $0.90 | $1.27 | $2.84 | $3.08 |
| Adjusted operating earnings (non-GAAP) | $743; $1.12/share | $739; $1.11/share | $2,219; $3.34/share | $2,057; $3.10/share |
The filing does not present a single consolidated margin measure. Operating income was lower despite nearly flat Q3 revenue; nine-month revenue rose while operating income declined. Dividends were $0.53 per common share in Q3 and $1.58 per share for the first nine months, unchanged from 2010.
- Cash flow: Nine-month operating cash flow was $2,917, down from $4,112. Capital expenditures were $2,972, versus $2,382. Investing cash outflow was $4,031; financing cash inflow was $573. Cash and cash equivalents ended at $1,071, down from $1,612 at year-end 2010.
- Debt and liquidity: Long-term debt, including amounts due within one year, had a carrying amount of $13,414; the balance sheet also reported $462 of short-term borrowings and $225 of short-term notes payable under PECO’s receivables agreement. Exelon reported $7.7 billion of aggregate credit commitments, with $6.9 billion available and no facility borrowings at September 30. Commercial paper outstanding was $389 at Exelon Corporate and $73 at Generation.
- Subsidiaries: Nine-month net income was $1,325 at Generation, $295 at ComEd and $314 at PECO. Generation’s operating income fell to $2,203 from $2,386; ComEd’s fell to $697 from $827; PECO’s fell to $524 from $591.
Material changes versus prior periods
- Exelon’s Q3 net income fell $244 and nine-month net income fell $150 year over year. Management attributed the decline principally to less favorable Generation hedge mark-to-market results and nuclear decommissioning trust investment performance, as well as higher operating and maintenance costs.
- PECO’s transition period ended December 31, 2010. The resulting absence of CTC recoveries reduced operating revenue net of purchased power and fuel expense by $351 in Q3 and $906 for the nine months, partly offset by lower CTC amortization expense.
- Generation’s nine-month revenue net of purchased power and fuel expense increased $138, but net income declined $223. Higher Mid-Atlantic margins after expiration of PECO’s full-requirements PPA and better South and West results were offset by Midwest weakness and adverse hedge and trust-fund results.
- ComEd’s nine-month net income increased $49, helped by new distribution rates effective June 1 and one-time benefits from its 2010 rate-case order. Q3 net income declined $9, with storm costs a key headwind. PECO’s nine-month net income increased $11, while Q3 net income fell $22.
- Exelon contributed $2.1 billion to qualified pension plans in January. The nine-month cash-flow statement reflects $2,089 of pension and postretirement contributions, versus $740 in 2010.
Outlook, commentary, risks and unusual items
- Outlook: The filing gives no general full-year 2011 EPS guidance in the text provided. Management expected the proposed Constellation merger to be break-even to adjusted earnings in 2012 and accretive in 2013, subject to approvals; estimated $144 of transaction costs and about $500 of integration costs, mainly in 2012–2013. Exelon expected to invest up to $713 in equity in the Antelope Valley solar project; total project investment was expected to reach up to $1.36 billion, with earnings and cash flow accretion beginning in 2013.
- Merger and acquisitions: The proposed stock-for-stock Constellation transaction remained subject to shareholder and regulatory approvals and was anticipated to close in early 2012. A PJM market-monitor settlement contemplated divestiture of three Constellation stations totaling 2,648 MW. Exelon completed its 230-MW Antelope Valley solar acquisition and acquired the 720-MW Wolf Hollow gas plant. Wolf Hollow generated a $36 bargain-purchase gain and a $6 gain on settling its existing PPA.
- Regulatory and operating risks: ComEd’s 2007 rate-case remand could result in customer refunds; ComEd estimated a maximum of about $30, while intervenors proposed about $37 including interest. The Governor vetoed Illinois infrastructure legislation that could have enabled $2.6–$3.0 billion of incremental ComEd investment over ten years; the General Assembly could consider an override. Environmental rules, including CSAPR, proposed toxic-emissions requirements and cooling-water rules, could increase compliance costs or affect plant economics. The filing also discusses nuclear safety reviews following the Japan disaster and 2011 Mid-Atlantic earthquake and storms; resulting requirements and costs were not yet clear.
- Tax and contingencies: Exelon reported a preliminary IRS settlement involving certain tax positions, but the like-kind-exchange dispute remained contested. A fully successful IRS challenge could require up to $850 in tax and interest, excluding penalties, and could add up to $250 of after-tax interest expense; Exelon expected to litigate and recorded no liability for the disputed position. PECO recorded a $171 regulatory liability for tax benefits expected to be refunded to customers over seven years. Environmental remediation reserves at Exelon were $228, including $174 related to former manufactured-gas-plant sites.
- Unusual earnings and cash-flow factors: Q3 included $36 of Wolf Hollow bargain-purchase gain, a $28 Generation nuclear decommissioning expense related to Zion, and $29 of acquisition-related costs across Exelon. Generation’s non-regulatory nuclear trust investments recorded $141 of unrealized losses in Q3, compared with $107 of gains in Q3 2010. Generation’s collateral position also affected cash: net counterparty collateral payments were $804 for the nine months.
Important facts for investors to verify
- Whether Exelon’s lower GAAP earnings persist after separating hedge mark-to-market effects, nuclear trust investment volatility and other nonrecurring items from adjusted operating earnings.
- Final outcomes and cash impacts of the ComEd rate-case remand, Illinois infrastructure legislation, the Constellation merger approvals and required divestitures.
- Progress, financing, cost and construction risks for Antelope Valley, including the loan guarantee and the contract provision allowing First Solar to repurchase the project if initial loan funding does not occur by year-end 2011.
- Potential IRS exposure from the disputed like-kind-exchange position and the timing and customer treatment of tax refunds and benefits.
- Generation’s forward power-price exposure: expected generation was 97%–100% hedged for the remainder of 2011, 85%–88% for 2012 and 56%–59% for 2013. Also verify liquidity and collateral sensitivity to credit downgrades.
- Whether pension funding, required environmental or nuclear-safety spending, storm costs and planned capital expenditures remain consistent with management’s cash-flow expectations.