Exelon Corporation — Q2 2013 Form 10-Q
Business context and period. This combined, unaudited filing covers Exelon Corporation and its principal subsidiaries: generation business Exelon Generation, and regulated utilities ComEd, PECO and BGE. It reports the three and six months ended June 30, 2013, with comparisons to 2012. Comparability is affected by the March 12, 2012 Constellation merger: 2012 Exelon and Generation results include acquired operations only from the merger date, while standalone BGE reports its full 2012 periods.
Key financial results
Amounts are in millions except per-share data. Exelon’s consolidated results:
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $6,141 | $5,966 | $12,223 | $10,656 |
| Operating income | $1,005 | $714 | $1,513 | $1,073 |
| Net income | $497 | $289 | $498 | $490 |
| Net income attributable to common shareholders | $490 | $286 | $486 | $486 |
| Diluted EPS | $0.57 | $0.33 | $0.57 | $0.62 |
| Dividends per common share | $0.31 | $0.53 | $0.84 | $1.05 |
- Q2 revenue rose about 3% and common net income rose about 71% year over year. Management attributed the improved Q2 result in part to higher Generation mark-to-market gains and lower amortization of acquired energy contracts.
- For the first half, revenue increased about 15%, but common net income was flat and diluted EPS declined. Results reflect the merger-comparison effect, lower Generation hedge gains, and a first-quarter tax-position charge.
- Management’s non-GAAP adjusted operating earnings were $454 million, or $0.53 per diluted share, in Q2 versus $522 million, or $0.61, a year earlier; first-half adjusted earnings were $1.056 billion, or $1.23 per diluted share, versus $1.125 billion, or $1.44.
- Cash from operations was $2.338 billion for the first half, down from $2.713 billion. Investing cash outflow was $2.549 billion, including $2.518 billion of capital expenditures; financing cash outflow was $284 million. Cash and cash equivalents ended June at $991 million, versus $1.349 billion a year earlier. Common dividends paid were $716 million.
- At June 30, total assets were $78.420 billion and total liabilities were $56.832 billion. The balance sheet reported $16.121 billion of long-term debt, $1.944 billion due within a year, $662 million of short-term borrowings and $210 million of PECO receivables-agreement notes payable; additional debt is separately reported for financing trusts and variable-interest entities. Shareholders’ equity was $21.353 billion.
- The filing projects 2013 capital expenditures of $5.525 billion: Generation $2.775 billion, ComEd $1.450 billion, PECO $575 million and BGE $650 million. These are projections, not commitments to a full-year earnings outcome.
Material changes and segment developments
- Generation: Q2 net income attributable to membership interest increased to $330 million from $166 million; first-half income declined to $311 million from $334 million. Q2 revenue net of purchased power and fuel was $2.124 billion, up $211 million, largely due to $228 million higher mark-to-market gains and lower acquired-contract amortization. First-half net revenue on this basis fell $123 million, including a $235 million decline in hedge gains and a $178 million decrease in electric margin. Lower realized energy and capacity prices, reduced load and higher nuclear fuel expense weighed on the business.
- ComEd: Q2 net income was $96 million versus $42 million, while first-half net income fell to $14 million from $129 million. First-half results included a substantial increase in interest expense, principally from Exelon’s like-kind-exchange tax-position remeasurement. Senate Bill 9 supported an estimated $10 million of additional revenue in the first half; management projected a further $15 million for the remainder of 2013 and $65 million in 2014.
- PECO: First-half net income increased to $200 million from $177 million; Q2 net income was $78 million versus $80 million. First-half revenue net of purchased power and fuel increased $20 million, mainly from favorable winter weather, partly offset by pricing.
- BGE: First-half common net income was $100 million versus a $20 million loss in the comparable standalone 2012 period. The improvement reflected higher distribution rates and the absence of 2012 merger-related customer credits and charitable-contribution accruals.
Outlook, risks and unusual items
- Dividend: In February 2013, Exelon changed its regular quarterly dividend policy from $0.525 to $0.31 per share, an annualized rate of $1.24, subject to Board approval each quarter. Management cited low forward energy prices and weaker financial expectations among the reasons. The Q2 payment was $0.31 per share.
- Market exposure: Generation’s expected output was 96%–99% hedged for 2013, 78%–81% for 2014 and 41%–44% for 2015. A $5/MWh reduction in annual average around-the-clock prices, based on June 30 market conditions and hedged positions, was estimated to reduce Generation pre-tax income by about $260 million in 2014 and $690 million in 2015; the 2013 impact was described as immaterial. Management cited low natural-gas prices, subsidized generation, weak demand and retail competition as pressures on power prices and margins.
- Tax contingency: Following an adverse appellate decision in a separate LILO case, Exelon concluded its like-kind-exchange tax position was no longer more likely than not to be sustained and recorded a noncash $265 million charge in Q1 2013. The IRS continues to assert an $86 million penalty, for which no liability was recorded. A fully successful IRS challenge could make up to $840 million of tax and after-tax interest, excluding penalties, currently payable; approximately $306 million relates to ComEd after Exelon’s hold-harmless arrangement. Exelon intends to litigate.
- Generation impairments: Generation cancelled nuclear uprate projects at Dresden and Quad Cities in Q1 and at LaSalle and Limerick in Q2 because costs and market conditions made them uneconomic. Q2 charges were approximately $92 million to operating and maintenance expense and $8 million to interest expense. Exelon also recorded a $14 million Q2 impairment on a long-term lease investment as lower long-term energy and capacity price expectations reduced estimated residual value.
- Regulatory and project matters: ComEd’s 2014 distribution-rate filing requested a $359 million revenue-requirement increase, subject to ICC review. BGE requested annual electric and gas base-rate increases of $101 million and $30 million, with new rates expected in December 2013; outcomes remain uncertain. BGE faces a FERC transmission-return complaint that could reduce annual revenue by about $10 million if the requested reduction is granted. Litigation also challenges Maryland’s 700 MW CPV contract-for-differences arrangement; its eventual effect could be material.
- Other contingencies: Generation reported potential additional collateral of $1.878 billion if it lost investment-grade status. The NRC identified alleged inaccuracies in historical nuclear decommissioning funding-status reports; any sanction is uncertain. Exelon also received an SEC subpoena seeking documents concerning nuclear decommissioning reporting and funding and is cooperating. Environmental, nuclear, asbestos, tax and other legal matters remain subject to uncertain outcomes; some loss ranges are not estimable.
- Management outlook: Exelon stated that operating cash flows, credit-market access and committed facilities were expected to fund operations and planned investment. It also cautioned that weaker power prices and demand could constrain discretionary investment and dividends and could make some generating units uneconomic. No specific full-year EPS guidance is stated in the supplied filing text.
Most important facts to verify
- How much of Q2’s earnings improvement came from Generation’s mark-to-market gains and acquired-contract amortization rather than recurring operating performance.
- The full-year cash-flow and earnings effect of the $265 million like-kind-exchange charge, and progress and potential cash exposure in the IRS dispute.
- Generation’s forward power-price sensitivity, hedge coverage and the potential collateral requirement following a credit downgrade.
- Regulatory decisions affecting ComEd’s requested rates and BGE’s rate case, FERC complaint and CPV contract.
- Final costs and schedules for the nuclear uprate cancellations, 2013 capital program and Maryland generation commitments.
- Whether decommissioning-related NRC and SEC inquiries, environmental obligations or other contingencies lead to material costs or changes in reported reserves.