Exelon Corporation — Q1 2012 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2012. Exelon completed its merger with Constellation on March 12, issuing approximately 188 million shares with an estimated value of $7.365 billion. Exelon’s 2012 consolidated results include Constellation and BGE only from March 12 through March 31, so comparisons with Q1 2011 are not like-for-like. The filing is a combined report for Exelon and its registrant subsidiaries.
Key financial results
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Operating revenue | $4.686 billion | $4.956 billion |
| Operating income | $359 million | $1.202 billion |
| Net income attributable to common stock | $200 million | $668 million |
| Diluted EPS | $0.28 | $1.01 |
| Adjusted operating earnings, non-GAAP | $603 million; $0.85 per diluted share | $778 million; $1.17 per diluted share |
| Cash from operating activities | $994 million | $(207) million |
| Capital expenditures | $1.496 billion | $1.150 billion |
Calculated operating margin was approximately 7.7%, versus 24.2% a year earlier; the short merger-period contribution and substantial unusual costs make this comparison particularly difficult to interpret. Operating cash flow less capital expenditures was approximately negative $502 million. Cash and cash equivalents were $721 million at quarter-end, down from $1.016 billion at December 31, 2011; the quarter included $964 million of cash acquired with Constellation.
At March 31, total assets were $77.628 billion and total liabilities were $55.439 billion, compared with $54.995 billion and $40.520 billion, respectively, at year-end. The increase principally reflects the merger. Reported long-term debt was $16.293 billion, with $670 million due within one year; the balance sheet also reports $517 million of long-term variable-interest-entity debt, $65 million of such debt due within a year, $648 million of debt to financing trusts, and $339 million of short-term borrowings. Current assets of $11.815 billion and current liabilities of $9.052 billion imply a calculated current ratio of about 1.3x. Credit facilities totaled $11.36 billion, with $8.5 billion available; none was drawn at quarter-end. Exelon’s quarterly dividend was $0.53 per share.
Material changes and performance drivers
- Net income attributable to common stock fell $468 million year over year. Operating income declined $843 million, while other income and deductions improved by $86 million, chiefly reflecting investment and tax-related items.
- Operating and maintenance expense increased $741 million. The filing cites merger and integration activity, Maryland merger commitments, and a $195 million expense related to the FERC settlement over Constellation’s prior trading activities, among other costs.
- Generation’s revenue net of purchased power and fuel, a non-GAAP measure, declined $65 million to $1.695 billion. Lower capacity revenues, realized power prices, and higher nuclear fuel costs reduced results; improved hedge mark-to-market results and acquired businesses partly offset the declines.
- ComEd net income increased to $87 million from $69 million, supported by higher distribution rates and EIMA-related revenue reconciliation. PECO common-stock income declined to $96 million from $125 million, mainly due to mild weather and lower load. BGE reported a $30 million net loss for the full quarter as a standalone registrant; Exelon’s consolidated results include BGE only from March 12, when BGE contributed $52 million of revenue and a $65 million net loss.
- Exelon’s reported results include a $117 million after-tax noncash benefit from reassessing state deferred taxes. Adjusted operating earnings exclude specified items, including merger-related costs, Maryland commitments, acquired-contract amortization, FERC settlement costs, and certain hedge and decommissioning-trust effects.
Outlook, risks and contingencies
- Management expected the merger to be accretive to earnings per share in 2013, the first full year after closing; this was a preliminary estimate, not a guarantee. Exelon projected about $400 million of additional merger-related costs, primarily in 2012–2013, with approximately $300 million expected to be expensed and $100 million capitalized.
- Merger-related regulatory commitments include an estimated Maryland investment exceeding $1 billion. They include $95–$120 million for a Baltimore headquarters and up to $625 million to develop 285–300 MW of generation over ten years. BGE’s $113 million residential customer credit was recorded as a revenue reduction; BGE dividends on common shares are restricted through the end of 2014. Exelon also agreed to divest three Maryland generating stations totaling 2,648 MW, subject to regulatory processes.
- Management cited weak economic conditions, mild weather, lower natural-gas and wholesale power prices, and subdued demand as pressures on generation and utility results. Generation reported 95%–98% of expected output hedged for 2012, 68%–71% for 2013, and 40%–43% for 2014, leaving greater exposure in later periods.
- ComEd’s Illinois formula-rate proceeding remained unresolved. An administrative law judge proposed a $146 million revenue-requirement reduction, compared with ComEd’s proposed $59 million reduction; the ICC could issue a materially different final order. ComEd also appealed a separate order requiring an estimated $37 million customer refund.
- Tax matters include a disputed IRS like-kind exchange position. Assuming other tax settlements are finalized, Exelon estimated a potential $840 million of tax and interest if the IRS prevailed, plus an asserted $86 million penalty; the company said it expected to litigate and believed it would prevail. These are potential exposures, not recorded payment amounts stated as certain.
- Environmental and operating exposures include evolving air and water rules, nuclear safety requirements, remediation obligations, and litigation. The eventual cost and operational effects of several rules and proceedings were not yet estimable. Exelon also identified possible additional collateral needs if ratings or market conditions deteriorate; Generation estimated $2.8 billion of incremental collateral in a below-investment-grade scenario, within stated available facility capacity.
Important facts for investors to verify
- How much of the GAAP earnings decline reflects recurring operations versus merger-period effects, regulatory commitments, FERC settlement costs, and tax benefits.
- Final purchase-accounting valuations for Constellation, including acquired energy contracts, liabilities, and the resulting amortization and earnings effects.
- Progress and final outcomes in the Maryland and Illinois regulatory proceedings, including divestitures, customer credits, and rate recovery.
- Merger integration costs against management’s estimate, delivery of anticipated savings, and the basis for the projected 2013 EPS accretion.
- Liquidity and collateral requirements, pension funding, capital spending, and the resolution or updated estimates of material tax, environmental, and legal contingencies.