Exelon Corporation — Q3 2010 Form 10-Q Summary
Business context and reporting period
Combined unaudited quarterly filing for Exelon Corporation and subsidiaries Exelon Generation, Commonwealth Edison (ComEd) and PECO Energy, for the quarter and nine months ended September 30, 2010. Exelon operates competitive generation and energy marketing businesses and regulated electric and gas delivery businesses in Illinois and Pennsylvania. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Third quarter: Revenue was $5,291, up 22% from $4,339. Operating income was $1,366 versus $1,403; net income was $845 versus $757; diluted EPS was $1.27 versus $1.14. The higher revenue largely reflected utility activity and increased purchased-power costs; operating expenses rose to $3,925 from $2,936.
- First nine months: Revenue was $14,150, up 7% from $13,202. Operating income was $3,786 versus $3,674, while net income declined to $2,039 from $2,126 and diluted EPS to $3.08 from $3.21. Generation net income fell $149 to $1,548; ComEd declined $29 to $246, while PECO rose $28 to $303.
- Adjusted earnings: Management’s non-GAAP adjusted operating earnings were $739, or $1.11 per diluted share, in Q3 versus $633, or $0.96, a year earlier. Nine-month adjusted earnings were $2,057, or $3.10 per share, versus $2,112, or $3.19.
- Cash flow: Nine-month operating cash flow was $4,112 versus $4,629. Capital expenditures were $2,382, compared with $2,252; operating cash flow less capital expenditures was approximately $1,730. Cash and cash equivalents at September 30 were $2,735, up from $2,010 at year-end 2009. Common dividends paid were $1,042; quarterly dividends were $0.53 per share.
- Debt and liquidity: Long-term debt, including amounts due within one year, was $12,215; debt to financing trusts was $390. The balance sheet also included $65 of short-term borrowings and a $225 short-term receivable-backed note. Exelon reported $7.4 billion of aggregate credit commitments, with $6.9 billion available at September 30. Total assets were $50,948 and total liabilities $36,906.
- Operating measures: Generation’s nuclear fleet capacity factor was 94.2% for the first nine months versus 94.9% in 2009; production cost was $17.00/MWh versus $15.63. ComEd and PECO earnings benefited from favorable weather, while Generation cited weaker market and portfolio conditions, higher fuel costs and more planned nuclear outage days.
Material changes versus comparable periods
- Q3 net income increased 12%, despite lower operating income, in part because the prior-year quarter included significant charges, including early debt retirement costs and investment-tax-credit-related effects.
- Nine-month net income and diluted EPS declined despite higher revenue and operating income. Management cited less favorable nuclear decommissioning trust investment performance, market and portfolio conditions, increased nuclear fuel costs, lower nuclear output from additional outage days, and tax-related charges. Favorable items included weather, hedging gains, capacity revenue and lower Illinois Settlement Legislation costs.
- Generation’s nine-month revenue net of purchased power and fuel expense, a non-GAAP measure, fell to $4,986 from $5,167. ComEd’s rose to $2,196 from $2,044; PECO’s rose to $2,233 from $1,957.
- Cash flow from operations decreased by $517, with higher pension and postretirement contributions ($740 versus $456) among the disclosed cash-flow factors.
Outlook, management commentary, risks and unusual items
- No quantified companywide earnings forecast is provided in the supplied filing text. Management said cash flows, credit-market access and available credit facilities were expected to meet operating, financing and capital needs. Projected 2010 capital expenditures were $3,365.
- Generation had hedged 97%–100% of expected generation for the remainder of 2010, 87%–90% for 2011 and 62%–65% for 2012. Management warned that weaker economic recovery, additional natural-gas supply and low wholesale prices could pressure margins; later years have greater unhedged exposure.
- Generation agreed to acquire John Deere Renewables for about $860, subject to regulatory approvals, with closing expected in Q4 2010. It issued $900 of senior notes primarily to fund the transaction. If the deal is terminated or not completed by March 31, 2011, $550 of the notes must be repurchased. Up to another $40 was contingent on development projects proceeding.
- ComEd’s appeal of its 2007 distribution rate case resulted in an adverse court ruling on post-test-year depreciation and a smart-meter cost-recovery rider. The company estimated a possible refund of up to $18 for the remainder of 2010 and disclosed further potential rate impacts. Its pending 2010 rate case requested a $396 annual revenue-requirement increase, which could be reduced by about $85; approval and timing remained uncertain.
- PECO and parties filed proposed settlements for annual electric and gas delivery-revenue increases of $225 and $20, respectively, subject to Pennsylvania regulator approval. If approved, the rates were expected to take effect January 1, 2011.
- Exelon and IRS Appeals reached a nonbinding preliminary agreement on certain tax positions, with an estimated 2011 tax and interest payment of about $235 and additional refunds of about $300 expected between 2011 and 2014. The separate like-kind-exchange dispute remained unresolved; a fully successful IRS challenge could result in up to $810 of tax and interest becoming payable and up to $220 of additional after-tax interest expense, as estimated at September 30.
- Generation recorded a $57 impairment of sulfur-dioxide allowances following proposed EPA rules. Planned retirement of four fossil units is expected to add accelerated depreciation; timing depends partly on transmission upgrades and regulatory proceedings. Environmental rules also create potential compliance and asset-value risks, including estimated Oyster Creek cooling-tower costs of $700–$800 if required.
- Generation transferred Zion Station decommissioning responsibility and related assets to ZionSolutions. At September 30, pledged assets were about $801 and the payable to ZionSolutions about $768; EnergySolutions provided a $200 letter of credit. Generation retained spent-fuel obligations.
- Exelon estimated 2010 benefit-plan contributions of about $954, including a $500 incremental pension contribution made in Q3. Management’s estimated pension and postretirement plan underfunding increased from year-end, based on updated assumptions.
- Management identified commodity-price, counterparty-credit, regulatory, environmental, tax, pension-funding and financing-market risks. A downgrade below investment grade could trigger significant collateral requirements, particularly for Generation.
Important facts for investors to verify
- Whether the JDR acquisition closed on the stated terms and whether the $550 note repurchase condition was avoided.
- Final outcomes and cash effects of the IRS settlements, the unresolved like-kind-exchange litigation, and any related changes to tax liabilities or interest expense.
- ComEd’s rate-case decisions, potential refunds and the effect of the appellate ruling on allowed cost recovery; also whether PECO’s proposed rate settlements were approved.
- Generation’s forward power-price exposure, hedge coverage, realized hedge performance and cash collateral requirements, especially if credit ratings or market prices change.
- Final environmental requirements and potential costs affecting fossil plants, nuclear facilities and emissions allowances, including any impairment of leased-plant residual values.
- Actual pension contributions, plan funding status and future required contributions compared with management’s estimates.
- Whether operating cash flow and planned capital spending support dividends and investment needs while maintaining liquidity and debt capacity.