Exelon Corporation — Q3 2009 Form 10-Q
Business context and reporting period. Exelon is a utility holding company whose principal businesses are Generation, Commonwealth Edison (ComEd) and PECO. This combined, unaudited filing covers the quarter and nine months ended September 30, 2009; comparisons are with the corresponding 2008 periods. Dollar amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Exelon consolidated | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Operating revenues | $4,339 | $5,228 | $13,202 | $14,366 |
| Operating income | $1,403 | $1,413 | $3,674 | $3,966 |
| Net income | $757 | $700 | $2,126 | $2,030 |
| Diluted EPS | $1.14 | $1.06 | $3.21 | $3.06 |
| Operating cash flow | Not presented quarterly | $4,629 | $4,367 |
- Revenue declined 17% in Q3 and 8% in the nine-month period. Operating income was nearly flat in Q3 and fell about 7% over nine months, while net income and diluted EPS increased in both comparisons.
- Q3 net income benefited substantially from the year-over-year swing in nuclear decommissioning trust investment results: unrealized gains in 2009 versus losses in 2008. Other income also included debt-retirement losses and reversal of previously recognized Illinois investment tax credit benefits.
- Nine-month operating cash flow was $4.63 billion; capital expenditures were $2.25 billion, implying cash flow after capital expenditures of about $2.38 billion. Cash and equivalents were $2.37 billion at September 30, up from $1.27 billion at year-end 2008.
- Balance-sheet debt, including amounts due within one year and financing-trust debt, was approximately $12.9 billion at September 30. Total liabilities were $36.9 billion and shareholders’ equity was $12.5 billion. Long-term debt fair value exceeded carrying value; the filing reports $12.56 billion fair value versus $11.89 billion carrying amount for long-term debt including current maturities, excluding separate financing-trust debt.
- Exelon reported $7.3 billion of aggregate revolving-credit commitments and approximately $6.8 billion available. Its stated credit facilities expire in October 2012 for Exelon, Generation and PECO, and February 2011 for ComEd. The filing says liquidity is sufficient, while noting possible future refinancing and collateral needs.
- Common dividends paid were $1.04 billion in the first nine months; dividends per share were $0.53 in Q3 and $1.58 year to date. Generation distributed $1.8 billion to Exelon. Exelon made no share repurchases in the period.
Material changes and management commentary
- Generation’s nine-month revenue fell 11% to $7.42 billion and net income fell to $1.70 billion from $1.73 billion. Lower wholesale prices, weaker market conditions, higher nuclear fuel costs and a $223 million impairment of two Texas plants weighed on results; trust-fund gains and other items partly offset the pressure. Q3 Generation net income rose to $657 million from $635 million, despite lower revenue.
- ComEd’s nine-month revenue declined 4% to $4.42 billion, while net income rose to $275 million from $110 million, helped by higher distribution rates, lower operating costs and tax-related items. Retail deliveries fell 6% year to date, reflecting economic conditions and weather. Q3 net income was $46 million versus $33 million.
- PECO’s nine-month revenue declined 4% to $4.05 billion, while net income rose to $275 million from $246 million. Lower bad-debt expense and higher gas distribution rates helped; lower electric load and increased scheduled transition-charge amortization were offsets. Q3 net income was $92 million versus $90 million.
- Management cited weak electricity demand, depressed wholesale prices, adverse weather and economic conditions, higher benefit costs, and greater Generation exposure to unhedged prices beyond 2010 as important operating pressures. Generation reported hedges covering 98%–100% of expected generation for the remainder of 2009, 88%–91% for 2010 and 63%–66% for 2011.
- Management projected about $3.40 billion of 2009 capital expenditures and announced cost actions expected to yield approximately $350 million of 2010 O&M savings versus the prior baseline; it expected about half to be sustainable. No full-year earnings or EPS guidance is stated in the supplied filing text.
Outlook, risks and unusual items
- Generation issued $1.5 billion of senior notes in September and used proceeds in part to refinance 2011 maturities. Early retirement of Exelon and Generation notes produced $93 million of Q3 losses; additional approximately $24 million was expected in Q4 following calls of remaining notes.
- A $223 million first-quarter impairment was recorded for the Handley and Mountain Creek Texas generating stations after lower forward energy prices. Generation also recorded a $416 million net decrease in nuclear decommissioning obligations during Q3, including $47 million of pre-tax income from the reduction exceeding related asset balances.
- Exelon’s dispute with the IRS over tax deferrals from ComEd’s 1999 fossil-plant sale could accelerate tax and interest payments of up to $1.1 billion if the IRS prevails; management estimates a successful challenge could adversely affect results by as much as $300 million after tax for interest expense. The filing also describes other contested tax positions and uncertain outcomes.
- Generation estimated an NRC minimum decommissioning-funding shortfall of $59 million at September 30 and said it expects to address any remaining shortfall through financial guarantees rather than cash contributions, subject to approvals. Market declines or regulatory changes could change funding needs. Separately, the DOE’s spent-fuel repository schedule remains uncertain; Exelon continued using 2020 as its estimate for DOE acceptance.
- Environmental and regulatory exposures include unresolved nuclear groundwater matters, air- and water-rule requirements, MGP remediation reserves, and litigation. A required closed-cycle cooling retrofit at Salem could cost Exelon and Generation more than $500 million. ComEd’s original-cost audit dispute could lead to asset disallowances and customer refunds if the Illinois Attorney General’s position is accepted.
- PECO’s electric generation rate caps and its supply PPA with Generation end December 31, 2010. Pennsylvania transition policy and the economics of replacement supply may materially affect PECO and Generation. The filing also notes Generation’s exposure to counterparty collateral demands if credit ratings decline and refinancing risk for expiring credit facilities.
- Growth plans include nuclear uprates targeting 1,300–1,500 MW over eight years, with estimated investment of about $3.5 billion. Exelon had not decided to build a new nuclear plant and shifted toward seeking an early site permit. ComEd and PECO sought federal smart-grid grants; receipt was not assured. Exelon terminated its proposed NRG acquisition effort in July 2009.
Important facts for investors to verify
- How much of earnings growth came from recurring operations versus trust-fund valuation gains, tax adjustments, regulatory accounting and other unusual items.
- Whether subdued demand and wholesale power prices persist, and how Generation’s hedge coverage and margins evolve after 2011 and after PECO’s PPA expires.
- The outcome and potential cash consequences of the IRS disputes, especially the 1999 fossil-asset tax positions, and the timing of any resolution.
- Whether Generation can satisfy NRC decommissioning funding requirements without significant cash contributions, and whether trust-asset values or rules change.
- ComEd’s and PECO’s ability to recover planned grid investment through rates, obtain requested federal grants, and manage refinancing and collateral requirements.
- The status and financial exposure of material environmental, litigation and regulatory matters, including the Salem cooling-water issue and ComEd audit proceedings.