Exelon Corp. Q1 2009 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2009, for Exelon Corporation and its subsidiaries: Exelon Generation Company, LLC (Generation), Commonwealth Edison Company (ComEd), and PECO Energy Company (PECO). Exelon operates as a utility services holding company with three reportable segments: Generation (wholesale and competitive retail), ComEd (regulated electric utility in northern Illinois), and PECO (regulated electric and gas utility in southeastern Pennsylvania).
Key Financial Metrics
| Metric (in millions) | Q1 2009 | Q1 2008 |
|---|---|---|
| Operating Revenues | $4,722 | $4,517 |
| Operating Income | $1,254 | $1,123 |
| Net Income | $712 | $581 |
| Diluted EPS | $1.08 | $0.88 |
| Operating Cash Flow | $1,950 | $718 |
| Capital Expenditures | $(712) | $(897) |
| Total Assets | $48,863 | $47,817 |
| Total Debt (Long-term + Current) | $12,000 | $11,646 |
Note: Total Debt calculated as sum of Short-term borrowings, Long-term debt due within one year, Long-term debt to PECO Energy Transition Trust due within one year, and Long-term debt.
Material Changes vs. Prior Period
- Net Income Increase: Net income rose 22.5% to $712 million, driven by higher energy gross margins at Generation (due to increased nuclear output and favorable market conditions), increased distribution revenues at ComEd and PECO from rate case orders, and tax benefits from an Illinois Supreme Court decision regarding Investment Tax Credits (ITC).
- Asset Impairment: Generation recorded a $223 million impairment charge related to its Handley and Mountain Creek Texas plants due to declining forward energy prices. This was partially offset by the factors increasing income.
- Operating Expenses: Total operating expenses increased to $3,468 million. The increase was primarily due to the impairment charge and higher pension costs, partially offset by lower purchased power costs and reduced nuclear refueling outage expenses.
- Cash Flow: Operating cash flow surged to $1.95 billion, significantly higher than the prior year, largely due to a $784 million net collection of counterparty collateral compared to a $161 million disbursement in 2008.
Guidance, Outlook, and Risks
- NRG Acquisition: Exelon is pursuing an acquisition of NRG Energy, Inc. The offer was extended to June 26, 2009. Exelon expects to close in the fourth quarter of 2009, pending regulatory approvals (FERC, NRC, state commissions) and the resolution of a lawsuit filed by NRG.
- Regulatory Environment:
- Illinois: ComEd is subject to the Illinois Settlement Legislation, including rate relief programs and energy efficiency mandates. A 2007 rate case order is effective, and a transmission rate case is ongoing.
- Pennsylvania: PECO is preparing for the expiration of its electric generation rate caps and Power Purchase Agreement (PPA) with Generation on December 31, 2010. Act 129 mandates smart meter deployment and energy efficiency targets.
- Market Risks:
- Commodity Prices: Generation hedges 91-94% of expected generation for 2009. Unhedged positions face risk from declining electricity prices.
- Counterparty Credit: Net credit exposure for Generation is $1.218 billion, predominantly with investment-grade counterparties. A downgrade to non-investment grade could trigger significant collateral requirements (approx. $606 million for derivatives).
- Nuclear Decommissioning: Trust funds for nuclear decommissioning are underfunded by approximately $185 million relative to NRC minimum requirements based on Dec 2008 values. Exelon is evaluating remedies, which could include letters of credit or additional contributions.
- Unusual Items: The $223 million impairment charge is a non-cash item impacting operating income. The $784 million collateral collection is a significant non-operating cash flow driver.
Investor Verification Checklist
- Impairment Details: Verify the fair value methodology used for the Texas plant impairment and the potential for further impairments if energy prices decline.
- NRG Transaction Status: Monitor the status of regulatory approvals (FERC, NRC) and the outcome of the NRG lawsuit regarding the exchange offer.
- Decommissioning Funding: Review the specific remedies Exelon plans to implement to address the NRC underfunding status of nuclear trust funds.
- Collateral Exposure: Assess the impact of potential credit rating downgrades on collateral posting requirements and liquidity.
- Regulatory Rate Cases: Track the resolution of pending rate cases in Illinois (ComEd) and Pennsylvania (PECO) and their impact on future revenue recovery.