Business context and reporting period
Exelon Corporation’s combined Form 10-Q covers the quarter and six months ended June 30, 2015. The filing also includes Exelon Generation, ComEd, PECO and BGE. Exelon combines competitive power generation and energy marketing with regulated electric and gas utilities. Results are unaudited. Comparisons are affected by Generation’s consolidation of CENG beginning April 1, 2014 and the inclusion of Integrys in 2015.
Key financial results
Amounts are in millions except per-share data. Exelon consolidated results:
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenue | $6,514 | $6,024 | $15,345 | $13,261 |
| Operating income | $1,134 | $842 | $2,501 | $1,010 |
| Net income attributable to common shareholders | $638 | $522 | $1,331 | $612 |
| Diluted EPS | $0.74 | $0.60 | $1.54 | $0.71 |
| Adjusted operating earnings (non-GAAP) | $508 | $440 | $1,123 | $970 |
- Operating cash flow for the first half was $3,969, versus $1,751 a year earlier; capital expenditures were $3,460, versus $2,501. Cash and cash equivalents at June 30 were $6,014.
- At June 30, long-term debt was $25,220, up from $19,362 at year-end 2014. The balance sheet also showed $543 of short-term borrowings, $226 of long-term debt due within a year and $648 of debt to financing trusts.
- Exelon reported $8.5 billion of committed credit facilities, with $6.4 billion available after letters of credit and commercial paper. No borrowings were outstanding under the facilities.
- Exelon’s quarterly common dividend was $0.31 per share, unchanged from 2014.
Material changes versus the prior comparable period
- First-half net income attributable to common shareholders more than doubled, while revenue increased about 16%. Management attributed the improvement principally to Generation’s higher revenue net of purchased power and fuel, including favorable derivative mark-to-market results, lower nuclear outage days, capacity pricing, lower costs to serve load and the inclusion of CENG and Integrys.
- Generation recorded $397 million of first-half economic-hedging mark-to-market gains, compared with $744 million of losses in the first half of 2014. This was a major driver of the year-over-year earnings change and can reverse with market movements.
- The prior-year comparison included a $261 million gain from CENG consolidation; that gain did not recur in 2015. Exelon also had lower realized and unrealized gains on nuclear decommissioning trust investments than in 2014.
- Operating and maintenance expense rose $99 million year over year for the first half, largely reflecting CENG consolidation and higher Generation labor, contracting and materials costs. Lower storm costs and lower impairment charges partly offset the increase.
- ComEd’s first-half net income fell to $189 million from $209 million, while PECO’s increased to $209 million from $173 million and BGE’s increased to $157 million from $106 million. Generation’s net income attributable to membership interest rose to $841 million from $155 million; the comparison reflects consolidation and market-related items.
Outlook, management commentary, risks and contingencies
- PHI acquisition: Exelon expected to complete its approximately $7.2 billion all-cash acquisition in the third quarter of 2015, subject to remaining regulatory approval, including in the District of Columbia. Maryland approval faced judicial-review petitions and a motion to stay. Exelon had issued $4.2 billion of long-term debt in June to finance part of the transaction and expected to settle forward equity sales in July. Merger-related commitments were expected to exceed $300 million, largely charged at closing and paid by the end of 2016; final amounts and treatment could change with approval conditions.
- Generation exposure: Management identified Quad Cities, Clinton and Ginna as the nuclear plants at greatest risk of early retirement, but had made no closure decisions. Decisions could be influenced by power and capacity prices, policy, environmental requirements and Ginna’s reliability-support arrangements. Early closure could trigger accelerated depreciation, impairments, severance and decommissioning costs.
- Market and hedging risks: Generation had hedged 98%–101% of expected generation for 2015, 77%–80% for 2016 and 46%–49% for 2017. Lower forward power and gas prices, capacity-market changes, subsidized generation and weather may affect earnings. The filing cautions that fair-value and mark-to-market movements can materially affect reported results.
- Major regulatory matters: PECO sought a $190 million annual electric delivery revenue increase, with a decision expected in the fourth quarter of 2015. BGE considered transmission-return complaints likely to result in a lower allowed return; management could not estimate the maximum refund exposure. Illustrative complaint outcomes included refunds of approximately $13 million and $14 million, plus an estimated ongoing revenue reduction of about $11 million annually if requested returns were granted.
- Tax and legal exposure: Exelon’s unresolved like-kind exchange tax litigation could result in up to $810 million of tax and after-tax interest as of June 30, excluding penalties, if the IRS prevailed. The filing also describes environmental, asbestos, nuclear-insurance and other contingencies; some potential losses cannot be reasonably estimated.
- Investment plans: Exelon projected 2015 capital expenditures of $7.46 billion. Its utilities anticipated investing approximately $16 billion over five years in infrastructure, with rate base projected to increase about $6 billion by the end of 2019. Exelon stated that it expects operating cash flows and financing access to cover operating, financing and capital requirements.
- The filing provides no consolidated earnings-per-share guidance for 2015. Management’s forward-looking statements are subject to market, regulatory, operational, financing and other risks.
Important facts for investors to verify
- How much of first-half earnings growth came from recurring operations versus Generation’s derivative mark-to-market movements, CENG consolidation and other comparability items; review GAAP and adjusted earnings reconciliations.
- Whether the PHI merger closed as expected, its final regulatory conditions and costs, and the effect of debt issuance and equity settlement on leverage and share dilution.
- Updated economics and decisions for Quad Cities, Clinton and Ginna, including capacity-market outcomes and Ginna’s regulatory support agreement.
- The progress and potential loss exposure in BGE’s transmission-return proceedings and Exelon’s like-kind exchange tax litigation.
- Actual capital spending, available liquidity and collateral needs, particularly if commodity prices or credit ratings change.