Exelon Corporation 10-Q Summary: Q1 2015
Business context and reporting period
Quarter ended March 31, 2015. This combined filing covers Exelon and its principal subsidiaries: Exelon Generation, Commonwealth Edison (ComEd), PECO and Baltimore Gas and Electric (BGE). Exelon operates competitive generation and regulated electric and gas utilities. Figures below are in millions of dollars unless otherwise noted.
Comparability is affected by Generation’s consolidation of CENG beginning April 1, 2014, and its acquisition of Integrys Energy Services in November 2014. Both contributed to higher 2015 generation revenue and earnings.
Key financial metrics
| Exelon consolidated | Q1 2015 | Q1 2014 |
|---|---|---|
| Operating revenue | $8,830 | $7,237 |
| Operating income | $1,366 | $168 |
| Net income | $738 | $93 |
| Net income attributable to common shareholders | $693 | $90 |
| Diluted EPS | $0.80 | $0.10 |
| Adjusted operating earnings, non-GAAP | $615; $0.71 per diluted share | $530; $0.62 per diluted share |
| Cash from operating activities | $1,490 | $165 |
| Capital expenditures | $1,784 | $1,217 |
- Operating margin was approximately 15.5%, versus 2.3% in Q1 2014, calculated as operating income divided by revenue. The sharp increase in GAAP earnings reflects, in significant part, a swing in derivative mark-to-market results: Generation recorded $162 million of economic-hedging gains versus $730 million of losses a year earlier.
- Revenue net of purchased power and fuel, a non-GAAP operating measure, rose to $4,360 million from $2,897 million. Management attributed the increase to CENG and Integrys, lower costs to serve load, and the hedging mark-to-market swing, among other factors.
- Q1 investing cash outflow was $1,751 million; financing cash inflow was $208 million. Cash and cash equivalents ended the quarter at $1,825 million, down $53 million from year-end 2014. Operating cash flow improvement included a favorable $708 million year-over-year change in net counterparty collateral flows, so the increase should not be read as solely recurring earnings-driven cash generation.
- At March 31, 2015, total assets were $87,391 million and total liabilities were $62,753 million. Reported short-term borrowings, current maturities of long-term debt, long-term debt and debt to financing trusts totaled approximately $22,736 million; the comparable December 31, 2014 total was approximately $22,272 million. Current assets of $11,357 million exceeded current liabilities of $7,374 million.
- Common dividend was $0.31 per share, unchanged from Q1 2014. The board declared a further $0.31 quarterly dividend for Q2 2015, subject to future board approval for subsequent dividends.
Material changes versus the prior comparable period
- Generation’s attributable earnings improved to $443 million from a loss of $185 million, reflecting CENG consolidation, Integrys, and improved hedging marks, partly offset by higher operating and maintenance expense, lower realized energy prices and reduced capacity credits.
- ComEd net income declined to $90 million from $98 million, with management citing unfavorable weather and volume and lower allowed return on equity, partly offset by higher distribution revenue and regulatory cost recovery.
- PECO net income increased to $139 million from $89 million, primarily on lower storm-related operating costs and favorable weather and volume. BGE net income attributable to common shareholder increased to $106 million from $85 million, primarily from distribution rate increases and lower operating costs.
- Consolidated operating and maintenance expense increased $223 million, largely from Generation’s CENG-related costs and refueling outages, higher utility maintenance and uncollectible-account costs. Interest expense increased $118 million, mainly due to higher Generation debt and financing for the pending PHI acquisition.
Outlook, commentary, risks and unusual items
- Exelon continued to expect completion of its all-cash acquisition of Pepco Holdings (PHI) in late Q2 or Q3 2015. The transaction price is $27.25 per PHI share; Exelon estimated total cash needs, including related costs and preferred securities, at approximately $7.2 billion. Required regulatory approvals and settlements remained pending, and the DOJ had not advised that its investigation was concluded. The filing does not provide a clear full-year 2015 EPS guidance figure.
- Management projected 2015 capital expenditures of approximately $7.4 billion for Exelon, including $3.625 billion at Generation, $2.425 billion at ComEd, $550 million at PECO and $700 million at BGE. The utilities plan approximately $16 billion of investment over five years. Exelon cited maintaining investment-grade credit metrics and a sustainable dividend as financial priorities.
- Generation’s major reportable segments had hedged 94%–97% of expected 2015 generation, 67%–70% for 2016 and 37%–40% for 2017. Greater unhedged exposure in later years leaves results more sensitive to commodity prices. Management described continued pressure from low gas and wholesale power prices, subsidized generation and competitive retail markets.
- BGE considered a reduction in its transmission return on equity probable in pending FERC complaints. It recorded a reserve at the low end of a reasonably possible loss range; the maximum exposure was not estimable and could materially affect results and cash flows. If requested ROEs were adopted, the filing estimates approximately $11 million of annual revenue reduction and potential refunds of about $13 million and $14 million for the respective complaint periods.
- Three nuclear units did not meet NRC minimum decommissioning funding assurance criteria at year-end 2014. Generation has until March 31, 2017 to address any funding shortfall. The Ginna reliability-support agreement was operating from April 1, 2015 but remained subject to regulatory review; changes to approved pricing or early retirement could affect results.
- Exelon disclosed a pending tax dispute over a 1999 like-kind exchange. A fully successful IRS challenge could require up to $810 million of tax and after-tax interest as of March 31, 2015, excluding penalties; litigation was ongoing. The filing also identifies environmental, asbestos, nuclear-insurance and other legal contingencies, some with potential exposures that are not currently estimable.
- Unusual earnings adjustments included $48 million of after-tax PHI-related interest-rate-swap gains in the non-GAAP reconciliation, $21 million of after-tax merger and integration costs, and a $6 million after-tax benefit from a Midwest Generation bankruptcy lease settlement. Exelon reported approximately $289 million of cumulative PHI-related expense through March 31, 2015.
Most important facts for investors to verify
- How much of Q1’s GAAP earnings improvement reflects recurring operating performance versus derivative marks, acquisition consolidation and other excluded items; compare GAAP EPS with adjusted EPS.
- Whether the PHI merger receives all required approvals, its final customer-benefit commitments, financing mix and total integration costs.
- Generation’s forward hedging position, realized power and capacity prices, and the cash and collateral implications of market movements or a credit downgrade.
- Outcomes and possible financial effects of BGE’s FERC ROE complaints, Generation’s nuclear decommissioning funding requirements and the Ginna agreement review.
- Potential cash exposure and timing for the like-kind-exchange tax litigation and other contingencies, including environmental remediation and asbestos claims.