Exelon Corporation 10-Q Summary
Business context and reporting period. This combined filing covers Exelon Corporation and subsidiaries Exelon Generation, Commonwealth Edison (ComEd), PECO and Baltimore Gas and Electric (BGE) for the quarter and nine months ended September 30, 2015. Exelon combines competitive power generation and energy marketing with regulated electricity and gas utilities. Financial amounts below are in millions of dollars unless stated otherwise.
Key financial results
| Metric | Three months ended Sep. 30, 2015 | Three months ended Sep. 30, 2014 | Nine months ended Sep. 30, 2015 | Nine months ended Sep. 30, 2014 |
|---|---|---|---|---|
| Operating revenue | $7,401 | $6,912 | $22,746 | $20,173 |
| Operating income | $1,200 | $1,738 | $3,701 | $2,747 |
| Net income attributable to common shareholders | $629 | $993 | $1,959 | $1,604 |
| Diluted EPS | $0.69 | $1.15 | $2.22 | $1.86 |
| Adjusted operating earnings, non-GAAP | $757; $0.83 per diluted share | $676; $0.78 per diluted share | $1,880; $2.13 per diluted share | $1,646; $1.91 per diluted share |
| Operating cash flow | Not presented for quarter alone | Not presented for quarter alone | $5,674 | $3,643 |
| Capital expenditures | Not presented for quarter alone | Not presented for quarter alone | $5,443 | $4,114 |
| Dividends per common share | $0.31 | $0.31 | $0.93 | $0.93 |
Calculated consolidated operating margin was approximately 16.2% in Q3 2015 versus 25.1% in Q3 2014, and 16.3% for the first nine months of 2015 versus 13.6% in the prior-year period. These are simple calculations from reported revenue and operating income, not company-reported measures.
- Cash flow and liquidity: Operating cash flow less capital expenditures was approximately $231 million for the first nine months of 2015, compared with negative $471 million in 2014. Investing cash outflow was $5,689 million and financing cash inflow was $5,402 million. Cash and cash equivalents were $7,265 million at September 30, up from $1,878 million at year-end 2014.
- Debt: Balance-sheet debt included $675 million of short-term borrowings, $897 million due within one year, $24,541 million of long-term debt and $648 million of debt to financing trusts. Exelon issued $5,909 million of long-term debt and $1,868 million of common stock during the nine-month period, largely to finance the proposed PHI acquisition. Debt increased from year-end 2014.
- Credit availability: Committed credit facilities totaled $8.5 billion; $6.8 billion was available at September 30 and there were no facility borrowings. Commercial paper outstanding was $604 million at ComEd and $50 million at BGE.
Material changes and management commentary
- Q3 GAAP net income attributable to common shareholders declined to $629 million from $993 million; nine-month earnings rose to $1,959 million from $1,604 million. Adjusted operating earnings increased in both comparisons, but are a non-GAAP measure defined by Exelon.
- Generation was the main source of quarter-to-quarter earnings volatility. Its Q3 revenue net of purchased power and fuel was $2,249 million, down $283 million, chiefly reflecting $139 million of economic hedge mark-to-market losses versus $267 million of gains a year earlier, plus lower margins and capacity revenues after asset sales. For nine months, that measure increased to $7,041 million from $5,520 million, aided by CENG consolidation, Integrys results, higher capacity revenue, lower cost to serve load and a favorable swing in hedge marks.
- ComEd, PECO and BGE reported higher nine-month net income: $339 million, $299 million and $212 million, respectively, versus $335 million, $255 million and $156 million. Rate mechanisms, capital investment and weather contributed to results; utility earnings remain subject to regulatory decisions and cost recovery.
- Management said it expects operating cash flow to meet operating, financing and capital requirements, while prioritizing investment-grade credit metrics and a sustainable dividend. Exelon projected 2015 capital expenditures of $7.6 billion. The filing describes approximately $16 billion of utility infrastructure investment over five years and Generation-approved growth project investment of $2.3 billion from 2015 through 2019.
Outlook, risks, contingencies and unusual items
- Proposed PHI acquisition: The all-cash transaction is valued at approximately $6.9 billion for PHI common shares. By September 30, Exelon said it had arranged sufficient funds for the purchase price, costs and commitments. Regulatory approvals remained outstanding, including in Washington, D.C.; following an October settlement, the DCPSC reopened its review, with a possible close in Q1 2016. Merger-related direct benefits were estimated at $430 million or more net present value, plus $50 million of charitable contributions; most were expected to be charged to earnings at closing. Timing, final costs and approval remain uncertain.
- Nuclear fleet economics: Exelon deferred decisions on Quad Cities and Byron for one year; Clinton was also deferred for a year after quarter-end. Quad Cities was expected to operate at least through May 2018, Byron through May 2019, and Clinton was then obligated through May 2016. Oyster Creek is scheduled to cease operation by the end of 2019. Early retirement could cause accelerated depreciation, impairment, severance and decommissioning costs. The filing identifies $1.729 billion of asset retirement obligations for Quad Cities, Clinton and Ginna combined.
- Decommissioning estimate: Generation’s nuclear decommissioning obligation rose approximately $1.1 billion in the first nine months, including a $775 million third-quarter update. The update included roughly $550 million for higher expected site-security costs during decommissioning and $285 million from revised spent-fuel transfer timing assumptions. These estimates are sensitive to assumptions and future plant decisions.
- Regulatory and market exposure: Important uncertainties include power and gas prices, capacity-market rules and litigation, emissions and water-quality requirements, rate proceedings, and the Ginna reliability-support agreement. BGE considered a reduction in its transmission return on equity probable and recorded a reserve; estimated refunds under the complaints could total about $27 million, with an estimated ongoing revenue reduction of about $11 million annually if the requested rates were adopted.
- Tax and legal contingencies: Exelon is litigating the IRS challenge to its 1999 like-kind exchange tax position. The filing discusses potential tax and interest exposure and an IRS deposit; the disclosed estimates differ by context, so the ultimate amount and timing are uncertain. Environmental remediation and asbestos matters also remain, including possible exposures that management cannot reliably estimate.
- Unusual accounting item: Generation recorded a $52 million pre-tax downward correction to Level 3 derivative valuations, including amounts originally recorded in 2014 and the first two quarters of 2015. Exelon and Generation said it was not material to the periods presented and did not expect a material 2015 impact.
- Other notable items: Exelon recorded a $64 million loss from settling forward-starting interest-rate swaps in connection with merger financing. It issued 57.5 million shares in July, raising net proceeds of $1.868 billion. The quarterly dividend remained $0.31 per share; future dividends require board approval. The filing provides no explicit full-year earnings guidance.
Important facts for investors to verify
- Whether the PHI merger received all required approvals, closed on the expected timetable, and resulted in the anticipated purchase funding, commitments and earnings charges.
- How much of reported earnings and cash flow reflects recurring operations versus derivative marks, nuclear trust investment movements, asset-sale gains, CENG consolidation and other adjustments.
- Whether the $7.6 billion 2015 capital expenditure projection, the utility investment plans and financing needs changed after quarter-end.
- Updates to nuclear plant operating decisions, decommissioning assumptions and the potential financial effects of early retirement.
- Resolution and potential financial impact of the like-kind exchange tax litigation, BGE transmission-rate complaints, merger proceedings and other material contingencies.
- Exelon’s debt and liquidity after merger financing, including the use of cash, available facilities, collateral requirements and any changes in commercial paper or credit ratings.