Business context and reporting period
Exelon Corporation’s unaudited Form 10-Q covers the three and nine months ended September 30, 2013. Exelon operates competitive power generation and regulated electric and gas utilities through Generation, ComEd, PECO and BGE. The filing presents separate registrant statements as well as Exelon consolidated results; figures below are Exelon consolidated unless noted. Several 2012 nine-month comparisons are not fully like-for-like because Constellation and BGE results were included only from the March 12, 2012 merger date.
Key financial metrics
Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $6,502 | $6,579 | $18,725 | $17,235 |
| Operating income | $1,254 | $603 | $2,767 | $1,676 |
| Net income attributable to common shareholders | $738 | $296 | $1,224 | $782 |
| Diluted EPS | $0.86 | $0.35 | $1.42 | $0.97 |
| Adjusted operating earnings (non-GAAP), diluted EPS | $667; $0.78 | $658; $0.77 | $1,722; $2.00 | $1,783; $2.21 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $4,394 | $4,574 |
For the nine months, capital expenditures were $3,887 million and net cash used in investing was $3,970 million. Cash and cash equivalents at September 30 were $1,644 million. The balance sheet reported current assets of $9,951 million and current liabilities of $7,507 million. Debt-related balances included $17,583 million of long-term debt, $1,461 million due within one year, $214 million of short-term borrowings, $521 million of VIE debt (current and long-term), and $648 million of financing-trust debt.
Exelon’s Q3 dividend was $0.31 per share; dividends paid over nine months were $981 million. The company reported that the board’s revised annualized dividend policy is $1.24 per share, down from the prior $2.10 rate.
Material changes versus comparable periods
- Q3 revenue fell 1% year over year, while operating income and common-shareholder net income increased substantially. Management attributed the improvement in part to higher Generation mark-to-market gains, capacity revenue, lower amortization of acquired energy contracts, and lower operating and maintenance costs.
- Nine-month revenue rose about 9% and common-shareholder net income increased about 57%, but operating cash flow declined by $180 million. Adjusted operating earnings fell from $1,783 million to $1,722 million, and adjusted diluted EPS fell from $2.21 to $2.00.
- Generation’s nine-month revenue net of purchased power and fuel expense, a company-defined non-GAAP measure, increased only $43 million. Lower realized energy prices and lower load were partly offset by capacity revenue, other business activities, and reduced merger-related contract amortization.
- ComEd’s net income declined to $140 million for the first nine months from $219 million. Its operating revenue fell, but revenue net of purchased power expense increased by $196 million, mainly reflecting rate formula effects and capital investment; higher interest expense, including the tax-position remeasurement, weighed on earnings.
- PECO’s nine-month common-shareholder net income decreased to $285 million from $297 million. BGE improved to $150 million from a $24 million loss, with 2013 comparison affected by BGE’s post-merger inclusion in Exelon’s 2012 results.
Outlook, commentary, risks and unusual items
- Management said cash flows were expected to be sufficient for operating expenses, financing costs and capital spending. Projected 2013 capital expenditures were $5.45 billion. No specific full-year earnings guidance is stated in the supplied filing text.
- Generation reported 97%–100% of expected generation hedged for 2013, 84%–87% for 2014 and 48%–51% for 2015. Management highlighted exposure to weaker power prices, fuel prices, weather, demand, competition and subsidized generation.
- Exelon recorded a first-quarter non-cash charge of approximately $265 million after reassessing its 1999 like-kind-exchange tax position. At September 30, a fully successful IRS challenge could result in up to $840 million of tax and after-tax interest becoming payable, excluding penalties; Exelon planned to initiate Tax Court litigation by December 29, 2013.
- Generation recorded a $39 million pre-tax impairment charge on 11 wind projects in Q3. It also cancelled nuclear uprate projects in the first half of 2013, recording related charges, including approximately $92 million in operating and maintenance expense and $8 million in interest expense for the second-quarter cancellations.
- Regulatory matters include ComEd’s formula-rate investigation, the FutureGen power contract appeal, and litigation over Maryland and New Jersey generation-support contracts. The filing says adverse outcomes in certain proceedings could materially affect results, cash flows or financial position. BGE’s proposed rate increases and gas infrastructure surcharge remained subject to regulatory approval.
- Other areas to monitor include nuclear decommissioning and NRC inquiries, environmental compliance costs, Midwest Generation’s bankruptcy-related exposures, derivative collateral requirements, and the potential for additional impairment of leased coal-plant assets.
Important facts for investors to verify
- How much of the GAAP earnings improvement reflects recurring operations versus hedge valuation changes, acquired-contract amortization, tax items and impairments; compare with the non-GAAP reconciliation.
- The outcome and potential cash cost of the like-kind-exchange tax litigation, including interest accruals and any penalty exposure.
- Whether ComEd’s formula-rate treatment and BGE’s pending rate requests and surcharge are approved, and whether contract-related litigation changes obligations or recovery.
- Generation’s future realized power margins, hedge coverage beyond 2015, collateral needs under a credit downgrade, and the cost and recoverability of planned capital and environmental work.