Exelon Corporation — Q2 2011 Form 10-Q
Business context and period. This unaudited combined filing covers Exelon Corporation and its principal subsidiaries: Generation, Commonwealth Edison (ComEd) and PECO. Exelon operates competitive power generation and regulated electric and gas delivery businesses. The reporting period ended June 30, 2011; comparisons are with the second quarter and first half of 2010 unless noted. Dollar amounts are in millions except per-share data.
Financial performance and position
| Exelon consolidated | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenue | $4,587 | $4,398 | $9,638 | $8,859 |
| Operating income | $1,034 | $1,018 | $2,236 | $2,421 |
| Net income | $620 | $445 | $1,288 | $1,194 |
| Diluted EPS | $0.93 | $0.67 | $1.94 | $1.80 |
| Operating margin, approximately | 22.5% | 23.1% | 23.2% | 27.3% |
- Q2 revenue rose 4.3% and net income rose 39.3%; six-month revenue rose 8.8% and net income rose 7.9%. Operating income declined 7.6% for the first half despite higher revenue.
- Q2 operating expenses were $3,553 versus $3,380. Purchased power increased to $1,407 from $1,134; depreciation and amortization fell to $329 from $519, principally reflecting lower PECO stranded-cost (CTC) amortization.
- Q2 total other deductions were $82 versus $397 a year earlier. Lower interest expense and a swing in “Other, net” to $100 income from a $122 loss helped lift net income. The filing identifies a $43 tax-and-interest benefit related to a nuclear decommissioning trust tax deduction; results also reflect volatile trust investment and derivative items.
- For the first half, operating cash flow was $1,013 versus $2,369. The $2.1 billion pension contribution, increased collateral postings and working-capital movements were major cash uses. Capital expenditures were $1,985 versus $1,584; investing cash outflow was $2,074.
- Cash and equivalents were $562 at June 30, down from $1,612 at year-end 2010. Current assets were $4,987 and current liabilities $4,268. Long-term debt was $11,764, with $1,048 due within one year; debt to financing trusts was $390. Exelon also had $140 of short-term borrowings and $225 of accounts-receivable-agreement notes payable.
- Credit facilities totaled $7.7 billion, with $7.2 billion available at June 30; no borrowings were outstanding under the facilities. Exelon reported $140 million of commercial paper outstanding. The quarterly dividend was $0.53 per share, unchanged from Q2 2010.
Material changes and operating drivers
- Generation’s Q2 net income increased to $443 from $382; first-half net income slipped to $938 from $943. Its first-half mark-to-market result shifted to a $272 loss from a $109 gain. Improved Mid-Atlantic margins after the PECO power-purchase agreement expired were offset by weaker Midwest margins, lower nuclear output and higher congestion costs. Nuclear capacity factor fell to 89.6% from 94.8% in Q2, while production cost rose to $19.41/MWh from $16.61.
- ComEd’s Q2 net income was $114 versus $9, while first-half net income was $183 versus $125. The comparison includes a 2011 rate-case benefit and prior-year tax-related charges. The ICC approved a $143 million annual delivery-revenue increase, effective June 1, versus ComEd’s $343 million request; the order’s approved return on equity was 10.5%.
- PECO’s Q2 net income rose to $83 from $75 and first-half net income to $210 from $176. Revenue fell sharply as the transition-period CTC recovery ended December 31, 2010; lower CTC amortization expense partly offset the revenue decline. New electric and gas distribution rates took effect January 1, 2011.
- Exelon’s adjusted non-GAAP operating earnings were $1.05 per diluted share for Q2 and $2.22 for the first half, compared with $0.99 and $1.99, respectively. These exclude specified items and are not GAAP measures; GAAP diluted EPS was $0.93 and $1.94.
Outlook, significant items and risks
- Merger: Exelon agreed to acquire Constellation in a stock-for-stock transaction at 0.930 Exelon shares per Constellation share. Management anticipated closing in early 2012, subject to shareholder and regulatory approvals and proposed divestiture of three PJM plants totaling 2,648 MW. Exelon estimated $144 million of direct transaction costs and about $500 million of integration costs, primarily in 2012–2013; projected synergies were expected to partially offset integration costs in 2012 and fully offset them in 2013 and beyond. The transaction was expected to be break-even to adjusted earnings in 2012 and accretive in 2013. These are estimates, not guaranteed results.
- Other investment plans: Generation agreed to acquire the 720-MW Wolf Hollow plant for about $305 million, subject to approvals, with closing expected in Q3 2011. ComEd’s proposed Illinois infrastructure legislation contemplated an additional $2.6 billion of capital investment over ten years, but enactment was uncertain. Exelon projected 2011 capital expenditures of $4.031 billion, including $2.510 billion at Generation.
- Regulatory and legal exposures: ComEd had recorded an estimated $55 million refund obligation associated with its 2007 rate-case appeal; the final amount remained subject to ICC action. The 2010 rate-case order was appealed. A disputed IRS like-kind exchange tax position could result in up to $840 million of tax and interest, plus a potential $86 million after-tax penalty; Exelon said it expected litigation and believed it would prevail. The filing also describes environmental remediation, nuclear decommissioning and other litigation contingencies.
- Market, operating and policy risks: Generation’s expected output was hedged 95%–98% for 2011, 82%–85% for 2012 and 49%–52% for 2013, leaving greater forward exposure in later years. The filing cites wholesale power-price weakness, weather and demand, fuel supply and counterparty performance, possible collateral demands following credit downgrades, and evolving nuclear and environmental rules. Generation estimated that loss of investment-grade status could require substantial additional collateral; its liquidity would also be exposed to derivative-market movements.
- Subsequent event: A July 11 storm affected more than 850,000 ComEd customers. ComEd estimated Q3 restoration costs of approximately $55 million in operating and maintenance expense and $25 million in capital expenditures, and intended to request a waiver of potential customer-compensation requirements.
- Management outlook: Management stated that cash flows, capital-market access and credit facilities were expected to fund operations, financing costs and capital spending. No consolidated full-year earnings guidance is clearly provided in the supplied filing text.
Important facts for investors to verify
- Whether the Constellation merger received all required approvals, proceeded on the expected schedule and stayed within its cost and synergy estimates.
- The final ComEd refund exposure and results of appeals of its rate orders, along with the outcome of proposed Illinois ratemaking legislation.
- Whether operating cash generation recovers after the unusually large pension contribution and collateral outflows, and how planned capital spending is financed.
- Changes in Generation’s hedge coverage, realized power margins, nuclear fleet performance and collateral requirements.
- Resolution and cash impact of the IRS tax disputes, environmental and nuclear obligations, and the July storm restoration costs.