Exelon Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; filed April 27, 2011. The combined filing covers Exelon and its principal subsidiaries: Exelon Generation, Commonwealth Edison (ComEd), and PECO. Exelon operates competitive power generation and regulated electric and gas delivery businesses. Financial amounts below are in millions of dollars except per-share data.
Key financial results
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Operating revenue | $5,052 | $4,461 |
| Operating income | $1,202 | $1,402 |
| Net income | $668 | $749 |
| Diluted EPS | $1.01 | $1.13 |
| Adjusted operating earnings, non-GAAP | $778; $1.17 per diluted share | $662; $1.00 per diluted share |
| Operating cash flow | $(207) | $1,861 |
| Capital expenditures | $1,150 | $878 |
| Cash and cash equivalents at period end | $487 | $2,524 |
| Common dividend per share | $0.53 | $0.53 |
Revenue rose about 13%, but operating income fell about 14% and net income about 11%. Revenue growth was more than offset by higher purchased-power costs and unfavorable derivative mark-to-market results. The filing reports no single consolidated gross-margin measure; Generation’s non-GAAP revenue net of purchased power and fuel expense was $1,760, down from $1,822.
Operating cash flow turned negative largely because Exelon contributed $2.1 billion to qualified pension plans in January, including $2.088 billion of pension and postretirement contributions reflected in the cash-flow reconciliation. Cash declined by $1.125 billion from year-end. At March 31, Exelon reported $12.811 billion of long-term debt including amounts due within one year, $390 million of debt to financing trusts, $50 million of short-term borrowings, and $225 million of short-term notes payable under PECO’s receivables agreement. Total assets were $51.376 billion and total equity was $13.934 billion. The registrants reported $7.3 billion of available capacity across revolving credit facilities and no facility borrowings.
Material changes and drivers
- Generation net income declined $66 million to $495 million. Its mark-to-market hedging activities swung to a $146 million loss from a $233 million gain, while higher realized margins after PECO’s power-purchase agreement expired, capacity revenue, and improved nuclear availability partly offset the impact.
- ComEd net income declined $47 million to $69 million, principally reflecting higher operating and maintenance costs, including uncollectible-account expense, and a $17 million estimated refund obligation tied to a court ruling on its 2007 rate case.
- PECO net income rose $25 million to $126 million. Higher distribution rates effective January 1 and lower interest expense helped; the expiration of transition-period CTC recoveries reduced revenue net of purchased power and fuel by $268 million. Lower CTC amortization expense also reduced depreciation and amortization.
- Exelon’s non-GAAP adjusted operating earnings increased to $778 million from $662 million. The reconciliation adjusts for items including economic-hedge mark-to-market impacts, nuclear decommissioning trust gains, fossil-unit retirements, and the 2011 Illinois tax-rate remeasurement. This non-GAAP measure is not a substitute for GAAP earnings.
Outlook, risks, contingencies, and unusual items
- Rates and regulatory recovery: ComEd requested a $343 million annual distribution-revenue increase. An April 1 ALJ proposed order recommended $152 million and a 10.5% return on equity; a final ICC order was expected by the end of May 2011, with new rates expected by June. The filing says the amount ultimately approved was uncertain. ComEd recorded an estimated $34 million refund obligation at March 31 related to the 2007 rate-case appeal. Proposed Illinois legislation could enable formula rates and an additional $2.6 billion of ComEd grid investment over ten years, but enactment was uncertain. PECO’s approved distribution-rate increases were $225 million annually for electric and $20 million for gas, effective January 1, 2011.
- Tax matters: Exelon described a preliminary IRS settlement concerning involuntary-conversion and CTC tax positions, with an estimated 2011 assessment of about $300 million and expected refunds of about $270 million over 2011–2014. A separate like-kind-exchange dispute remained unresolved: a successful IRS challenge could require up to $840 million of tax and interest, plus a potential $86 million penalty; management said it believed it was more likely than not to prevail in litigation. Illinois tax legislation and revised state tax apportionment produced a $29 million after-tax non-cash charge at Exelon in Q1.
- Nuclear and environmental: Following the Fukushima accident, Exelon warned that regulatory responses could increase costs, shorten plant lives, require impairment charges, or increase collateral needs; the effects could not be predicted. Exelon said Oyster Creek would cease operations by 2019. A Salem cooling-system retrofit, if ultimately required, was estimated to cost Exelon and Generation about $430 million based on a 2006 estimate; the final regulatory requirements remained uncertain. Environmental rules for air emissions, water intake, and waste could also require material spending.
- Plant retirements and investment: Generation planned staged retirements of Cromby and Eddystone units from 2011 through 2012, subject to transmission upgrades. Expected retirement-related costs were $38 million, with approximately $206 million of accelerated depreciation expected in total; Q1 included $24 million of accelerated depreciation and a $2 million severance-related charge. Exelon projected 2011 capital expenditures of $4.047 billion. Nuclear uprates were planned to add 1,300–1,500 MW over eight years, with 121 MW added through March 31.
- Market, credit, and liquidity risks: Generation had hedged 93%–96% of expected 2011 output, 73%–76% for 2012, and 38%–41% for 2013, leaving greater exposure in later years. A below-investment-grade downgrade could trigger substantial collateral postings; the filing estimated $1.479 billion of incremental Generation collateral under its stated scenario. Management said liquidity was sufficient and expected cash flows to meet operating, financing, and capital needs. No explicit full-year earnings guidance is stated in the provided filing text.
Most important facts for investors to verify
- Whether the ICC’s final ComEd rate-case order matched the ALJ’s $152 million recommendation, and the eventual amount and timing of any 2007-rate-case refund.
- Cash generation and liquidity after the unusually large pension contribution, including the planned 2011 capital program and future pension funding needs.
- How much Generation’s hedge settlements and market prices affect earnings as hedge coverage falls in 2013 and beyond.
- The final resolution and cash consequences of the IRS tax disputes, particularly the unresolved like-kind-exchange position and potential penalty.
- Regulatory outcomes and potential costs related to nuclear safety, Salem cooling-water requirements, air and waste rules, and planned generating-unit retirements.