Exelon Corporation — Q2 2010 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and six months ended June 30, 2010, with comparisons to the corresponding 2009 periods. Exelon is a utility holding company whose principal businesses are competitive power generation and regulated electricity and gas delivery through Generation, ComEd and PECO.
Key financial results
Amounts are in millions of dollars except per-share data. Cash flow and balance-sheet amounts are for the six months ended or as of June 30, respectively.
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Operating revenue | $4,398 | $4,141 | $8,859 | $8,863 |
| Operating income | $1,018 | $1,016 | $2,421 | $2,271 |
| Net income | $445 | $657 | $1,194 | $1,369 |
| Diluted EPS | $0.67 | $0.99 | $1.80 | $2.07 |
| Adjusted operating earnings (non-GAAP) | $656 | $683 | $1,319 | $1,479 |
- Cash flow: First-half operating cash flow was $2,369, down from $3,047. Capital expenditures were $1,584, including nuclear fuel; cash dividends paid were $694. Cash and cash equivalents ended at $1,168, compared with $2,010 at year-end 2009.
- Liquidity and debt: At June 30, current assets were $5,600 and current liabilities $4,030. Long-term debt was $10,811, with $215 due within one year; short-term borrowings were $289 and short-term notes payable under the receivables agreement were $225. The balance sheet also included $404 of variable-interest-entity debt due within one year. Total liabilities were $35,900 and shareholders’ equity was $13,186.
- Margins and operating costs: Consolidated operating income was nearly unchanged in Q2 and increased for the first half. Depreciation and amortization rose to $519 in Q2 from $439 and to $1,033 for the first half from $875, reflecting capital spending, PECO transition-charge amortization and, at Generation, accelerated depreciation for planned plant retirements.
Material changes versus prior periods
- Q2 revenue increased about 6%, but net income fell about 32%; first-half revenue was essentially flat while net income declined about 13%. The filing attributes the earnings decline primarily to weaker Generation results, unfavorable nuclear decommissioning trust investment performance, higher depreciation and interest costs, and tax-related items.
- Generation’s first-half net income declined to $943 from $1,041. Lower generation margins, unfavorable trust-fund performance and additional planned nuclear outage days were partly offset by lower operating and maintenance expense and improved derivative mark-to-market results relative to 2009.
- ComEd’s first-half net income declined to $125 from $230. Q2 net income was $9 versus $116, affected by remeasurement of tax uncertainties and related interest and tax expense. Favorable weather and the approved recovery mechanism for prior uncollectible-account under-collections provided offsets.
- PECO’s first-half net income was $176 versus $183; Q2 net income increased to $75 from $71. Higher electric margins and favorable Q2 weather were partly offset by increased transition-charge amortization, storm costs and interest expense.
- Exelon recognized a $65 after-tax charge in Q2 relating to remeasurement of tax uncertainties, compared with a $66 after-tax gain in Q2 2009. Separately, first-quarter 2010 health-care legislation resulted in a $65 after-tax tax charge.
Outlook, management commentary and risks
- No formal earnings guidance is stated in the supplied filing text. Management expected 2010 capital expenditures of approximately $3,440 and benefit-plan contributions of approximately $954, including an incremental $500 contribution to the largest pension plan.
- Generation reported that expected generation was hedged 96%–99% for the remainder of 2010, 86%–89% for 2011 and 57%–60% for 2012. Management cited weak wholesale markets, possible further pressure from natural-gas supply and sluggish demand as risks to Generation earnings.
- ComEd sought a $396 annual distribution-revenue increase; PECO sought annual electric and gas delivery increases of $316 and $44, respectively. Approval amounts and timing remained subject to regulatory decisions. ComEd’s and PECO’s rate-regulated procurement mechanisms generally allow recovery of approved energy procurement costs.
- PECO’s smart-meter and grid program received a $200 DOE grant. PECO described planned investment of up to $650 over ten years; the grant is intended to reduce the effect on ratepayers.
- Generation planned to retire four fossil-fueled units, with expected related costs of $37 and accelerated depreciation of approximately $200. Retirement timing depends in part on transmission upgrades and regulatory approvals.
- Environmental rules and proceedings remain uncertain. Generation estimated Oyster Creek cooling-tower retrofit costs of $700–$800; potential Salem retrofit costs attributable to Exelon and Generation could exceed $500. Proposed air rules could affect allowance values and fossil-plant economics.
- Tax matters are material. The IRS disputes tax positions associated with the 1999 fossil-plant sale and competitive transition charges. Exelon disclosed potential tax and interest payments of up to $800 if the IRS successfully challenges the like-kind exchange position, and a potential after-tax interest impact of up to $210. The company said outcomes and possible changes in unrecognized tax benefits could not be predicted.
- Generation’s derivative agreements include collateral provisions triggered by credit downgrades. Management estimated that losing investment-grade status could require Generation to provide approximately $994 of incremental collateral for financial instruments and related contracts, plus other stated financial assurances.
Most important facts for investors to verify
- Reconcile GAAP net income and EPS with non-GAAP adjusted operating earnings, particularly the treatment of tax remeasurements, hedge mark-to-market movements and nuclear trust results.
- Track cash generation against capital spending, dividends, pension funding and debt maturities; verify available credit capacity and the status of PECO’s $225 receivables financing agreement, which was scheduled to terminate September 16, 2010 unless extended.
- Monitor the IRS disputes, settlement discussions, and any resulting changes in tax liabilities, cash payments or interest expense.
- Confirm outcomes of ComEd and PECO rate cases, including approved increases and recovery of infrastructure, pension and uncollectible-account costs.
- Assess Generation’s forward power prices, hedge coverage, nuclear outage performance and retirement schedule, as well as the costs and implications of environmental requirements.
- Review the status of PETT transition bonds: the filing reports $426 of restricted cash and $404 of debt due within one year, with retirement scheduled for September 1, 2010.