Exelon Corporation — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; financial statements are unaudited. Exelon is a utility holding company with competitive power generation (Generation) and regulated electric and gas delivery businesses (ComEd and PECO). Comparisons below are with Q1 2009 unless noted. Dollar amounts are in millions.
Key financial results
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Operating revenues | $4,461 | $4,722 | Down 5.5% |
| Operating income | $1,402 | $1,255 | Up 11.7% |
| Net income | $749 | $712 | Up 5.2% |
| Diluted EPS | $1.13 | $1.08 | Up $0.05 |
| Adjusted operating earnings, non-GAAP | $662; $1.00 per diluted share | $797; $1.20 per diluted share | Down 17.0% in earnings |
| Operating cash flow | $1,861 | $1,950 | Down 4.6% |
| Capital expenditures | $878 | $712 | Up $166 |
| Cash and cash equivalents at quarter-end | $2,524 | $2,149 | Up $375 year over year |
Operating income rose despite lower revenue, largely because operating and maintenance expense fell $299 million, including the absence of a $223 million 2009 asset impairment and lower costs from efficiency measures. Exelon’s effective tax rate increased to 42.9% from 30.4%. Comprehensive income was $1,143 million versus $1,283 million, including lower other comprehensive income from cash-flow hedges.
Generation’s net income was $561 million (prior year $528 million); ComEd’s was $116 million ($114 million); PECO’s was $101 million ($113 million). Generation’s nuclear fleet capacity factor declined to 92.3% from 96.2%, while production cost rose to $18.97/MWh from $15.98/MWh, reflecting more outage days and higher costs.
Liquidity, debt and financial position
- At March 31, 2010, Exelon reported total assets of $50.7 billion, total liabilities of $37.2 billion and shareholders’ equity of $13.5 billion.
- Reported debt included $11.6 billion of long-term debt, including amounts due within one year; $404 million of newly consolidated PETT transition-bond debt due within one year; $390 million of debt to financing trusts; $256 million of short-term borrowings; and $225 million of short-term notes payable under PECO’s receivables arrangement. PETT consolidation followed a change in VIE accounting and did not represent new borrowing by the operating business.
- Exelon, Generation, ComEd and PECO had revolving credit commitments of approximately $7.4 billion in aggregate, with $6.9 billion available at quarter-end. ComEd replaced its $952 million facility with a $1 billion unsecured facility maturing in March 2013.
- Exelon generated $1.9 billion of operating cash flow, spent $878 million on capital expenditures and paid $347 million in common dividends. Operating cash flow included $477 million of net counterparty collateral received, making collateral movements an important cash-flow factor.
- Management stated that cash flow, credit-market access and facilities were expected to provide sufficient liquidity. The filing projected 2010 capital expenditures of $3.45 billion and expected total 2010 benefit-plan contributions of about $921 million, including an incremental pension contribution of approximately $500 million, subject to review and board approval.
Material changes, outlook and risks
- Earnings quality and drivers: GAAP net income increased, but adjusted non-GAAP operating earnings declined. Management cited weaker Generation market and portfolio conditions, lower nuclear output, higher outage and fuel costs, partly offset by reduced operating costs, hedge gains, better nuclear decommissioning trust performance and lower Illinois settlement costs. Exelon recorded $65 million of after-tax tax expense from 2010 health-care legislation; management estimated that legislation could add $10 million to $15 million to annual income-tax expense.
- Regulatory matters: ComEd recognized a $70 million regulatory asset and corresponding expense reduction for recoverable 2008–2009 uncollectible-account under-collections, offset partly by a $10 million required low-income assistance contribution. ComEd anticipated filing for an electric distribution rate increase. PECO requested annual delivery-revenue increases of $316 million for electric service and $44 million for gas service; the regulator’s decision was expected in Q4 2010, and approval was uncertain.
- Investment plans: PECO received a $200 million DOE smart-grid grant and planned up to $650 million of smart-grid and smart-meter spending over ten years. Exelon also described planned nuclear uprates of 1,300–1,500 MW, with an estimated investment of about $3.5 billion over eight years. These are plans, not guaranteed returns.
- Generation and market exposure: Generation reported hedges covering 95%–98% of expected generation for the remainder of 2010, 79%–82% for 2011 and 48%–51% for 2012. Management warned that weak economic recovery, lower natural-gas prices and increased subsidized low-carbon generation could pressure wholesale power prices and demand. No specific company-wide EPS guidance was provided in the supplied filing text.
- Plant retirements and environmental exposure: Exelon planned to retire four fossil units, subject to transmission upgrades and reliability requirements. Expected costs were $38 million, with approximately $180 million of accelerated depreciation expected over time. Potential cooling-tower retrofits were estimated at $700–$800 million for Oyster Creek and likely above $500 million for Exelon’s share at Salem; requirements and timing remained uncertain.
- Contingencies: An IRS challenge to tax treatment of the 1999 fossil-plant sale could make up to $1.1 billion of tax and interest payable; the IRS also asserted approximately $196 million of penalties, which Exelon had not accrued. A successful challenge to both disputed tax positions could produce up to $300 million of after-tax interest expense. The filing also identifies environmental, regulatory, litigation, commodity-price, counterparty, pension-funding and credit-facility renewal risks.
- Unusual accounting and financing items: PETT was consolidated effective January 1, 2010; its $404 million debt was classified as due within one year and was scheduled for retirement in September 2010. PECO’s receivables transfer was reclassified as a secured borrowing, producing a $225 million short-term note payable. Generation had $212 million of variable-rate tax-exempt debt classified as due within one year because related letters of credit were due to expire in June 2010.
Investor verification priorities
- Reconcile GAAP net-income growth with the 17% decline in adjusted operating earnings, particularly the effects of hedging, trust-fund results, taxes and prior-year impairments.
- Assess whether operating cash flow remains robust excluding collateral receipts and other timing-related working-capital and tax movements.
- Track rulings on PECO’s rate requests, ComEd’s anticipated rate filing, and recovery of ComEd’s uncollectible-account regulatory asset.
- Verify funding and execution of pension contributions, 2010 capital spending, the DOE grant-supported smart-grid program and planned nuclear uprates.
- Monitor IRS litigation and potential tax, interest and penalty exposure, along with PETT’s scheduled debt retirement and Generation’s expiring letter-of-credit arrangements.
- Follow environmental permitting and cost developments for Oyster Creek, Salem and the planned fossil-unit retirements; compare actual outcomes with the disclosed estimates.