Exelon Corporation — Q2 2009 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2009; filed July 24, 2009. Exelon is a utility holding company with competitive generation and regulated electricity and gas delivery businesses. This combined filing also reports separately for Exelon Generation, Commonwealth Edison (ComEd), and PECO. Financial amounts below are in millions of dollars unless noted.
Key financial metrics
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Operating revenue | $4,141 | $4,622 | $8,863 | $9,139 |
| Operating income | $1,017 | $1,430 | $2,271 | $2,553 |
| Net income | $657 | $748 | $1,369 | $1,329 |
| Diluted EPS | $0.99 | $1.13 | $2.07 | $2.01 |
| Operating margin | 24.6% | 30.9% | 25.6% | 27.9% |
Margins are calculated as operating income divided by revenue. First-half operating cash flow was $3,047, versus $1,674 in 2008; capital expenditures were $1,444, versus $1,511. Cash and equivalents were $1,838 at June 30, up from $1,271 at year-end 2008. The cash-flow improvement included a $1,009 year-over-year swing in net counterparty collateral flows, so it does not solely reflect earnings or recurring working capital.
At June 30, total assets were $48,979 and total liabilities were $36,739. Reported debt, including current maturities and financing-trust debt, was approximately $12.8 billion, compared with approximately $12.9 billion at year-end. Current assets of $5,825 exceeded current liabilities of $4,166. Exelon reported $6.8 billion of available capacity under aggregate revolving credit facilities of $7.3 billion. Common dividends were $0.53 per share for Q2 and $1.05 for the first half.
Material changes versus the prior comparable period
- Q2 net income fell $91, or 12%, and diluted EPS declined $0.14. Generation earnings fell $141 to $512, primarily reflecting weaker energy economics, lower market prices, prior-year trading-option and uranium-settlement gains, and economic-hedge mark-to-market losses.
- First-half net income rose $40 to $1,369 despite lower revenue and operating income. Higher regulated distribution revenue, decommissioning-trust gains, tax-related items, cost savings, and fewer nuclear refueling days partly offset Generation weakness and the impairment charge.
- Generation recorded a $223 impairment in Q1 on its Handley and Mountain Creek Texas plants after lower forward energy prices reduced estimated recoverable values.
- ComEd and PECO first-half net income increased to $230 from $76 and $183 from $155, respectively, supported by rate changes and other items. ComEd deliveries fell 4.1% and PECO electric deliveries fell 2.6% year over year.
Outlook, management commentary, risks and unusual items
- Management cited recession-driven weakness in energy demand and prices, customer payment pressures, and potential pressure on Generation margins if low power prices persist. Generation had hedged 95%–98% of expected output for 2009, 87%–90% for 2010, and 59%–62% for 2011.
- Management projected 2009 capital expenditures of $3,415. Exelon targeted 2010 operating and maintenance spending of about $4.35 billion, versus approximately $4.5 billion in 2009, and expected over half of planned savings to be sustainable. The filing provides no EPS guidance.
- Exelon recorded a $40 severance charge in June for planned elimination of approximately 500 positions. Most reductions were expected by August 31, 2009.
- On July 15, the Illinois Supreme Court changed its ruling on investment tax credits and electricity tax treatment to apply prospectively. Exelon said it would likely reverse previously recognized tax-related income in Q3 unless the court changed its position again.
- The IRS disputes Exelon and ComEd tax positions related to the 1999 sale of fossil generating assets. A successful IRS challenge could make up to $1.1 billion of tax and interest currently payable; a possible $196 million penalty was not accrued. Management estimated a potential after-tax interest charge of up to $300 million if the IRS prevailed on both positions.
- Generation reported an NRC funding shortfall estimate of approximately $185 million for six nuclear units under its own assumptions; the NRC’s more conservative published scenario indicated approximately $1.0 billion. Generation planned to submit a remediation plan and expected to rely on financial guarantees, subject to NRC review. Potential additional funding or guarantees could affect liquidity.
- Other material exposures include nuclear spent-fuel disposal uncertainty, environmental proceedings and possible cooling-system compliance costs, regulatory and rate-case outcomes, counterparty and collateral risk, and pension funding. Generation’s Texas impairment reflects sensitivity to commodity prices.
- Exelon terminated its proposed NRG acquisition on July 21, after the quarter. Rating agencies subsequently affirmed most ratings and generally assigned stable outlooks; Moody’s placed PECO’s long-term rating on negative outlook and downgraded its short-term rating.
- Exelon estimated that the House-passed climate bill could increase first-year revenue by about $1.1 billion under specified assumptions, but expressly stated this was not a forecast. The bill was not law at filing.
Important facts for investors to verify
- Whether Q3 results reverse the investment-tax-credit and state-tax benefits recognized earlier in 2009, and the final amount of any adjustment.
- Progress and estimated exposure in the IRS fossil-asset tax dispute, including potential interest, penalties, and timing of cash payments.
- Generation’s NRC-accepted nuclear decommissioning funding plan, subsequent trust performance, and any required guarantees or contributions.
- Whether Generation sustains hedging coverage and margins as the 2011 hedge position is lower, and how prolonged low wholesale prices affect earnings.
- Actual delivery volumes, customer collections, and realization of the announced cost savings and 2009 capital-spending plan.
- Credit-rating changes, facility renewals, and liquidity or collateral needs, particularly as Generation’s and ComEd’s variable-rate debt credit support approaches expiry.