Exelon Corporation — Q3 2014 Form 10-Q
Business context and reporting period. This combined, unaudited filing covers Exelon Corporation and subsidiaries Generation, ComEd, PECO, and BGE for the quarter and nine months ended September 30, 2014, compared with the corresponding 2013 periods. Exelon operates competitive power generation and regulated electric and gas delivery businesses. Beginning April 1, 2014, Generation assumed operational control of CENG’s nuclear fleet and Exelon began consolidating CENG.
Financial performance and position
Amounts are in millions of dollars, except per-share data. Exelon’s figures are consolidated.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $6,912 | $6,502 | $20,173 | $18,725 |
| Operating income | $1,400 | $1,254 | $2,391 | $2,767 |
| Net income | $1,074 | $736 | $1,725 | $1,235 |
| Net income attributable to common shareholders | $993 | $738 | $1,604 | $1,224 |
| Diluted EPS | $1.15 | $0.86 | $1.86 | $1.42 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $3,643 | $4,394 |
| Capital expenditures | Not presented quarterly | Not presented quarterly | $4,114 | $3,887 |
- Operating revenue increased 6% in the quarter and 8% over nine months. Nine-month operating income declined 14%, despite higher revenue; Q3 operating income increased 12%.
- Management’s non-GAAP adjusted operating earnings were $676 million, or $0.78 per diluted share, in Q3, versus $667 million and $0.78 in 2013. For nine months, they were $1.646 billion, or $1.91 per share, versus $1.722 billion and $2.00. These figures exclude specified items and are not GAAP earnings.
- Nine-month operating cash flow fell $751 million, to $3.643 billion. The filing cites increased collateral posted, higher pension and postretirement contributions, and changes in working capital and other assets and liabilities among the cash-flow drivers.
- Cash and cash equivalents were $2.763 billion at September 30, versus $1.609 billion at year-end 2013. Total current assets were $11.837 billion and current liabilities $8.431 billion.
- Debt components at September 30 included $562 million of short-term borrowings, $2.064 billion of long-term debt due within one year, $19.200 billion of long-term debt, and $648 million of debt to financing trusts. The comparable year-end 2013 balances were $341 million, $1.509 billion, $17.623 billion, and $648 million.
- Exelon reported $8.5 billion of committed credit facilities, with $7.5 billion available at quarter-end; there were no borrowings under those facilities. ComEd had $528 million of commercial paper outstanding and BGE $20 million.
- Exelon’s common dividend was $0.31 per share in Q3, unchanged from Q3 2013. A $0.31 fourth-quarter 2014 dividend was declared after quarter-end.
Material changes versus prior periods
- CENG consolidation: Exelon recognized a $261 million gain on consolidation in the first nine months. CENG contributed to consolidated results from April 1 onward, with a corresponding noncontrolling interest. The reported increase in earnings therefore includes a material consolidation and accounting change.
- Generation results: Q3 revenue net of purchased power and fuel increased, aided by CENG, portfolio optimization, and lower fuel costs. For nine months, this measure declined slightly, principally because economic hedges moved from $271 million of gains in 2013 to $477 million of losses in 2014, alongside lower realized energy prices and higher replacement-power and fuel costs.
- Regulated utilities: Nine-month net income increased at ComEd to $335 million from $140 million, partly reflecting lower interest expense following the 2013 tax-position remeasurement. PECO net income attributable to its common shareholder declined to $255 million from $285 million; BGE declined to $146 million from $150 million.
- Cash generation: Despite higher net income, nine-month operating cash flow decreased, including $615 million of net counterparty collateral posted versus $73 million in the prior-year period.
Outlook, management commentary, risks and unusual items
- PHI acquisition: Exelon expected to complete its all-cash acquisition of Pepco Holdings in Q2 or Q3 2015, subject to regulatory and other approvals. The expected total cash requirement, including preferred securities and transaction costs, was approximately $7.2 billion. Exelon had reduced its bridge facility to $3.9 billion after equity issuance and planned asset divestitures. It reported $57 million of PHI transaction expense through September 30. DOJ review and several regulatory approvals remained outstanding; litigation settlements also awaited court approval.
- Financing and divestitures: Exelon issued $1.15 billion of 2.5% junior subordinated notes in equity units and entered forward sale agreements for 57.5 million common shares; the forward agreements had not been settled at quarter-end. Generation closed the $615 million Safe Harbor sale, recording a $329 million pretax gain. Generation had agreements to sell other assets with expected total pretax proceeds of $1.3 billion.
- Subsequent event: On October 24, 2014, Generation agreed to sell its interests in Keystone and Conemaugh for approximately $475 million, including working capital. Exelon expected a fourth-quarter pretax impairment of approximately $350–$400 million.
- Impairments and contingencies: Generation recorded an $86 million pretax impairment of wind assets in Q2 and a $50 million pretax impairment on assets held for sale in Q3. A $44 million pretax loss contingency was recorded for a Maryland merger commitment; potential cumulative subsidy payments could reach approximately $105 million over 20 years, depending on future conditions.
- Capital program: Management projected 2014 capital expenditures of $5.925 billion for Exelon and described approximately $16 billion of planned utility investment over five years. ComEd’s accelerated smart-meter program targets deployment of more than four million meters by 2018. No clear full-year consolidated EPS guidance is provided in the supplied filing text.
- Market and regulatory risks: Generation cited commodity prices, weather, competitive market conditions, subsidized generation, and the portion of its portfolio left unhedged as key exposures. Expected generation was hedged 98%–101% for 2014, 86%–89% for 2015, and 55%–58% for 2016. A $5/MWh reduction in annual average energy prices was estimated to reduce 2015 and 2016 pretax income by approximately $120 million and $470 million, respectively, based on September 30 conditions.
- Other significant exposures: Generation’s nuclear decommissioning asset retirement obligation was $6.652 billion at September 30, including CENG-related obligations and estimates still subject to refinement. A BGE transmission-rate complaint could result in refunds; an outcome reducing BGE’s base return on equity to 8.7% could mean an estimated $13 million refund and approximately $10 million of annual revenue reduction. Environmental, nuclear insurance, spent-fuel, tax, asbestos, and other legal contingencies remain relevant. Management cautions that forward-looking statements are subject to risks and actual results may differ.
Important facts for investors to verify
- How much of the increase in GAAP earnings reflects recurring operating performance versus CENG consolidation, asset-sale gains, tax settlements, and other unusual items.
- Whether operating cash flow recovers from the 2014 decline, and how collateral requirements, pension funding, capital spending, and the planned PHI financing affect liquidity and debt.
- The status, final regulatory conditions, financing, expected synergies, and potential termination costs of the PHI merger; also the completion and proceeds of announced asset sales.
- The final ICC decision on ComEd’s distribution-rate request, BGE rate-case settlement approval, and outcomes of BGE’s transmission ROE proceeding and other significant regulatory cases.
- Updates to CENG fair-value estimates and nuclear decommissioning obligations, as well as the timing and amount of the announced Keystone and Conemaugh impairment.
- Generation’s hedge coverage, realized power and fuel economics, and whether the stated 2015–2016 price sensitivity remains representative as market conditions and the generation portfolio change.