Business context and reporting period
Exelon Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2012. Exelon operates generation and regulated electric and gas delivery businesses through Generation, ComEd, PECO and BGE. Exelon completed its merger with Constellation on March 12, 2012; reported 2012 results include the acquired businesses only from that date, limiting direct comparison with 2011.
Financial performance and position
Amounts are in millions of dollars except per-share data. Q3 and nine-month comparisons are with the corresponding 2011 periods.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenues | $6,565 | $5,254 | $17,205 | $14,705 |
| Operating income | $603 | $1,181 | $1,676 | $3,417 |
| Net income attributable to common stock | $296 | $601 | $782 | $1,889 |
| Diluted EPS | $0.35 | $0.90 | $0.97 | $2.84 |
| Dividends per share | $0.53 | $0.53 | $1.58 | $1.58 |
- Margins: Operating margin was approximately 9.2% in Q3 2012 versus 22.5% in Q3 2011; net margin was approximately 4.5% versus 11.4%.
- Cash flow: Nine-month cash from operations was $4,557, compared with $2,917. Capital expenditures were $4,145 versus $2,972. Cash and cash equivalents at period-end were approximately $1,700, including $98 held by variable-interest entities.
- Debt and liquidity: Long-term debt, including amounts due within one year, had a reported carrying amount of $18,715. Exelon reported $9.8 billion of committed revolving credit facilities and no borrowings under those facilities at September 30; approximately $7.5 billion was available according to the liquidity discussion. The filing also reports $60 of short-term borrowings and $225 of PECO-related receivables-agreement notes payable.
- Balance sheet: Total assets were $78,353 and total liabilities $56,163, compared with $54,995 and $40,520, respectively, at December 31, 2011. The merger materially changed the consolidated balance sheet.
Material changes versus the prior comparable period
- Revenue rose, but operating income and net income fell sharply. Q3 operating expenses increased to $5,972 from $4,073; nine-month expenses rose to $15,460 from $11,288.
- Management attributed much of the revenue increase to the acquired Constellation and BGE businesses. Generation’s results also reflected weaker realized power prices and lower capacity revenues in the Midwest, offset in part by newly consolidated regions and businesses.
- Reported earnings included substantial merger-related and unusual items. These included a $278 pretax impairment on Maryland generating stations held for sale, $671 of Exelon merger and integration costs for nine months, $195 of Generation expense for a FERC settlement, and costs associated with Maryland merger commitments. Acquired energy-contract amortization was $714 for Exelon from the merger date through September 30.
- Exelon’s adjusted, non-GAAP operating earnings were $0.77 per diluted share in Q3 versus $1.12, and $2.21 for nine months versus $3.34. These figures exclude specified items and are not GAAP measures.
- Generation’s nuclear fleet capacity factor was 90.7% in Q3 versus 95.8%; production cost rose to $19.04/MWh from $17.35/MWh.
Outlook, management commentary, risks and contingencies
- Outlook: The filing does not provide formal consolidated 2012 earnings guidance. Exelon stated that it expected the merger to be accretive to earnings per share in 2013, while cautioning that this preliminary expectation could change and was subject to integration, cost and other uncertainties.
- Market conditions: Management cited low natural-gas and wholesale power prices, weak economic conditions, and declining or flat load expectations. It warned that continued price and demand pressure could constrain discretionary investment or dividends and make some generation uneconomic.
- Regulatory matters: ComEd’s Illinois rate orders reduced its revenue requirement; following an October rehearing order, ComEd expected to record approximately $135 of pretax revenue in Q4 2012 and appealed aspects of the orders. BGE requested electric and gas rate increases of $131 and $45, respectively; approval was uncertain.
- Merger obligations and sale: Exelon agreed to substantial Maryland customer, charitable, energy-development and other commitments. The sale of three Maryland generating stations was expected to close in Q4 2012; the filing reported a $278 impairment and estimated sale proceeds, with final amounts subject to adjustment.
- Contingencies: Exelon estimated that a fully successful IRS challenge to its disputed like-kind exchange tax position could result in up to $870 of tax and interest, excluding penalties; Exelon believed it was more likely than not to prevail. Other disclosed exposures include environmental remediation, storm-related claims, nuclear decommissioning and regulatory proceedings.
- Collateral and credit risk: A downgrade below investment grade could require Generation to post approximately $2,004 of additional collateral. Generation’s net derivative and related counterparty credit exposure was reported as $2,070 after collateral and netting.
- Subsequent event: Hurricane Sandy caused outages in PECO and BGE territories. The companies estimated Q4 incremental operating costs of $49–$55 and $33–$37, respectively, plus capital expenditures of $32–$36 and $13–$14.
Important facts for investors to verify
- How much of the year-over-year earnings decline reflects the acquired businesses, lower generation economics, acquisition accounting and nonrecurring charges; review GAAP and adjusted earnings reconciliations.
- Whether the Maryland station sale closed on expected terms, and the final proceeds and impairment after purchase-price adjustments.
- Whether ComEd’s rate-case appeals and expected Q4 revenue adjustment were realized, and how regulatory decisions affect investment recovery and cash flow.
- The status and ultimate cash impact of the IRS like-kind exchange dispute and other material legal and environmental contingencies.
- Whether merger integration, Maryland commitments, capital spending, pension obligations and collateral needs remain within available liquidity and financing capacity.