Exelon Corporation — Q1 2016 Form 10-Q
Business context and reporting period
The filing covers the three months ended March 31, 2016. Exelon operates competitive generation and regulated electric and gas utilities. On March 23, 2016, it completed its approximately $7.1 billion acquisition of Pepco Holdings (PHI), adding Pepco, Delmarva Power (DPL) and Atlantic City Electric (ACE). Exelon’s results include PHI only from March 24–31; PHI’s purchase accounting also makes its pre- and post-merger results non-comparable.
Financial performance and position
- Revenue: $7.573 billion, down 14% from $8.830 billion a year earlier. Competitive-business revenue declined to $4.473 billion from $5.632 billion; regulated utility revenue was $3.100 billion versus $3.198 billion.
- Earnings: Operating income was $483 million, down from $1.366 billion; net income attributable to common shareholders was $173 million versus $693 million. GAAP diluted EPS was $0.19 versus $0.80. Adjusted operating earnings, a non-GAAP measure, were $632 million ($0.68 per diluted share), compared with $615 million ($0.71) a year earlier.
- Cash flow: Operating cash flow was $1.473 billion versus $1.490 billion. Capital expenditures were $2.202 billion versus $1.784 billion. Investing cash outflow was $8.548 billion, including $6.645 billion for business acquisitions; financing cash inflow was $1.533 billion. Ending cash was $960 million, down from $6.502 billion at year-end 2015.
- Debt and liquidity: At March 31, total short- and long-term borrowings and debt, including current maturities, were approximately $35.0 billion, excluding $641 million of debt to financing trusts. Short-term borrowings were $3.640 billion versus $533 million at year-end; long-term debt including current maturities was $31.372 billion versus $25.145 billion. Exelon reported $8.3 billion of available credit-facility capacity and no facility borrowings.
- Dividend: Q1 common dividend was $0.31 per share. The board declared $0.318 for Q2 and announced a policy to increase the dividend 2.5% annually for three years, beginning June 2016.
Material changes versus the prior comparable period
- GAAP earnings fell sharply, while adjusted operating earnings increased modestly. The comparison is affected by the PHI acquisition and substantial one-time merger costs.
- Exelon recognized $508 million of PHI merger commitments, including customer credits and other regulatory commitments; operating and maintenance expense also reflected $52 million of merger-related severance and $119 million of Generation Upstream asset impairment. These items contributed to the $754 million increase in operating and maintenance expense.
- Generation revenue net of purchased power and fuel declined $110 million. Lower realized energy prices, lower mark-to-market gains and acquired-contract amortization weighed on results; improved nuclear outage timing and higher capacity prices partly offset the decline.
- ComEd net income rose to $115 million from $90 million, primarily on higher distribution and transmission formula-rate earnings. PECO net income fell to $124 million from $139 million, mainly due to weather; BGE common-shareholder income was $98 million versus $106 million.
Outlook, management commentary, risks and unusual items
- Merger and commitments: The PHI purchase price was approximately $7.142 billion; preliminary purchase accounting recorded $4.016 billion of goodwill and a net $1.5 billion liability for acquired energy contracts. Exelon estimated merger commitments at approximately $444 million net present value, excluding charitable and renewable-generation commitments; actual costs may differ materially. The purchase-price allocation remains preliminary.
- Nuclear fleet: Management cited weak market economics and policy uncertainty. After quarter-end, Exelon said it intended to close Clinton in June 2017 and Quad Cities in June 2018 absent adequate Illinois legislation, with Quad Cities also required to clear the 2019–2020 PJM capacity auction. Early retirement could trigger impairment, accelerated depreciation, decommissioning funding and other charges. Oyster Creek is planned to close by end-2019; Ginna’s approved reliability agreement runs through March 2017, with an approximately $101 million retroactive revenue adjustment expected in April 2016.
- Capital investment and savings: Exelon projected 2016 capital expenditures of $9.375 billion and utility investment of approximately $25 billion over five years, with an estimated $11 billion rate-base increase by end-2020. Its cost-management program targets $350 million of operating and capital cost savings, with approximately 35% of run-rate savings expected by end-2016 and full realization in 2018.
- Regulatory matters: Pepco requested a $127 million annual delivery-revenue increase; ACE requested $84 million and a grid-resiliency program. Approval and final rate outcomes remain uncertain. FERC approved a transmission-ROE settlement that provides customer refunds for BGE, Pepco, DPL and ACE.
- Risks and contingencies: Exelon faces exposure to commodity prices, nuclear economics and decommissioning, environmental remediation, regulatory decisions and merger integration. The West Lake Landfill matter could have a material adverse impact, though the company said the likelihood of full excavation was remote; potential incremental costs were not estimable. The like-kind-exchange tax litigation could require substantial payments if Exelon loses; the filing estimated potential tax and after-tax interest of $460 million and $300 million, respectively, as of March 31, before considering subsequent tax refunds and applicable offsets.
Most important facts for investors to verify
- How much of Q1’s GAAP earnings decline reflects recurring operations versus the PHI merger, purchase accounting and other excluded items; reconcile adjusted earnings to GAAP.
- Final PHI purchase accounting, merger-commitment costs and the timing and funding of required customer credits and equity contributions.
- Liquidity, refinancing needs and short-term borrowing trends following the acquisition and large cash outflow.
- Illinois policy and auction outcomes affecting Clinton and Quad Cities, and the financial consequences of any early retirement.
- Regulatory rate-case decisions, the Ginna revenue adjustment, and material tax and environmental contingency developments.