Exelon Corporation — Q1 2014 Form 10-Q
Business context and period: Combined quarterly filing for Exelon and subsidiaries Exelon Generation, ComEd, PECO and BGE. The reporting period is the three months ended March 31, 2014; financial statements are unaudited. Exelon operates competitive power generation and regulated electric and gas utilities.
Financial results and liquidity
- Revenue: $7.237 billion, up 19% from $6.082 billion. The increase was more than offset at the operating-margin level by sharply higher purchased power and fuel costs.
- Earnings: Operating income was $163 million versus $508 million. Net income attributable to common shareholders was $90 million, or $0.10 per diluted share, versus a $4 million loss, or $0.01 loss per share. Operating margin was approximately 2.3%, down from 8.4%.
- Adjusted earnings: Management’s non-GAAP adjusted operating earnings were $530 million, or $0.62 per diluted share, versus $602 million, or $0.70, a year earlier. The reconciliation adds back $443 million after tax for mark-to-market economic-hedging losses in 2014.
- Segment trends: Generation recorded a $185 million net loss, compared with an $18 million loss. ComEd earned $98 million versus an $81 million loss; PECO earned $89 million versus $121 million; and BGE earned $85 million versus $77 million.
- Cash flow and investment: Operating cash flow was $165 million, down from $859 million. Capital expenditures were $1.217 billion, and cash and cash equivalents at quarter-end were $914 million, including $123 million held by variable-interest entities. Cash flow was affected by $677 million of net collateral postings and $472 million of pension and postretirement contributions.
- Debt and liquidity: At March 31, Exelon reported $980 million of short-term borrowings, $18.247 billion of long-term debt and $292 million of long-term debt due within one year; the balance sheet also reports separate VIE debt and financing-trust obligations. Total liabilities were $56.690 billion and total assets were $79.468 billion. Credit facilities totaled $8.4 billion, with $5.8 billion available and no facility borrowings.
- Dividend: Exelon declared and paid a first-quarter common dividend of $0.31 per share.
Changes versus the prior-year quarter
- Exelon’s GAAP common earnings improved from a small loss to a profit, but adjusted operating earnings declined. The contrast primarily reflects volatile derivative accounting and the prior-year $265 million after-tax charge for remeasurement of a tax position, rather than a comparable improvement in underlying operating performance.
- Management attributed weaker Generation results to lower realized energy prices, higher replacement-power procurement costs, lower generation volumes and higher fossil-fuel costs during extreme cold weather. Generation’s mark-to-market economic-hedging loss increased to $730 million from $403 million.
- Generation’s nuclear fleet capacity factor fell to 94.1% from 96.4%; production cost rose to $20.71/MWh from $19.67/MWh. Unplanned outage days increased to 20 from 6.
- Regulated utility results varied: ComEd benefited from distribution revenue and lower interest expense; PECO’s earnings fell amid higher storm costs; BGE’s earnings increased with new distribution rates and higher gas margins in cold weather.
Outlook, management commentary and key risks
- Outlook and investment: No specific full-year earnings guidance is stated in the provided filing text. Exelon projected 2014 capital expenditures of $5.7 billion and described approximately $15 billion of planned utility investment over five years. Management emphasized maintaining investment-grade credit metrics and a sustainable dividend.
- Market exposure: Generation had hedged 91%–94% of expected output for 2014, 64%–67% for 2015 and 37%–40% for 2016. A $5/MWh decline in annual average power prices was estimated to reduce pre-tax income by approximately $30 million, $420 million and $700 million, respectively, in those years, based on March 31 conditions.
- Collateral risk: Generation could be required to post an additional $2.1 billion of collateral following a downgrade below investment grade. The company said this was within available facility capacity, but the amount underscores sensitivity to market prices and credit ratings.
- CENG transaction: Effective April 1, 2014, Generation began operating CENG’s nuclear fleet under a services agreement and expects to consolidate CENG beginning in Q2. Fair-value remeasurement at consolidation could produce a material gain or loss. The transaction includes a $400 million loan to CENG at 5.25%, preferred-distribution terms and EDF’s option to sell its 49.99% interest to Generation during 2016–2022. Exelon also disclosed support and indemnity commitments connected with the CENG plants.
- Proposed PHI acquisition: On April 29, Exelon agreed to acquire Pepco Holdings for $27.25 per share in cash, targeting completion in the first half of 2015, subject to shareholder, regulatory and other approvals. Planned funding includes approximately 50% debt, equity and up to $1 billion from non-core asset sales; Exelon also arranged a $7.2 billion bridge facility.
- Tax and regulatory exposures: Exelon’s disputed 1999 like-kind exchange position could result in as much as $840 million of tax and after-tax interest if the IRS prevails, excluding penalties; litigation is ongoing. A separate lease termination is expected to trigger approximately $285 million of 2014 tax payments. Other uncertainties include ComEd’s requested $275 million distribution revenue-requirement increase, pending environmental rules and litigation, and the potential financial effects of nuclear licensing and decommissioning matters.
Important facts for investors to verify
- Whether Generation’s underlying margins and cash generation improve as weather effects, outages, power prices and replacement-power costs normalize.
- The actual Q2 accounting and fair-value impact of consolidating CENG, together with the loan repayment, preferred distributions, put option and support obligations.
- How Exelon will permanently finance the PHI acquisition, obtain required approvals and manage the effect on leverage, credit ratings and the dividend.
- Progress on the like-kind exchange tax litigation, the expected 2014 tax payments and any potential cash or earnings effects.
- Regulatory outcomes affecting utility rate recovery and planned capital spending, including ComEd’s rate update and major environmental and nuclear obligations.