Exelon Corporation — Q1 2013 Form 10-Q
Business context and reporting period. This combined filing covers Exelon Corporation and its principal subsidiaries: generation business Exelon Generation, and regulated utilities ComEd, PECO and BGE. The quarter ended March 31, 2013. Year-over-year comparisons are affected by the March 2012 Constellation merger: 2012 Exelon and Generation results include the acquired businesses only from March 12 through March 31, while 2013 includes a full quarter.
Key financial results
Amounts are in millions except per-share data. Exelon’s results are consolidated.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Operating revenue | $6,082 | $4,690 | +$1,392 |
| Operating income | $508 | $359 | +$149 |
| Net income (loss) attributable to common stock | $(4) | $200 | $(204) |
| Diluted EPS | $(0.01) | $0.28 | $(0.29) |
| Adjusted operating earnings (non-GAAP) | $602 | $603 | $(1) |
| Adjusted diluted EPS (non-GAAP) | $0.70 | $0.85 | $(0.15) |
| Cash from operating activities | $859 | $994 | $(135) |
| Capital expenditures | $1,447 | $1,496 | $(49) |
- Operating margin was approximately 8.4% of revenue, versus 7.7% in Q1 2012; the revenue comparison reflects the merger-related period difference.
- Generation’s revenue net of purchased power and fuel, a non-GAAP measure, declined to $1,364 from $1,699, chiefly reflecting a $403 mark-to-market loss on economic hedges versus a $60 gain in 2012.
- Cash and cash equivalents, including amounts held by variable-interest entities, totaled $772 at March 31, 2013, versus $1,486 at year-end 2012. Investing cash outflow was $1,471; financing cash outflow was $102.
- At March 31, Exelon reported $16,210 of long-term debt, $2,085 due within one year, and additional short-term borrowings and financing obligations. The balance sheet also reports $648 of debt to financing trusts and $497 of VIE debt. Total current liabilities were $8,321 and current assets $9,274.
- Committed credit facilities totaled $8.4 billion, with $6.7 billion available and no facility borrowings outstanding. ComEd had $220 million of commercial paper outstanding.
- Common dividends paid were $450 million; the Q1 dividend was $0.525 per share. The board reduced the quarterly dividend to $0.31 beginning in Q2 2013, or $1.24 annualized versus $2.10 previously.
Material changes and management commentary
- Despite higher reported revenue and operating income, Exelon’s GAAP common-stock result turned to a loss. Management attributed the deterioration principally to Generation’s hedge mark-to-market losses and a $265 million non-cash charge from reassessing the tax treatment of a 1999 like-kind exchange. Interest expense rose $428 million year over year, including interest related to the tax position and higher debt.
- Adjusted operating earnings were nearly flat, but adjusted EPS fell as weighted-average shares increased to 855 million from 705 million. The filing’s adjusted measure excludes specified items and is not GAAP.
- Segment common-stock results were: Generation loss of $18 (2012 income $168); ComEd loss of $81 (income $87); PECO income of $121 (income $96); and BGE income of $77 (2012 loss $33). ComEd’s loss chiefly reflected the tax-position remeasurement; PECO improved on weather and lower operating and maintenance costs; BGE’s comparison benefited from the absence of a 2012 merger-related customer rate credit and related costs.
- Management cited low natural-gas and power prices, state-subsidized generation that may depress PJM market prices, subdued demand and intense retail competition as pressures on Generation. Expected generation was hedged 98%–101% for 2013, 70%–73% for 2014 and 33%–36% for 2015.
- Management expected 2013 capital expenditures of approximately $5.4 billion and stated that operating cash flows, credit-market access and facilities should provide sufficient liquidity. No clear numeric full-year earnings or EPS guidance is provided in the supplied filing text.
Outlook, risks, contingencies and unusual items
- Tax dispute: Exelon recorded the $265 million charge after concluding it was no longer more-likely-than-not that its like-kind exchange position would prevail. A fully successful IRS challenge could make up to approximately $840 million of tax and after-tax interest payable, excluding penalties. The IRS also asserts an $86 million penalty; Exelon recorded no liability for that penalty and intends to litigate.
- Market and collateral exposure: Generation could need an additional $1.747 billion of collateral if downgraded below investment grade. The filing warns that market-price movements, counterparty performance and collateral requirements can affect cash flows and liquidity.
- Regulatory and legal matters: BGE’s ordered contract-for-differences arrangement for a proposed Maryland generating plant remains subject to litigation and other conditions; its eventual effect could be material. A FERC complaint seeking to lower BGE’s transmission return on equity could reduce annual revenue by about $10 million if granted. ComEd’s FutureGen sourcing agreement could materially affect cash flows and financial position depending on terms, market conditions and recovery.
- Other commitments: Exelon described more than $1 billion of estimated direct Maryland investment commitments related to the Constellation merger, including proposed generation development. Approximately $40 million of subsidy or liquidated-damages payments was reasonably possible if a project is not built. Generation also had $8.6 billion of fuel purchase obligations and $3.4 billion of specified energy-related purchase commitments.
- Operating and environmental risks: Nuclear decommissioning obligations, environmental remediation, future emissions and cooling-water rules, and potential reliability-related spending may require significant expenditures. A contingent NRC enforcement matter concerns alleged inaccuracies in historical decommissioning funding reports; Generation disputed the allegations and reported adequate current funding assurance.
- Unusual items: Generation recorded a $8 million pre-tax gain from final settlement of the 2012 sale of Maryland generating stations and a $21 million operating expense reversing capitalized costs for cancelled nuclear uprate projects. A $2 million BGE regulatory-asset amortization correction was disclosed as immaterial.
Most important facts for investors to verify
- Reconcile the $265 million tax-position charge, the potential $840 million tax-and-interest exposure, and the status and timing of the IRS litigation.
- Assess the underlying earnings trend using the non-GAAP reconciliation, including hedge losses, acquired-contract amortization and the comparability limits caused by the merger.
- Review the dividend reduction, forecast capital spending and liquidity needs alongside debt maturities, pension funding and potential collateral calls.
- Track regulatory and court outcomes affecting PJM capacity prices, BGE’s Maryland generation contract, ComEd’s procurement obligations and BGE transmission rates.
- Evaluate Generation’s unhedged exposure after 2015 and the potential costs of nuclear, environmental and infrastructure commitments.