10-QPeriod: Q1 FY2011

EXELON CORP Quarterly Report for Q1 Ended Mar 31, 2011

Filed April 27, 2011For Securities:EXC

Summary

This 10-Q filing from Exelon Corporation for the quarter ended March 31, 2011, primarily focuses on market risk disclosures, specifically concerning commodity price risk, counterparty credit risk, interest rate risk, and equity price risk. The company actively manages these risks through various hedging strategies, including financial derivative contracts, to mitigate the impact of market fluctuations on its generation and supply operations. Key takeaways for investors include Exelon Generation's significant hedging of future generation, with 93%-96% hedged for 2011, demonstrating a proactive approach to managing commodity price volatility. While proprietary trading activities are a small part of the business and generated modest gains, the company's primary focus remains on core energy generation and distribution operations. The filing also details the company's exposure to credit risk from counterparties and its collateral management practices, which are crucial for understanding the potential impact of defaults on its financial performance.

Financial Highlights

49 data points
Beta

Revenue

$4.96B

Net Income

$668.00M

13.5% Net Margin

EPS (Diluted)

$1.01

Total Assets

$51.38B

Cash & Equivalents

$487.00M

Free Cash Flow

-$1.36B

Financial Statements
Beta
Revenue$4.96B
Operating Expenses$3.75B
Operating Income$1.20B
Interest Expense$175.00M
Net Income$668.00M
EPS (Basic)$1.01
EPS (Diluted)$1.01
Shares Outstanding (Basic)662.00M
Shares Outstanding (Diluted)664.00M

Key Highlights

  • 1Exelon Generation has hedged a significant portion of its expected generation for 2011 (93%-96%), 2012 (73%-76%), and 2013 (38%-41%) to mitigate commodity price risk.
  • 2The company's proprietary trading activities are minimal, contributing only $5 million in pre-tax gains for the quarter, and are subject to strict risk management limits.
  • 3A $5 reduction in annual average energy prices could result in pre-tax net income decreases of $20 million (2011), $216 million (2012), and $484 million (2013) for unhedged positions.
  • 4Exelon Generation holds $957 million in net credit exposure, primarily to investment-grade counterparties, indicating a well-managed credit risk profile for its derivative and other financial instruments.
  • 5ComEd and PECO largely recover their energy procurement costs from customers, meaning that changes in the fair value of certain derivative contracts are recorded as regulatory assets or liabilities, limiting direct impact on their operating results.
  • 6The company has a substantial net investment in coal-fired plants subject to long-term leases ($635 million), with exposure to residual value risk mitigated by lease agreements and credit enhancements.

Frequently Asked Questions

Exelon, primarily through its Generation segment, actively manages commodity price risk by entering into physical and financial derivative contracts (forwards, futures, swaps, options) with approved counterparties. This hedging strategy aims to mitigate exposure to fluctuations in electricity and fuel prices. As of March 31, 2011, a significant percentage of expected generation was hedged for the upcoming years.

Proprietary trading activities, which involve entering into energy-related derivatives purely for profit from market price changes, represent a small portion of Exelon Generation's overall revenue. For the three months ended March 31, 2011, these activities resulted in a pre-tax gain of $5 million. The company employs stringent risk management policies, including volume and Value-at-Risk (VaR) limits, to control exposure from these activities.

Exelon is exposed to credit risk from counterparties who might default on derivative instruments. As of March 31, 2011, Exelon Generation had a total net credit exposure of $957 million, primarily to investment-grade counterparties. This exposure is net of collateral received and instruments subject to master netting agreements. While ComEd and PECO have immaterial credit exposure to energy suppliers, they also benefit from regulatory frameworks that allow for cost recovery.

For ComEd and PECO, certain derivative contracts, particularly those related to energy procurement, qualify for normal purchase and normal sale exceptions or are covered under regulatory approved programs. This means that changes in the fair value of these contracts are recorded as regulatory assets or liabilities on their balance sheets. This mechanism allows for full cost recovery from retail customers, thus limiting the direct impact on the utilities' operating results.