10-QPeriod: Q2 FY2014

EXELON CORP Quarterly Report for Q2 Ended Jun 30, 2014

Filed July 31, 2014For Securities:EXC

Summary

This 10-Q filing for Exelon Corporation (EXC) as of July 31, 2014, primarily details the company's market risk exposures, focusing on commodity price risk, counterparty credit risk, interest rates, and equity prices. Exelon actively manages these risks through its Risk Management Committee (RMC) and various hedging strategies. The Generation segment has hedged a significant portion of its expected generation for 2014, 2015, and 2016, with percentages ranging from 92%-95% for 2014 down to 46%-49% for 2016. Despite hedging efforts, a $5 reduction in annual average energy prices could result in a pre-tax net income decrease of approximately $570 million by 2016. A significant portion of the filing is dedicated to the pending merger with Pepco Holdings, Inc. (PHI). It outlines numerous risks associated with completing this merger, including regulatory approval hurdles, potential for burdensome conditions, the risk of not completing the merger, and substantial transaction and integration costs. Exelon has secured financing for the merger, including debt, equity, and a bridge credit facility, but notes that financing is subject to market conditions. The company also highlights the potential for goodwill impairment and legal challenges related to the merger.

Financial Highlights

50 data points
Beta

Revenue

$6.02B

Net Income

$522.00M

8.7% Net Margin

EPS (Diluted)

$0.60

Total Assets

$83.66B

Cash & Equivalents

$1.36B

Free Cash Flow

$302.00M

Financial Statements
Beta
Revenue$6.02B
Operating Expenses$5.46B
Operating Income$842.00M
Interest Expense$228.00M
Net Income$522.00M
EPS (Basic)$0.61
EPS (Diluted)$0.60
Shares Outstanding (Basic)860.00M
Shares Outstanding (Diluted)864.00M

Key Highlights

  • 1Exelon Corporation is actively managing commodity price risk through derivative and non-derivative hedging instruments, with significant portions of expected generation hedged through 2016.
  • 2A $5 annual average energy price decrease could lead to a pre-tax net income reduction of up to $570 million by 2016, indicating material exposure to unhedged positions.
  • 3The company is exposed to counterparty credit risk, with a total net credit exposure of $1,296 million for Generation as of June 30, 2014, primarily to investor-owned utilities, marketers, and power producers.
  • 4The filing extensively details risks and uncertainties surrounding the pending merger with Pepco Holdings, Inc. (PHI), including regulatory approvals, potential delays, and significant integration costs.
  • 5Financing for the PHI merger is being arranged through a combination of debt, equity issuances, and a bridge credit facility, with a stated intention to fund the cash consideration.
  • 6Goodwill impairment is identified as a potential risk following the acquisition of PHI, which could materially impact Exelon's future operating results.
  • 7Several legal proceedings are challenging the PHI merger, posing a risk of injunctions that could delay or prevent its completion.

Frequently Asked Questions

Exelon manages commodity price risk through a combination of selling and purchasing electricity, fossil fuels, and other commodities. The Generation segment uses non-derivative and derivative contracts (forwards, futures, swaps, options) to hedge anticipated exposures. The company hedges commodity risk on a ratable basis over three years, with significant percentages of expected generation hedged for 2014 through 2016.

Key risks include obtaining necessary regulatory approvals (FERC, FCC, state PUCs, HSR Act), potential for 'burdensome conditions' imposed by regulators, the possibility that the merger may not be completed, significant transaction and integration costs, potential for goodwill impairment after acquisition, and legal challenges that could delay or prevent completion.

Exelon intends to fund the merger through a combination of approximately $3.5 billion in debt, up to $1.0 billion from asset sales, and the remainder through equity issuance. This includes forward sales agreements for common stock and junior subordinated notes, as well as a $4.2 billion senior unsecured bridge credit facility to bridge financing until permanent arrangements are in place.

For Exelon Generation, a hypothetical $5 reduction in the annual average around-the-clock energy price, based on June 30, 2014, market conditions and hedged positions, would result in a pre-tax net income decrease of approximately $20 million for 2014, $270 million for 2015, and $570 million for 2016. This highlights the sensitivity of unhedged generation to energy price fluctuations.