10-QPeriod: Q2 FY2016

EXELON CORP Quarterly Report for Q2 Ended Jun 30, 2016

Filed August 9, 2016For Securities:EXC

Summary

This 10-Q filing for Exelon Corporation (EXC) as of and for the period ending June 30, 2016, provides insights into the company's market risk exposures, primarily related to commodity prices, interest rates, and counterparty credit. Exelon's robust risk management framework, overseen by its Risk Management Committee (RMC), actively seeks to mitigate these risks through various hedging strategies, including derivative and non-derivative contracts for electricity and natural gas. The filing details the hedging levels for expected generation through 2018, offering transparency into future price protection. Key to investors is the company's active management of its commodity price risk, particularly within its Generation segment. While proprietary trading represents a small portion of revenue, the company employs stringent risk management policies. The filing also highlights the regulatory recovery mechanisms for fuel and energy procurement costs across its utility subsidiaries (ComEd, PECO, BGE, Pepco, DPL, ACE), which largely insulate them from direct price volatility and thus protect shareholders from those specific market risks. Furthermore, the impact of the recent merger with PHI is noted, along with potential integration risks and the possibility of it not being immediately accretive to earnings.

Financial Highlights

50 data points
Beta

Revenue

$6.91B

Net Income

$267.00M

3.9% Net Margin

EPS (Diluted)

$0.29

Total Assets

$112.78B

Cash & Equivalents

$1.65B

Free Cash Flow

$793.00M

Financial Statements
Beta
Revenue$6.91B
Operating Expenses$6.29B
Operating Income$647.00M
Interest Expense$366.00M
Net Income$267.00M
EPS (Basic)$0.29
EPS (Diluted)$0.29
Shares Outstanding (Basic)924.00M
Shares Outstanding (Diluted)926.00M

Key Highlights

  • 1Exelon actively manages commodity price risk through extensive hedging of expected generation, with 97%-100% hedged for 2016, 78%-81% for 2017, and 47%-50% for 2018.
  • 2The Generation segment's risk exposure to a $5 annual average energy price decrease is estimated at $5 million pre-tax gain for 2016, but significant pre-tax decreases of $205 million and $475 million for 2017 and 2018 respectively, highlighting the importance of ongoing hedging.
  • 3Utility subsidiaries (ComEd, PECO, BGE, Pepco, DPL, ACE) have mechanisms to recover energy procurement costs from customers, mitigating direct commodity price risk for the company.
  • 4Exelon's risk management is overseen by a committee chaired by the CEO, reporting to the Board's Finance and Risk Committee, indicating a strong governance structure for managing market risks.
  • 5The company employs various derivative and non-derivative instruments to hedge against price fluctuations, with a focus on economic hedges to mitigate exposure.
  • 6Credit risk exposure is actively managed, with Generation's net exposure detailed by counterparty credit rating and maturity, demonstrating a focus on counterparty due diligence.
  • 7The recent merger with PHI is acknowledged, with potential integration risks and impacts on earnings accretion being a key consideration for investors.

Frequently Asked Questions

Exelon utilizes a comprehensive hedging strategy that includes both derivative and non-derivative contracts to mitigate commodity price risk. The Generation segment, in particular, hedges a significant portion of its expected generation over a multi-year period. Additionally, its utility subsidiaries have regulatory mechanisms in place to recover energy procurement costs from customers, which limits Exelon's direct exposure to these price fluctuations.

Exelon is exposed to credit risk from counterparties involved in derivative instruments and commodity contracts. The company manages this risk through counterparty credit approval processes, collateral requirements, and by monitoring credit ratings. As of June 30, 2016, Exelon Generation's total exposure before collateral was $1.439 billion, with a net exposure of $1.395 billion after collateral, primarily with investment-grade counterparties.

Exelon manages its exposure to interest rate fluctuations by utilizing a mix of fixed-rate and variable-rate debt. They may also employ strategies like fixed-to-floating interest rate swaps, often designated as fair value hedges, and interest rate derivatives to lock in rates for future financings, typically designated as cash flow hedges. As of June 30, 2016, Exelon had $800 million in fixed-to-floating hedges and $764 million in floating-to-fixed hedges outstanding.

The filing acknowledges that the merger with PHI may not achieve its anticipated results and could lead to integration challenges. Investors should be aware that the merger may not be immediately accretive to earnings and could potentially cause dilution to earnings per share. Exelon also expects to incur transaction and integration-related costs, and there's a risk of unexpected difficulties or costs in meeting commitments related to regulatory approvals for the merger.