Exelon Announces Solid Third Quarter Results; Revises Guidance Range Upward for Full Year 2010 Earnings
Exelon Corporation (NYSE: EXC) announced third quarter 2010 consolidated earnings.
CHICAGO – Exelon Corporation (NYSE: EXC) announced third quarter 2010 consolidated earnings as follows:
Adjusted (non-GAAP) Operating Results:
Net Income ($ millions) $739 $633
Diluted Earnings per Share $1.11 $0.96
Net Income ($ millions) $845 $757
Diluted Earnings per Share $1.27 $1.14
“As we mark the tenth anniversary of Exelon this month, we continue to deliver substantial value for our shareholders and improve operating performance across all of our businesses as demonstrated by our strong third quarter earnings results,” said John W. Rowe, Exelon Chairman and CEO. “Exelon Generation achieved an impressive nuclear fleet capacity factor that exceeded 95 percent, and ComEd and PECO provided reliable performance during a very hot summer. Because our year-to-date results look to position us in the upper end of our earnings guidance range for the full year, we are raising the range from $3.80 to $4.10 per share to $3.95 to $4.10 per share.”
Third Quarter Operating Results
As shown in the table above, Exelon’s adjusted (non-GAAP) operating earnings increased to $1.11 per share in the third quarter of 2010 from $0.96 per share in the third quarter of 2009, primarily due to:
• The effects of favorable weather conditions in the service territories of Commonwealth Edison Company (ComEd) and PECO Energy Company (PECO);
• The impact at Exelon Generation Company, LLC (Generation) of favorable capacity pricing related to the Reliability Pricing Model (RPM) for the PJM Interconnection, LLC (PJM) market;
• Reversal in the third quarter of 2009 of previously recorded benefits related to an Illinois investment tax credit ruling; and
• Lower income tax expense at Generation due to tax benefits associated with an increase in the manufacturing deduction rate.
Higher third quarter 2010 earnings were partially offset by:
• Increased depreciation and amortization expense primarily related to the higher scheduled competitive transition charge (CTC) amortization expense at PECO and increased depreciation expense across the operating companies due to ongoing capital expenditures; and
• Increased nuclear fuel costs at Generation.
Adjusted (non-GAAP) operating earnings for the third quarter of 2010 do not include the following items (after tax) that were included in reported GAAP earnings:
(in millions) (per diluted share)
Mark-to-market gains primarily from Generation’s economic hedging activities $99 $0.14
Unrealized gains related to nuclear decommissioning trust (NDT) fund investments to the extent not offset by contractual accounting $60 $0.09
Impairment of certain emissions allowances $(35) $(0.05)
Costs associated with the retirement of certain Generation fossil generating units $(14) $(0.02)
Costs associated with the 2007 Illinois electric rate settlement agreement $(3) -
External costs related to Exelon’s proposed acquisition of John Deere Renewables (JDR) $(1) -
Adjusted (non-GAAP) operating earnings for the third quarter of 2009 did not include the following items (after tax) that were included in reported GAAP earnings:
(in millions) (per diluted share)
Unrealized gains related to NDT fund investments to the extent not offset by contractual accounting $87 $0.13
Mark-to-market gains primarily from Generation’s economic hedging activities $77 $0.12
Costs associated with early debt retirements $(58) $(0.09)
Income resulting from decommissioning obligation reduction $32 $0.05
Costs associated with the 2007 Illinois electric rate settlement agreement $(11) $(0.02)
External costs related to Exelon’s previously proposed acquisition of NRG Energy, Inc. $(6) $(0.01)
Income for the true-up of severance costs as a result of headcount reductions associated with Exelon’s cost savings program $3 -
2010 Earnings Outlook
Exelon revised its guidance range upward for 2010 adjusted (non-GAAP) operating earnings from $3.80 to $4.10 per share to $3.95 to $4.10 per share. Operating earnings guidance is based on the assumption of normal weather for the balance of the year.
The outlook for 2010 adjusted (non-GAAP) operating earnings for Exelon and its subsidiaries excludes the following items:
• Mark-to-market adjustments from economic hedging activities
• Unrealized gains and losses from NDT fund investments to the extent not offset by contractual accounting as described in the notes to the consolidated financial statements
• Significant impairments of assets, including goodwill
• Costs associated with the 2007 Illinois electric rate settlement agreement
• Costs associated with ComEd’s 2007 settlement with the City of Chicago
• Costs associated with the retirement of fossil generating units
• Non-cash charge resulting from the passage of Federal health care legislation
• Non-cash remeasurement of income tax uncertainties
• External costs associated with Exelon’s proposed acquisition of JDR
• Impairment of certain emissions allowances
• Other unusual items
• Significant changes to GAAP
Third Quarter and Recent Highlights
• John Deere Renewables Acquisition: On August 31, 2010, Exelon announced an agreement to acquire JDR, a leading operator and developer of wind power, in a transaction that will add 735 operating megawatts (MW) of clean, renewable energy to Exelon’s generation portfolio. The acquisition, valued at approximately $860 million with a provision for up to an additional $40 million upon commencement of construction on 230 MW of advanced development projects, is expected to provide incremental earnings in 2012 and cash flows in 2013. Under the terms of the agreement, Exelon will acquire JDR’s 735 MW of installed, operating wind capacity spread across 36 projects in eight states. Approximately 75 percent of the operating portfolio is already sold under long-term power purchase arrangements. As part of the acquisition, Exelon also has the opportunity to pursue 1,200 MW of new wind projects that are in various stages of development. Exelon expects to close the transaction with JDR in the fourth quarter of 2010.
• Nuclear Operations: Generation’s nuclear fleet, including its owned output from the Salem Generating Station, produced 35,751 gigawatt-hours (GWh) in the third quarter of 2010, compared with 35,684 GWh in the third quarter of 2009. The Exelon-operated nuclear plants achieved a 95.4 percent capacity factor for the third quarter of 2010 compared with 94.7 percent for the third quarter of 2009. The Exelon-operated nuclear plants began one scheduled refueling outage in the third quarter of 2010, compared with beginning two scheduled refueling outages in the third quarter of 2009. When Peach Bottom Unit 2 was shut down for a scheduled refueling outage on September 12, 2010, the unit marked a second consecutive breaker-to-breaker run (continuous operation between refueling outages) of 692 days since its last refueling outage in 2008. The number of refueling outage days totaled 19 in the third quarter of 2010 versus 36 days in the third quarter of 2009. The number of non-refueling outage days at the Exelon-operated plants totaled 19 days in the third quarter of 2010 compared with 21 days in the third quarter of 2009.
• Fossil and Hydro Operations: The equivalent demand forced outage rate for Generation’s fossil fleet was 1.8 percent in the third quarter of 2010, compared with 10.6 percent in the third quarter of 2009. The improvement was largely due to the impact of extended maintenance outages in 2009. The equivalent availability factor for the hydroelectric facilities was 94.4 percent in the third quarter of 2010, compared with 97.1 percent in the third quarter of 2009, due to a planned outage in 2010 for a generator overhaul at Conowingo.
• Hedging Update: Exelon’s hedging program involves the hedging of commodity risk for Exelon’s expected generation, typically on a ratable basis over a three-year period. Expected generation represents the amount of energy estimated to be generated or purchased through owned or contracted-for capacity. The proportion of expected generation hedged as of September 30, 2010 is 97 to 100 percent for 2010, 87 to 90 percent for 2011 and 62 to 65 percent for 2012. The primary objectives of Exelon’s hedging program are to manage market risks and protect the value of its generation and its investment grade balance sheet while preserving its ability to participate in improving long-term market fundamentals.
• Zion Nuclear Station Decommissioning: On September 1, 2010, Exelon completed the transactions related to its agreement with EnergySolutions Inc., a nuclear services company, to begin the decommissioning of the Zion Station, which ceased operation in 1998. In the first-of-its-kind arrangement approved by the Nuclear Regulatory Commission, Exelon transferred to EnergySolutions the station license and substantially all the assets (other than land) associated with the Zion Station, including related NDT funds. The Zion Station is located on the shore of Lake Michigan about 40 miles north of Chicago. Exelon believes that the accelerated decommissioning of the Zion Station will make the land available for other uses earlier than originally planned.
• Fossil Plant Retirements Update: On September 7, 2010, PJM informed Exelon Power that transmission system upgrades necessary to allow Eddystone Generating Station Unit 2 to retire can be completed sooner than its original analysis indicated. PJM has determined that Eddystone Unit 2 is needed to remain in operation only until May 31, 2012. Also as announced earlier, Exelon will retire three additional fossil-fuel generating units: Cromby Unit 1 and Eddystone Unit 1 on May 31, 2011, and Cromby Unit 2 on December 31, 2011.
• Illinois Appellate Court Ruling: On September 30, 2010, the Illinois Appellate Court (Court) issued a decision related to appeals of the September 2008 rate order (Order) from the Illinois Commerce Commission (ICC) approving a $274 million increase in ComEd’s annual delivery services revenue requirement. The Court held that when the ICC allowed post-test year plant additions to rate base, the ICC should have deducted accumulated post-test year depreciation on test year plant. In addition, the Court reversed the ICC’s approval of a rider (Rider SMP) for ComEd to recover costs for its smart meter pilot program. The Court remanded the case to the ICC to implement its decision and also consider whether an additional three months of net plant investment, beyond what was approved in the Order, should be included in rate base. If the Court’s ruling is not reversed following further proceedings, ComEd estimates that the impact of the rate base/depreciation reserve issues on pre-tax revenue could be up to $77 million on an annual basis based on the 2008 Order. In addition, the loss of Rider SMP reduced pre-tax earnings by $4 million in the third quarter of 2010, with a further estimated reduction of $1 million expected in the fourth quarter of 2010.
On October 21, 2010, ComEd petitioned the Court for a rehearing of its decision regarding the post-test year depreciation reserve and Rider SMP. Although the timeline is uncertain at this point, ComEd expects the Court to follow its normal process. With respect to the Court’s finding on Rider SMP, on October 18, ComEd filed a petition with the ICC to recover the unrecovered portion of certain operating costs associated with the smart meter pilot by transferring these costs into its pending general rate case instead of the rider. ComEd has requested the ICC to act on its petition within the fourth quarter.
• ComEd Alternative Regulation Filing: On August 31, 2010, ComEd announced a filing with the ICC for a pilot program under an alternative regulatory structure that would allow for accelerated modernization of the distribution system, increased assistance to low-income households, and the purchase of state-of-the-art electric vehicles to service the electric system. Under the proposal, ComEd would be allowed to recover costs of these investments, previously approved by the ICC, as they occur and operate under a targeted incentive mechanism. All costs would be subject to review two years after implementation and would include performance metrics to allow customers to share in any costs savings or efficiencies. If approved, the new pilot would go into effect on May 31, 2011 after a nine-month ICC proceeding and would last two years.
• PECO Energy Procurement: On October 15, 2010, PECO announced the results of the fourth and last of planned electricity purchases under its Default Service Provider program to serve residential customers that have not chosen a competitive electric generation supplier beginning January 1, 2011. At that time, the prices PECO and its customers pay for electricity will be based on competitive electric market pricing, after being capped for more than 10 years. When combined with the previous three electricity purchases, the average price to compare for PECO’s residential customers is 9.92 cents per kilowatt hour beginning January 1, 2011. The price to compare is the price that customers can use to evaluate offers for purchasing their electricity from competitive electric generation suppliers.
• PECO Electric and Gas Delivery Rate Cases: On August 31, 2010, PECO filed joint settlement petitions for consideration by the Pennsylvania Public Utility Commission (PAPUC) that reflect agreements reached with all interested parties on the increases in natural gas and electric delivery charges beginning January 1, 2011. The settlements reflect an increase of $20 million in annual natural gas service revenue, which is approximately 46 percent of the $44 million originally requested, and a $225 million increase in annual electric service revenue, which is approximately 71 percent of the $316 million originally requested. The settlements are subject to administrative law judge review and PAPUC approval by mid-December 2010. Based on the electric delivery rate case settlement and electricity purchases, PECO now estimates that total prices for residential electric customers will increase about 5 percent on January 1, 2011.
• Financing Activities: On July 27, 2010, ComEd issued $500 million of 4.00 percent First Mortgage Bonds due August 1, 2020. The net proceeds of the bonds were used to refinance maturing first mortgage bonds, to make a contribution to its pension funds, and to fund other general corporate purposes.
On September 30, 2010, Generation issued $550 million of Senior Notes maturing on October 1, 2020, with a coupon of 4.00 percent and $350 million of Senior Notes maturing on October 1, 2041, with a coupon of 5.75 percent. Generation will use the net proceeds from the sale to fund a portion of the purchase price Generation will pay for its pending acquisition of JDR, fees and expenses related to that acquisition, and for general corporate purposes.
OPERATING COMPANY RESULTS
Generation consists of owned and contracted electric generating facilities, wholesale energy marketing operations and competitive retail sales operations.
Third quarter 2010 net income was $605 million compared with $657 million in the third quarter of 2009. Third quarter 2010 net income included (all after tax) mark-to-market gains of $99 million from economic hedging activities before the elimination of intercompany transactions, unrealized gains of $60 million related to NDT fund investments, a charge of $35 million associated with the impairment of certain emissions allowances, costs of $14 million associated with the retirement of certain fossil generating units, a charge of $3 million for costs associated with the 2007 Illinois electric rate settlement and a charge of $1 million for external costs associated with the proposed acquisition of JDR. Third quarter 2009 net income included (all after tax), unrealized gains of $87 million related to NDT fund investments, mark-to-market gains of $77 million from economic hedging activities before the elimination of intercompany transactions, costs of $36 million associated with the early retirement of long-term debt, income of $32 million resulting from a reduction in the decommissioning obligation, costs of $9 million associated with the 2007 Illinois electric rate settlement and income of $2 million from the true-up of 2009 costs incurred for severance. Excluding the effects of these items, Generation’s net income in the third quarter of 2010 decreased $5 million compared with the same quarter last year primarily due to:
• Lower energy gross margin largely due to lower energy prices under the power purchase agreement with PECO and higher nuclear fuel costs; and
• Increased depreciation expense.
The decrease in net income was partially offset by:
• The impact on energy gross margin of favorable capacity pricing related to RPM; and
• Lower income tax expense due to tax benefits associated with an increase in the manufacturing deduction rate.
Generation’s average realized margin on all electric sales, including sales to affiliates and excluding trading activity, was $35.11 per MWh in the third quarter of 2010 compared with $36.32 per MWh in the third quarter of 2009.
ComEd consists of the electricity transmission and distribution operations in northern Illinois.
ComEd recorded net income of $121 million in the third quarter of 2010, compared with net income of $46 million in the third quarter of 2009. Third quarter net income in 2009 included costs of $2 million after tax associated with the 2007 Illinois electric rate settlement. Excluding the effects of this item, ComEd’s net income in the third quarter of 2010 was up $73 million from the same quarter last year primarily reflecting:
• The effects of favorable weather conditions; and
• Reversal in the third quarter of 2009 of previously recorded benefits related to an Illinois investment tax credit ruling.
The increase in net income was partially offset by higher storm costs.
In the third quarter of 2010, cooling degree-days in the ComEd service territory were up 107 percent relative to the same period in 2009 and were 37 percent above normal. ComEd’s total retail electric deliveries increased by 16 percent quarter over quarter, with gains in deliveries across all major customer classes, primarily driven by the effects of favorable weather conditions.
Weather-normalized retail electric deliveries increased by 1.1 percent from the third quarter of 2009, primarily reflecting customer growth and an increase in deliveries to the large commercial and industrial class. For ComEd, weather had a favorable after-tax effect of $44 million on third quarter 2010 earnings relative to 2009 and a favorable after-tax effect of $19 million relative to normal weather that is incorporated in Exelon’s earnings guidance.
PECO consists of the electricity transmission and distribution operations and the retail natural gas distribution business in southeastern Pennsylvania.
PECO’s net income in the third quarter of 2010 was $127 million, up from $92 million in the third quarter of 2009. Third quarter net income in 2009 included income of $1 million from the true-up of costs incurred for severance. Excluding the effects of this item, PECO’s net income in the third quarter of 2010 was up $36 million from the same quarter last year reflecting:
• Increased CTC revenue to ensure full recovery in 2010 of stranded costs, which resulted in lower energy prices paid to Generation under the power purchase agreement;
• The effects of favorable weather conditions; and
• Lower interest expense on long-term debt.
The increase in net income was partially offset by:
• Higher CTC amortization, which was in accordance with PECO’s 1998 Restructuring Settlement with the PAPUC; and
• Higher operating and maintenance expense.
In the third quarter of 2010, cooling degree-days in the PECO service territory were up 37 percent from 2009 and were 29 percent above normal. Total retail electric deliveries were up 9 percent from last year, reflecting an increase in deliveries across all major customer classes, primarily driven by the effects of favorable weather conditions.
Weather-normalized retail electric deliveries increased by 0.5 percent from the third quarter of 2009, primarily reflecting increased residential deliveries. For PECO, weather had a favorable after-tax effect of $32 million on third quarter 2010 earnings relative to 2009 and a favorable after-tax effect of $20 million relative to normal weather that is incorporated in Exelon’s earnings guidance.
Adjusted (non-GAAP) Operating Earnings
Adjusted (non-GAAP) operating earnings, which generally exclude significant one-time charges or credits that are not normally associated with ongoing operations, mark-to-market adjustments from economic hedging activities and unrealized gains and losses from NDT fund investments, are provided as a supplement to results reported in accordance with GAAP. Management uses such adjusted (non-GAAP) operating earnings measures internally to evaluate the company’s performance and manage its operations. Reconciliation of GAAP to adjusted (non-GAAP) operating earnings for historical periods is attached. Additional earnings release attachments, which include the reconciliations on pages 7 and 8, are posted on Exelon’s Web site (download attachments) and have been furnished to the Securities and Exchange Commission on Form 8-K on October 22, 2010.
Conference call information: Exelon has scheduled a conference call for 11:00 AM ET (10:00 AM CT) on October 22, 2010. The call-in number in the U.S. and Canada is 866-503-0696, and the international call-in number is 973-935-8753. If requested, the conference ID number is 15729584. Media representatives are invited to participate on a listen-only basis. The call will be web-cast and archived in the Investor Relations section.
Telephone replays will be available until November 5. The U.S. and Canada call-in number for replays is 800-642-1687, and the international call-in number is 706-645-9291. The conference ID number is 15729584.
Forward Looking Statements
This press release includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties. The factors that could cause actual results to differ materially from these forward-looking statements include those discussed herein as well as those discussed in (1) Exelon’s 2009 Annual Report on Form 10-K in (a) ITEM 1A. Risk Factors, (b) ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and (c) ITEM 8. Financial Statements and Supplementary Data: Note 18; (2) Exelon’s Third Quarter 2010 Quarterly Report on Form 10-Q (to be filed on October 22, 2010) in (a) Part II, Other Information, ITEM 1A. Risk Factors, (b) Part 1, Financial Information, ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations and (c) Part I, Financial Information, ITEM 1. Financial Statements: Note 13 and (3) other factors discussed in filings with the Securities and Exchange Commission (SEC) by Exelon Corporation, Commonwealth Edison Company, PECO Energy Company and Exelon Generation Company, LLC (Companies). Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this press release. None of the Companies undertakes any obligation to publicly release any revision to its forward-looking statements to reflect events or circumstances after the date of this press release.
Exelon Corporation is one of the nation’s largest electric utilities with more than $17 billion in annual revenues. The company has one of the industry’s largest portfolios of electricity generation capacity, with a nationwide reach and strong positions in the Midwest and Mid-Atlantic. Exelon distributes electricity to approximately 5.4 million customers in northern Illinois and southeastern Pennsylvania and natural gas to approximately 486,000 customers in the Philadelphia area. Exelon is headquartered in Chicago and trades on the NYSE under the ticker EXC.