Exelon Corporation — Q3 2020 Form 10-Q
Business context and reporting period
Exelon is a utility holding company with competitive power generation and regulated electric and gas transmission and distribution businesses. This unaudited combined filing covers the quarter and nine months ended September 30, 2020, compared with the same 2019 periods; amounts below are in millions except per-share data.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $8,853 | $8,929 | $24,925 | $26,096 |
| Operating income | $769 | $1,353 | $2,554 | $3,412 |
| Net income attributable to common shareholders | $501 | $772 | $1,604 | $2,164 |
| Diluted EPS | $0.51 | $0.79 | $1.64 | $2.22 |
| Adjusted operating earnings (non-GAAP) | $1,017; $1.04/share | $900; $0.92/share | $2,403; $2.46/share | $2,329; $2.39/share |
| Operating margin (operating income/revenue) | 8.7% | 15.2% | 10.2% | 13.1% |
For the first nine months, operating cash flow was $4,222, down from $5,399. Capital expenditures were $5,606, implying operating cash flow less capital expenditures of negative $1,384, versus positive $140 in 2019. Dividends paid on common stock were $1,119.
At September 30, cash and cash equivalents were $1,858 and restricted cash was $485. Balance-sheet debt, including short-term borrowings, current and long-term debt, and debt to financing trusts, totaled approximately $39,160, compared with approximately $37,799 at year-end 2019. Credit facilities totaled $10.6 billion, with $8.5 billion available to support additional commercial paper. Management said liquidity was sufficient and expected cash flows to cover operating expenses, financing costs and capital spending.
Material changes versus prior comparable periods
- GAAP net income attributable to common shareholders fell $271 in Q3 and $560 for the first nine months. Adjusted operating earnings increased $117 in Q3 and $74 year to date.
- Results reflected a $500 impairment of Generation’s New England asset group, early-retirement costs and accelerated depreciation, COVID-19-related load and costs, and ComEd’s $200 Deferred Prosecution Agreement (DPA) expense. Higher mark-to-market gains and other items partly offset these pressures.
- Regulated utility results were mixed: ComEd’s nine-month net income declined $240, while BGE, PHI, Pepco and ACE reported increases; PECO and DPL reported declines.
- Generation’s nine-month revenue declined $1,008, but revenues net of purchased power and fuel expense increased $179, including stronger mark-to-market results. Generation’s membership-interest net income declined $158.
Outlook, commentary, risks and unusual items
- Generation announced plans to retire Byron in September 2021 and Dresden in November 2021; Mystic Units 8 and 9 are planned to retire when their cost-of-service agreement ends in May 2024. The filing estimates net incremental pre-tax retirement-related expense of $925 in 2020 and $1,560 in 2021; actual amounts may differ. The Byron and Dresden decisions also increased nuclear decommissioning obligations.
- Management estimated COVID-19 reduced Generation net income by about $45 in Q3 and $140 for the first nine months, and Utility Registrants’ net income by about $15 and $65, respectively. Generation forecast a $15–$25 Q4 net-income reduction from lower load. The company identified about $250 in cost savings and said full-year savings were expected to exceed prior expectations. No clear full-year earnings guidance is provided in the filing text.
- ComEd’s DPA requires $200 payment to the U.S. Treasury, not recoverable from customers. At September 30, $100 was recorded as restricted cash; the remaining $100 was recorded as restricted cash in October. A customer motion seeking to redirect the payment remained pending, and the SEC investigation into lobbying activities continued. Exelon and ComEd said the investigation outcome could not be predicted.
- Generation’s nuclear economics remain exposed to capacity-market rules. The expanded PJM minimum offer price rule could impair state-supported nuclear plants’ ability to clear future auctions absent an alternative such as a fixed resource requirement program. Management said potential adverse impacts could be material but could not be estimated.
- COVID-19, customer credit losses, market prices, regulatory decisions, nuclear decommissioning funding and environmental remediation remain risks. The filing cites potential Byron supplemental decommissioning cash needs of up to $180 net of taxes over 10 years and possible financial assurance of up to $275. Environmental liabilities and litigation outcomes may exceed recorded estimates.
Most important facts for investors to verify
- Whether underlying earnings and cash generation recover, and how much reported results depend on mark-to-market and other non-GAAP exclusions.
- Actual costs, timing and decommissioning funding requirements associated with the Byron, Dresden and Mystic retirements.
- Resolution and consequences of the ComEd DPA payment dispute, the continuing SEC investigation and related lawsuits.
- Effects of PJM and NYISO capacity-market decisions on Generation’s nuclear fleet and the viability of proposed policy alternatives.
- Whether COVID-19 load, receivable collections, credit-loss allowances and cost-saving plans track management’s expectations.
- Debt maturities, financing access and liquidity needs, including collateral requirements if Generation’s credit rating declines.