Exelon Corporation — Q2 2019 Form 10-Q
Business context and reporting period. Exelon is a diversified energy holding company with competitive generation and regulated electric and gas utilities. This combined, unaudited filing covers the quarter and six months ended June 30, 2019, with comparisons to 2018. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenues | $7,689 | $8,076 | $17,166 | $17,769 |
| Operating income | $841 | $942 | $2,060 | $2,043 |
| Net income attributable to common shareholders | $484 | $539 | $1,391 | $1,125 |
| Diluted EPS | $0.50 | $0.56 | $1.43 | $1.16 |
| Adjusted operating earnings (non-GAAP) | $583 | $686 | $1,429 | $1,611 |
| Adjusted diluted EPS (non-GAAP) | $0.60 | $0.71 | $1.47 | $1.66 |
- Margins: Approximate GAAP operating margin was 10.9% in Q2 2019 versus 11.7% in Q2 2018; net margin attributable to common shareholders was approximately 6.3% versus 6.7%, respectively. These are calculated from reported figures.
- Cash flow: First-half operating cash flow was $2,898, down from $3,869. Capital expenditures were $3,572, implying a simple operating-cash-flow-less-capex deficit of $674, versus a $62 surplus in 2018. Investing cash outflow was $3,459; financing cash outflow was $42. Period-end cash, cash equivalents and restricted cash totaled $1,178.
- Debt and liquidity: At June 30, total liabilities were $87,689. Debt-related balances included $31,909 long-term debt, $3,776 due within one year, $1,059 short-term borrowings and $390 debt to financing trusts. The filing says the registrants expect cash flows to meet requirements and reports substantial revolving credit access; MD&A cites $9 billion of aggregate bank commitments, while the credit discussion cites $9.8 billion of aggregate commitments.
- Balance sheet: Total assets were $121,596 and total equity was $33,907. Current assets of $11,655 were below current liabilities of $12,934.
Material changes and operating drivers
- Q2 GAAP earnings fell $55 year over year, principally on lower realized energy prices and increased mark-to-market losses. Higher gains on nuclear decommissioning trust (NDT) investments, reduced accelerated depreciation following Oyster Creek’s 2018 shutdown, New Jersey ZEC approval and utility rate increases partly offset the decline.
- First-half GAAP earnings rose $266, while adjusted operating earnings fell $182. The GAAP improvement reflected, among other items, higher realized and unrealized NDT gains, lower retirement-related charges and a TMI asset-retirement-obligation remeasurement benefit. Lower realized energy prices and the absence of prior-year Illinois ZEC revenue were offsets.
- Generation’s first-half revenues net of purchased power and fuel expense declined to $4,009 from $4,517; management cited lower realized energy prices and reduced capacity prices in several regions. Nuclear fleet capacity factor improved to 96.1% from 94.8% for the six-month period.
- Utility results generally benefited from rate increases and, at some utilities, lower storm costs. PECO first-half net income increased to $270 from $210; PHI to $223 from $149; ComEd to $344 from $329; BGE to $206 from $179.
Outlook, risks and unusual items
- Management estimated approximately $155 million of 2019 pre-tax, non-cash incremental charges associated with TMI’s planned September 2019 shutdown. The filing reports $71 million of such charges for the first half, net of the TMI ARO remeasurement benefit.
- Exelon expected 2019 qualified pension contributions of approximately $300 million and anticipated levelized annual contributions of approximately $500 million beginning in 2020. Management said projected capital expenditures had not materially changed from the 2018 Form 10-K; this excerpt does not provide the projected total.
- Oyster Creek’s sale and transfer of decommissioning responsibilities to Holtec closed July 1, 2019; an immaterial loss was expected in Q3. Generation’s Antelope Valley solar project remains exposed to PG&E’s bankruptcy: about $500 million of its nonrecourse debt was classified as current after a default event, with lender acceleration rights outstanding; approximately $740 million of related long-lived assets were not impaired at quarter-end.
- Generation identified potential nuclear-market and regulatory risks. Dresden, Byron and Braidwood remained exposed to early-retirement risk; ZEC support for certain plants faced legal or market-rule challenges. The Conowingo license conditions could raise costs, and Exelon said the outcome and financial effect were uncertain.
- Other contingencies include environmental remediation and litigation exposures, nuclear insurance obligations, and regulatory proceedings. Exelon and ComEd disclosed a grand jury subpoena concerning Illinois lobbying activities and said they were cooperating. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
- The filing contains forward-looking statements subject to risks and cautions that actual results may differ; it does not provide a company-wide full-year earnings guidance figure in the supplied text.
Most important facts for investors to verify
- Whether Q2 earnings weakness from lower realized power prices and hedging mark-to-market losses continues, and how adjusted earnings compare with GAAP results.
- Resolution of the Antelope Valley lender default and PG&E bankruptcy-related PPA risk, including whether acceleration or impairment occurs.
- Timing and financial outcomes of pending utility rate cases, FERC transmission proceedings, and challenges to ZEC or capacity-market arrangements.
- Actual TMI shutdown, decommissioning funding and costs; and whether other nuclear plants face retirement decisions.
- Liquidity needs, near-term debt maturities, collateral exposure and the availability and terms of credit facilities.
- Updates on environmental reserves, including West Lake Landfill and Anacostia River matters, and on the Illinois lobbying subpoena.