Exelon Corporation 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2016. Exelon operates competitive power generation and regulated electric and gas utilities. The results include Pepco Holdings (PHI) from its March 23, 2016 acquisition date; accordingly, 2016 and 2015 consolidated comparisons are not fully comparable, particularly for the nine-month period. PHI applied acquisition accounting, while its utility subsidiaries Pepco, DPL and ACE did not.
Key financial metrics
| Exelon consolidated, $ millions except per-share data | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Operating revenue | 9,002 | 7,401 | 23,486 | 22,746 |
| Operating income | 1,267 | 1,200 | 2,399 | 3,701 |
| Net income attributable to common shareholders | 490 | 629 | 930 | 1,959 |
| Diluted EPS | $0.53 | $0.69 | $1.00 | $2.22 |
| Adjusted operating earnings (non-GAAP) | 841 | 757 | 2,078 | 1,880 |
| Adjusted diluted EPS (non-GAAP) | $0.91 | $0.83 | $2.24 | $2.13 |
GAAP operating margin was approximately 14.1% in Q3 2016 versus 16.2% in Q3 2015, and 10.2% for the first nine months of 2016 versus 16.3% in 2015. Revenue growth reflects the PHI acquisition and regulated utility increases; lower GAAP earnings include significant unusual expenses and market-related effects. The company reported dividends declared of $0.32 per share for Q3 2016, versus $0.31 a year earlier.
- Cash flow: Nine-month operating cash flow was $7.363 billion, versus $5.674 billion in 2015. Investing cash outflow was $13.219 billion, including $6.896 billion for acquisitions and $6.368 billion of capital expenditures. Financing cash inflow was $1.251 billion. Cash declined by $4.605 billion to $1.897 billion.
- Debt and liquidity: At September 30, cash was $1.897 billion; current assets and current liabilities were $12.208 billion and $12.158 billion, respectively. Reported short-term borrowings were $567 million, current maturities of long-term debt $2.512 billion, long-term debt $32.330 billion, and long-term debt to financing trusts $642 million. The company reported $9.5 billion of aggregate credit commitments, with $7.9 billion available after letters of credit; $40 million was drawn under bilateral facilities.
- Capital investment: Projected 2016 capital expenditures were $8.821 billion. Exelon said the utilities expect to invest about $25 billion over five years in infrastructure, with rate base projected to increase about $9 billion through 2020.
Material changes versus prior period
- Exelon’s Q3 GAAP common net income fell $139 million year over year, while nine-month income fell $1.029 billion. Adjusted operating earnings increased in both comparisons; the filing’s reconciliation excludes, among other items, merger commitments, nuclear retirements, asset impairments and the tax case.
- PHI was acquired for approximately $7.142 billion. Preliminary purchase accounting recorded $4.0 billion of goodwill and a net $1.5 billion liability for acquired energy contracts. The fair-value allocation remained subject to finalization.
- PHI merger-related regulatory commitments were estimated at $513 million nominal, excluding renewable-generation commitments; the filing cited $444 million on a net-present-value basis excluding renewable generation and charitable contributions. Regulatory approval and allocation details remained subject to review in some jurisdictions.
- Generation acquired ConEdison Solutions’ competitive retail energy business on September 1 for $257 million. No goodwill was recorded in the preliminary allocation.
Outlook, management commentary, risks and unusual items
- Management described regulated utilities as a source of steadier earnings and Generation as a source of free cash flow, while emphasizing operating discipline, investment-grade credit metrics and dividend growth. The dividend policy targets 2.5% annual increases for three years beginning with the June 2016 dividend, subject to Board approval.
- A cost-management program targets about $350 million of O&M savings and $50 million of capital-cost savings; management expected about 35% of run-rate savings by end-2016 and full realization in 2018, with a projected EPS benefit of $0.13–$0.18 from 2018 onward.
- Generation announced planned shutdowns of Clinton on June 1, 2017 and Quad Cities on June 1, 2018 after adverse capacity-auction results and limited progress on policy or market reforms. The decision generated $146 million of one-time charges; accelerated depreciation, nuclear-fuel amortization and related items added $443 million of pre-tax expense through September. TMI, Ginna and Nine Mile Point also faced economic or policy uncertainty.
- The New York Zero Emission Credit program set a first-tranche price of $17.48/MWh, but contracts and legal challenges were unresolved. Generation’s proposed $110 million FitzPatrick purchase remained subject to regulatory approval; it also involved $200–$250 million of expected incremental refueling and operating costs before closing.
- The Tax Court rejected Exelon’s like-kind-exchange tax position and upheld a penalty. Exelon recorded an approximately $200 million charge and estimated a gross payment of about $1.4 billion in early 2017, with an estimated net cash outflow of about $1 billion after anticipated tax benefits. Exelon deposited about $1.25 billion with the IRS in October 2016, after quarter-end, and intended to appeal.
- Other notable exposures include a $52 million BGE charge following smart-grid cost disallowances, possible further nuclear decommissioning funding requirements, environmental remediation and litigation, regulatory rate-case outcomes, commodity prices and collateral demands. The filing reports a potential $1.9 billion of additional Generation collateral if it were downgraded below investment grade.
Most important facts for investors to verify
- Reconcile reported GAAP results with adjusted earnings, and distinguish PHI’s post-acquisition contribution from comparable legacy results.
- Confirm the timing, final amount, appeal status and cash impact of the like-kind-exchange tax payment and related tax benefits.
- Track execution and regulatory approval of PHI merger commitments, cost savings and the integration plan.
- Assess the economics, decommissioning funding and potential guarantees associated with announced or at-risk nuclear plant retirements, including the FitzPatrick transaction and New York ZEC contracts.
- Review available liquidity and refinancing needs in light of higher debt, capital spending, collateral exposure and the cash balance decline.
- Monitor utility rate decisions, BGE smart-grid disallowances, Pepco’s potential bill-stabilization refunds, environmental matters and other contingencies.