Exelon Corporation (EXC) | Q1 2019 Form 10-Q
Business context and reporting period
Combined quarterly filing for Exelon and its generation and regulated utility subsidiaries. The unaudited period ended March 31, 2019; comparisons are with the three months ended March 31, 2018 unless noted. Exelon operates competitive generation and energy marketing businesses alongside regulated electric and gas utilities.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Operating revenue | $9.477 billion | $9.693 billion |
| Operating income | $1.218 billion | $1.101 billion |
| Net income | $966 million | $636 million |
| Net income attributable to common shareholders | $907 million | $585 million |
| Diluted EPS | $0.93 | $0.60 |
| Adjusted operating earnings (non-GAAP) | $846 million; $0.87/share | $925 million; $0.96/share |
| Operating cash flow | $1.044 billion | $1.502 billion |
| Capital expenditures | $1.873 billion | $1.880 billion |
- Operating margin was approximately 12.9%, versus 11.4% a year earlier. Revenue declined about 2.2%, while operating income increased.
- Operating cash flow less capital expenditures was negative $829 million, compared with negative $378 million in Q1 2018. Cash, cash equivalents and restricted cash totaled $1.314 billion at quarter-end.
- At March 31, total assets were $121.6 billion, total liabilities $87.9 billion and total equity $33.7 billion. Debt-related balances were about $37.1 billion, including short-term borrowings, current and long-term debt, and financing-trust debt.
- Current assets were $12.5 billion and current liabilities $12.2 billion. Exelon reported access to credit facilities; the filing describes aggregate commitments of $9.8 billion in its credit matters discussion.
- The $13.3 billion nuclear decommissioning trust balance is restricted for decommissioning purposes and is not general-purpose liquidity.
Material changes versus the prior comparable period
- GAAP net income attributable to common shareholders rose $322 million, but adjusted operating earnings fell $79 million. The GAAP increase was driven primarily by NDT investment gains versus losses in 2018, lower derivative mark-to-market losses, a TMI asset-retirement-obligation benefit and higher capacity prices.
- Exelon recorded $467 million of “Other, net,” compared with a $28 million deduction in Q1 2018; the 2019 amount included substantial NDT-related gains. These investment movements can make reported earnings volatile.
- Revenue fell $216 million at Generation, while its revenues net of purchased power and fuel expense declined $128 million. Management cited lower realized energy prices and the absence of prior-year Illinois ZEC revenue, partly offset by higher capacity prices and lower derivative mark-to-market losses.
- Utility performance was mixed: PECO, BGE and PHI reported higher net income, chiefly reflecting rate increases and lower storm costs; ComEd net income was $157 million versus $165 million.
- Exelon adopted the new lease accounting standard in 2019. It materially affected balance-sheet presentation through operating lease right-of-use assets and liabilities, but did not materially affect earnings or cash flows.
Outlook, management commentary and risks
- Management said operating cash flows were expected to cover operating expenses, financing costs and capital expenditures. The filing does not provide a clear full-year 2019 EPS guidance figure.
- Exelon forecast approximately $155 million of incremental pre-tax, non-cash TMI early-retirement charges for full-year 2019. TMI was expected to cease generation around September 30, 2019. Oyster Creek, shut in 2018, was expected to be transferred under its sale and decommissioning agreement in the second half of 2019, subject to conditions and approvals.
- Utilities expected approximately $29 billion of investment over five years, projected to increase rate base by about $13 billion by year-end 2023. Exelon also targeted an additional $250 million of cost savings by 2020 and approximately $200 million of annual ongoing cost reductions by 2021.
- Generation hedged 90%–93% of expected output for 2019, 64%–67% for 2020 and 38%–41% for 2021. Greater unhedged exposure in later years increases sensitivity to wholesale power prices.
- PG&E’s Chapter 11 filing triggered a default under Antelope Valley Solar Ranch’s nonrecourse debt. Approximately $502 million outstanding was classified as current, and distributions were suspended. Exelon reported about $750 million in related long-lived assets and no impairment at quarter-end, but a rejected power-purchase agreement could cause a material future impairment or further financing consequences.
- Other material uncertainties include nuclear plant economics and capacity-market rules; proposed or existing clean-energy support programs; Conowingo licensing conditions that could raise costs; environmental remediation and litigation; and potential collateral demands. A Generation downgrade below investment grade could require approximately $1.9 billion of additional collateral.
- Exelon declared a quarterly dividend of $0.3625 per share and stated a policy of 5% annual increases for 2018–2020, subject to future Board approval. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much Q1 GAAP earnings growth came from NDT gains and other nonrecurring or market-sensitive items, and whether adjusted earnings trends better reflect underlying performance.
- Whether PG&E bankruptcy proceedings lead to acceleration or restructuring of Antelope Valley debt, rejection or modification of its PPA, or impairment of the project’s assets.
- Progress and final costs for TMI shutdown and Oyster Creek transfer, including decommissioning obligations and funding requirements.
- Generation’s realized power prices, capacity revenues and hedge coverage as 2021 exposure remains substantially less hedged than 2019.
- Utility rate-case and FERC outcomes, including recovery of transmission-related tax regulatory assets and the expected timing and returns on planned capital investment.
- Cash-flow conversion, capital spending, debt maturities, credit-facility availability and any collateral requirements; restricted trust assets should not be treated as freely available cash.