Exelon Corporation — Q3 2019 Form 10-Q
Business context and reporting period. Exelon is a utility holding company with competitive power generation and regulated electric and gas utilities, including ComEd, PECO, BGE and Pepco Holdings. This combined filing covers the quarter and nine months ended September 30, 2019; financial statements are unaudited. Unless noted otherwise, amounts are in millions of dollars.
Financial results and key metrics
- Q3 revenue: $8,929, down 5.0% from $9,403 in Q3 2018. Competitive-business revenue declined to $4,499 from $4,971, while regulated utility revenue increased to $4,510 from $4,457.
- Q3 earnings: Operating income was $1,353, up from $1,146; net income attributable to common shareholders was $772, versus $733; diluted EPS was $0.79, versus $0.76. Operating margin, calculated as operating income divided by revenue, was approximately 15.2%, compared with 12.2%.
- Nine-month results: Revenue was $26,096, down from $27,170; operating income was $3,412, up from $3,189; net income attributable to common shareholders was $2,164, up from $1,858. Diluted EPS increased to $2.22 from $1.92. Calculated operating margin was approximately 13.1%, versus 11.7%.
- Adjusted operating earnings (non-GAAP): Q3 was $0.92 per diluted share, compared with $0.88. Nine-month adjusted earnings were $2.39 per share, compared with $2.55.
- Cash flow and investment: Nine-month operating cash flow was $5,399, down from $6,675. Capital expenditures were $5,259, versus $5,497; operating cash flow less capital expenditures was approximately $140, versus $1,178. Investing cash flow includes large, largely offsetting purchases and sales of nuclear decommissioning trust investments.
- Liquidity and debt: September 30 cash, cash equivalents and restricted cash totaled $2,178. Current assets were $12,206 and current liabilities $13,085. Balance-sheet long-term debt was $32,056, with $4,248 due within one year and $1,019 of short-term borrowings; $390 of debt to financing trusts was also reported separately. Exelon reported $9 billion of aggregate bank commitments and said liquidity was sufficient for expected needs.
- Capital returns: Exelon paid $1,055 in common dividends during the first nine months. The declared quarterly dividend was $0.3625 per share.
Material changes versus prior comparable periods
- Q3 common-shareholder earnings and EPS improved despite lower revenue, supported by fewer nuclear outage days, lower operating and maintenance costs, nuclear asset-retirement-obligation benefits, New York and New Jersey zero-emission credit (ZEC) revenues, and utility rate increases. Lower capacity prices, lower realized energy prices, reduced mark-to-market gains, and unfavorable PECO weather and volume partly offset these benefits.
- Nine-month earnings rose, with higher nuclear decommissioning trust (NDT) investment gains and lower costs associated with Oyster Creek’s prior-year retirement among the contributors. Lower realized energy and capacity prices, higher mark-to-market losses, and the absence of certain 2018 Illinois ZEC revenue were offsets.
- Generation’s nine-month revenues net of purchased power and fuel expense declined 10% to $6,132. Generation’s net income attributable to its membership interest nevertheless increased to $728 from $547, with NDT gains and reduced operating costs contributing.
- Operating cash flow fell by $1,276 year over year, reflecting working-capital and other changes, non-cash operating items and increased collateral posted, among other factors.
Outlook, risks and unusual items
- No company-wide 2019 EPS guidance is stated in the supplied filing text. Management said cash flows were expected to cover operating expenses, financing costs and capital expenditure requirements. Exelon announced an additional approximately $100 million in annual Generation cost savings targeted by 2022.
- Management estimated qualified pension contributions of approximately $300 million in 2019 and approximately $500 million annually beginning in 2020, subject to market conditions.
- Generation permanently ceased operations at Three Mile Island on September 20, 2019. Early-retirement charges were $113 for Q3 and $185 for the first nine months, before tax; the nine-month amount includes accelerated depreciation and other retirement-related effects, partly offset by an asset-retirement-obligation benefit. Oyster Creek was sold to Holtec on July 1, 2019; the sale loss was described as immaterial.
- Generation recorded a $164 pre-tax impairment of equity-method investments in distributed-energy companies, partly offset by noncontrolling-interest and tax effects; the filing says the net reduction to Exelon and Generation earnings was $15.
- PG&E’s Chapter 11 filing triggered a default under approximately $495 of Antelope Valley solar project nonrecourse debt, which remained classified as current. The facility had approximately $730 of net long-lived assets; the filing warns that rejection of its power-purchase agreement could lead to a material impairment.
- Exelon and ComEd received grand-jury subpoenas concerning Illinois lobbying activities; the SEC notified them it had opened an investigation. They said they were cooperating and could not predict the outcome.
- Generation’s Conowingo licensing settlement, signed after quarter-end, would entail estimated average costs of $11–$14 annually over a proposed 50-year license, subject to FERC approval and incorporation into a new license.
- Other notable exposures include potential additional environmental remediation costs, unresolved regulatory and rate proceedings, nuclear plant economics and market-price volatility, and collateral requirements if Generation loses investment-grade ratings. Exelon estimated that such a downgrade could require $1.5 billion of incremental Generation collateral.
Most important facts for investors to verify
- Progress and potential financial consequences of the SEC and U.S. Attorney investigations involving Exelon and ComEd.
- Whether PG&E’s bankruptcy affects the Antelope Valley power-purchase agreement, loan default or asset recoverability.
- Generation’s earnings and cash-flow sensitivity to power and capacity prices, ZEC programs, outages and potential early retirements.
- Timing and funding of capital spending, pension contributions, debt maturities and collateral obligations; assess cash flow after capital expenditures.
- Regulatory outcomes, including the Conowingo license and utility rate proceedings, and the range of possible environmental and litigation liabilities.
- Reconcile GAAP earnings with non-GAAP adjusted operating earnings and evaluate the effect of NDT investment gains and other unusual items.