EXELON CORP quarterly report, Q2 FY2018

Exelon Corporation — Q2 2018 Form 10-Q

Business context and period. Exelon is a utility holding company with competitive generation and regulated electric and gas utilities. This combined filing covers Exelon and its subsidiaries for the quarter and six months ended June 30, 2018; financial figures below are consolidated and in millions of dollars unless stated otherwise.

Financial results and liquidity

Metric	Q2 2018	Q2 2017	Six months 2018	Six months 2017
Operating revenue	$8,076	$7,665	$17,769	$16,413
Operating income	$942	$300	$2,043	$1,608
Net income attributable to common shareholders	$539	$95	$1,125	$1,086
Diluted EPS	$0.56	$0.10	$1.16	$1.17
Adjusted operating earnings (non-GAAP)	$686; $0.71/share	$524; $0.56/share	$1,611; $1.66/share	$1,124; $1.21/share

• Operating margin was approximately 11.7% in Q2 2018 versus 3.9% in Q2 2017, and 11.5% for the first half versus 9.8% a year earlier.
• First-half operating cash flow was $3,869, up from $2,895. Capital expenditures were $3,807, compared with $3,845; cash flow after capital expenditures was therefore approximately $62.
• At June 30, cash and cash equivalents were $694; restricted cash was $206 current, with additional restricted cash classified in other long-term assets. Cash, cash equivalents and restricted cash reported in the cash-flow statement totaled $1,028.
• Long-term debt was $33,179, with $1,158 due within one year; short-term borrowings were $1,252. The filing reports $34,337 of long-term debt including current maturities, before short-term borrowings.
• Current assets were $11,489 and current liabilities $9,626. Total assets were $117,249, total liabilities $84,410, and total equity $32,839.
• Exelon reported $9.5 billion of aggregate credit-facility commitments and $8.0 billion available at June 30. First-half common dividends paid were $666; dividends declared were $0.35 per share for Q2.

Material changes versus prior periods

• Q2 GAAP earnings rose sharply, but the comparison was affected by Generation’s commodity hedge mark-to-market results: a $90 million gain in Q2 2018 versus a $184 million loss in Q2 2017. Generation’s nuclear decommissioning trust investment results also weighed on 2018 other income.
• Q2 operating and maintenance expense fell $638 million year over year, mainly because 2017 included substantial EGTP impairment and TMI retirement-related charges, as well as higher outage and other costs. First-half O&M declined $692 million.
• First-half GAAP EPS was slightly lower despite higher net income. The 2017 comparison included a $226 million bargain purchase gain from the FitzPatrick acquisition; 2018 included $60 million of gains on asset sales and higher depreciation and amortization.
• First-half depreciation and amortization increased $368 million, partly reflecting capital investment and accelerated charges from planned TMI and Oyster Creek retirements. Exelon recorded $351 million of incremental pre-tax retirement-related expense in the first half.
• First-half adjusted operating earnings increased to $1.66 per diluted share from $1.21, after excluding specified items including hedge and decommissioning-trust gains or losses, impairments and plant-retirement costs. This non-GAAP measure is management-defined.
• Results varied by subsidiary: Generation reported first-half net income attributable to membership interest of $314 million versus $184 million; PHI reported $149 million versus $205 million. ComEd, BGE and PECO reported first-half net income of $329 million, $179 million and $210 million, respectively.

Outlook, commentary, risks and unusual items

• Management expects cash flows, credit-market access and credit facilities to support operating costs, financing and capital requirements. Projected 2018 capital expenditures were approximately $7.9 billion. The utilities anticipate about $26 billion of infrastructure investment over five years, with rate base projected to increase about $11 billion by year-end 2022.
• Exelon’s stated dividend policy called for 5% annual increases through 2020, beginning with the March 2018 dividend; the Q3 2018 dividend of $0.345 per share had been declared. The supplied filing text does not provide a clear full-year 2018 EPS guidance figure.
• Generation had hedged 97%–100% of expected output for 2018, 71%–74% for 2019 and 41%–44% for 2020. Management cautions that later-year exposure is higher; a $5/MWh reduction in average around-the-clock power prices was estimated to increase 2018 pre-tax income by about $13 million but reduce it by about $269 million in 2019 and $549 million in 2020, based on June 30 positions and assumptions.
• TMI was scheduled to cease generation around September 2019; Oyster Creek was expected to shut by October 2018. Retirement decisions generated $351 million of incremental pre-tax expense in the first half. Management projected total 2018 retirement-related incremental expense of $635 million and $340 million in 2019; actual amounts may differ.
• After quarter-end, Generation agreed to sell and decommission Oyster Creek. Exelon estimated a $60 million–$100 million pre-tax Q3 charge from remeasuring the decommissioning obligation; closing remained subject to regulatory and other conditions. Also after quarter-end, Generation agreed to acquire FirstEnergy Solutions’ load business for $140 million, subject to bankruptcy-auction and regulatory conditions.
• Mystic units 8 and 9 faced possible retirement in 2022 absent reliability and fuel-security solutions. FERC proceedings could provide temporary cost-of-service compensation, but future market rules and outcomes remained uncertain; further adverse developments could cause material impairment.
• Key regulatory and legal uncertainties include challenges to Illinois and New York zero-emission credit programs; potential expanded PJM/NYISO market mitigation of supported generation; and FERC recovery of transmission-related tax regulatory assets. Exelon disclosed potential additional income-tax charges of up to $84 million across the affected registrants if certain prospective recovery is no longer probable.
• Environmental and other contingencies include the West Lake Landfill remediation, estimated at about $340 million for all potentially responsible parties, with Exelon’s share uncertain; an additional groundwater study estimated at $20 million total; and potentially material Conowingo license conditions that Generation challenged. The filing states that some ultimate costs cannot yet be reasonably estimated.
• Generation disclosed $1.5 billion of potential additional collateral if downgraded below investment grade. Exelon also reported $1.176 billion of net counterparty exposure for Generation after collateral and netting, including $206 million to one counterparty exceeding 10% of net exposure.

Most important facts for investors to verify

• How much of Q2’s GAAP earnings improvement reflects repeatable operations versus mark-to-market movements, trust-fund performance and prior-year impairment or retirement charges; reconcile GAAP and adjusted earnings.
• Whether Generation’s ZEC support, capacity-market rules and Mystic proceedings sustain earnings and avoid further impairments or earlier retirements.
• The final cost, timing and funding implications of TMI and Oyster Creek retirements and the Oyster Creek decommissioning transaction.
• Utility rate-case outcomes, customer refunds of TCJA savings, and FERC decisions on transmission tax-asset recovery.
• Capital spending, cash generation, debt maturities, facility availability and collateral needs under adverse commodity-price or credit-rating scenarios.
• Developments and potential Exelon exposure in West Lake, Conowingo, tax litigation and other environmental or nuclear contingencies.