Exelon Corporation — Q1 2017 Form 10-Q
Business context and reporting period. This combined filing covers Exelon Corporation and its generation and regulated utility subsidiaries for the three months ended March 31, 2017. Exelon operates competitive power generation and regulated electric and gas utilities. The 2016 comparison includes Pepco Holdings (PHI) only from March 24, 2016; PHI’s acquisition accounting also means its predecessor and successor results are not directly comparable.
Key financial results
Amounts below are in millions, except per-share data.
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Operating revenue | $8,757 | $7,573 | Up $1,184; substantially affected by including PHI for the full quarter in 2017 versus eight days in 2016. |
| Operating income | $1,296 | $483 | Includes a $226 after-tax bargain purchase gain on the FitzPatrick acquisition. |
| Net income attributable to common shareholders | $995 | $173 | Up $822; includes material acquisition and tax-related items. |
| Diluted EPS | $1.07 | $0.19 | Adjusted (non-GAAP) operating earnings were $605, or $0.65 per diluted share, versus $632, or $0.68. |
| Operating cash flow | $1,201 | $1,473 | Down $272. |
| Capital expenditures | $2,114 | $2,202 | Cash outflow; 2017 full-year projected capital expenditures are $8,225. |
| Cash and cash equivalents | $609 at March 31 | $635 at December 31, 2016 | Quarter-end cash declined by $26. |
| Debt | $2,048 short-term borrowings; $34,689 long-term debt including current maturities | $1,267 short-term; $34,005 long-term including current maturities at December 31, 2016 | Debt balances increased overall; the filing reports $3,645 of long-term debt due within one year. |
| Current assets / current liabilities | $12,194 / $14,437 | $12,412 / $13,457 at December 31, 2016 | Current liabilities exceeded current assets at quarter-end. |
| Dividend | $0.33 per share declared | $0.31 per share declared | Board policy targets 2.5% annual increases for three years beginning with the June 2016 dividend; future dividends remain subject to Board approval. |
Material changes and management commentary
- Exelon’s reported earnings rose sharply, but adjusted operating earnings declined to $605 million from $632 million. Management cited lower Generation margins, including mark-to-market losses versus gains a year earlier; regulated utility improvements partly offset those pressures.
- Generation’s revenue net of purchased power and fuel expense was $2,090, down $207. Results reflected $49 of economic hedge mark-to-market losses versus $103 of gains in 2016, lower realized energy and capacity prices, and natural-gas portfolio effects. Nuclear fleet capacity factor was 94.0%, compared with 95.8%, largely due to more refueling outage days.
- ComEd net income rose to $141 from $115, supported by distribution and transmission formula-rate earnings and increased capital investment. BGE net income attributable to common shareholders increased to $125 from $98, primarily reflecting higher distribution rates and lower storm costs. PECO net income was $127 versus $124.
- PHI’s 2017 net income was $140. Utility results improved from the brief 2016 post-acquisition successor period, which recorded a $309 net loss, including substantial merger-related costs; comparisons are not like-for-like.
- Exelon reported a $146 reduction in uncertain tax benefits following IRS guidance supporting the deductibility of certain merger commitments. The like-kind exchange dispute remains significant: Exelon expects to pay about $1.3 billion, including $300 million attributable to ComEd, when appealing the Tax Court decision in Q3 2017. After estimated interest-related tax benefits, the company estimates a net cash outflow of about $950 million; $1.25 billion had already been deposited with the IRS.
Outlook, risks and contingencies
- Investment and cost program: Exelon projects $8.225 billion of 2017 capital expenditures. The utilities expect approximately $25 billion of investment over five years, with rate base projected to increase about $9 billion by the end of 2021. The company expects to achieve about 60% of targeted run-rate cost savings by the end of 2017 and full savings in 2018; targets are approximately $350 million in operating and maintenance savings and $50 million in capital-cost savings.
- Generation and nuclear policy: Management’s nuclear economics depend on power and capacity prices and state support programs. Illinois and New York zero-emission credit programs face legal challenges. If the programs do not operate as expected, Clinton, Quad Cities, Ginna, Nine Mile Point and FitzPatrick could again face heightened early-retirement risk. Three Mile Island is identified as the plant at greatest current risk, following repeated failure to clear PJM capacity auctions.
- Subsequent event—EGTP: On May 2, 2017, the ERCOT generation subsidiary EGTP agreed with lenders to begin an orderly asset sale. Exelon expects to classify assets and liabilities as held for sale and record a $300–$400 million pre-tax impairment in Q2. The filing says the matter has no direct effect on other Exelon or Generation debt or credit facilities.
- Market and liquidity exposure: Generation had hedged 97%–100% of expected 2017 generation, 60%–63% for 2018 and 30%–33% for 2019. A downgrade below investment grade could require Generation to post an additional $1.8 billion of collateral. Exelon reported $8.0 billion of available capacity under its credit facilities at quarter-end.
- Tax, regulatory and legal matters: The IRS payment and appeal, ZEC litigation, utility rate proceedings, environmental remediation and nuclear decommissioning obligations may affect future cash flows. Potential outcomes and timing are uncertain. Management also warned that potential federal tax reform could materially affect the regulated utilities, including through customer-rate adjustments.
- Accounting and comparability: Management expected no material amount or timing impact from the forthcoming revenue-recognition standard based on its preliminary assessment, but anticipated more detailed disclosures; implementation issues remained open. Interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- How much of the $995 million GAAP common income reflects recurring operations, versus the FitzPatrick bargain purchase gain, tax benefits, nuclear trust investment gains and hedge revaluation.
- Whether the estimated $950 million net cash outflow for the like-kind exchange is finalized, and its timing, appeal outcome and effect on Exelon and ComEd liquidity.
- EGTP sale proceeds, impairment, debt repayment and any subsequent effects on Generation’s reported results.
- Legal and regulatory outcomes for Illinois and New York ZEC programs, rate cases, and any resulting changes to nuclear plant economics or utility recovery.
- Generation’s commodity prices, hedge coverage and collateral requirements, alongside planned capital spending, cash generation and debt maturities.