Business context and reporting period
Exelon Corporation’s unaudited combined Form 10-Q covers the quarter and nine months ended September 30, 2018, with comparisons to 2017. Exelon combines its competitive generation business with regulated utilities, including ComEd, PECO, BGE and Pepco Holdings’ utilities. Unless stated otherwise, financial amounts below are in millions of dollars.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $9,403 | $8,768 | $27,170 | $25,180 |
| Operating income | $1,146 | $1,499 | $3,189 | $3,105 |
| Net income attributable to common shareholders | $733 | $823 | $1,858 | $1,907 |
| Diluted EPS | $0.76 | $0.85 | $1.92 | $2.02 |
| Adjusted operating earnings (non-GAAP) | $856 | $820 | $2,467 | $1,943 |
| Adjusted diluted EPS (non-GAAP) | $0.88 | $0.85 | $2.55 | $2.06 |
- Nine-month operating cash flow was $6,675, versus $5,673 in 2017; capital expenditures were $5,497, versus $5,556. Cash, cash equivalents and restricted cash totaled $2,321 at September 30, 2018.
- At September 30, Exelon reported $35,290 of long-term debt, including amounts due within one year; $834 of short-term borrowings; and $390 of debt to financing trusts. Long-term debt was $32,947 at year-end 2017, excluding current maturities and financing-trust debt.
- Exelon reported $119,485 in total assets, $86,097 in liabilities and $33,388 in equity. Its $9,403 of Q3 operating revenue and $1,146 of operating income compare with $8,768 and $1,499, respectively, in Q3 2017.
- The company declared quarterly dividends of $0.345 per share in 2018; dividends declared for the first nine months totaled $1.04 per share.
Material changes versus the prior comparable period
- Nine-month revenue rose about 8%, but net income attributable to common shareholders fell 3% and diluted EPS declined from $2.02 to $1.92. Adjusted operating earnings increased from $1,943 to $2,467; this is a non-GAAP measure and is not directly comparable to GAAP net income.
- Q3 operating income and common-shareholder net income declined despite higher revenue. Management cited weaker Generation revenue net of purchased power and fuel, including lower realized energy prices, more nuclear outage days and the absence of EGTP results after its 2017 deconsolidation. Lower tax expense partly supported earnings.
- For the nine months, Generation revenue net of purchased power and fuel increased, supported by Illinois and New York zero-emission credits, higher capacity prices, FitzPatrick and fewer outage days. These gains were partly offset by lower realized energy prices and EGTP’s deconsolidation. The prior-year period included a $233 million bargain purchase gain on FitzPatrick.
- Lower operating and maintenance expense year to date reflected the absence of 2017 EGTP impairments and lower merger, outage and other costs; higher depreciation included accelerated charges associated with early plant retirements. Utility revenues also reflected customer pass-backs of Tax Cuts and Jobs Act (TCJA) tax savings.
Outlook, management commentary, risks and unusual items
- Management projected 2018 capital expenditures of approximately $7.85 billion. It also described approximately $28 billion of planned utility infrastructure investment over five years, expected to increase rate base by about $11 billion by the end of 2022. These are plans, not guaranteed outcomes.
- Exelon said it expected operating cash flows, credit-market access and facilities to fund operations and investment. At September 30, it reported $9 billion of syndicated revolving credit commitments and approximately $8 billion of available capacity across facilities. Management’s investment-grade credit objective is important: a Generation downgrade below investment grade could require about $1.8 billion of additional collateral.
- Generation had hedged 98%–101% of expected output for 2018, 82%–85% for 2019 and 48%–51% for 2020, leaving greater commodity-price exposure in later years. Low power prices, market competition and nuclear-market rules remain risks.
- Oyster Creek permanently stopped generating on September 17, 2018; its sale and decommissioning transaction was expected to close in the second half of 2019, subject to approvals. TMI was scheduled to cease operations around September 2019. Generation also identified Mystic units for potential retirement absent market and reliability changes; FERC proceedings and a January 2019 decision deadline were pending.
- Early retirement decisions generated $525 million of incremental pretax expense in the first nine months, including $441 million of accelerated depreciation, $52 million of nuclear-fuel amortization and $32 million of operating and maintenance costs. Separately, Oyster Creek ARO remeasurement added an $84 million pretax charge; Pepco recorded a $22 million charge for asbestos-related AROs at Buzzard Point. Generation also recorded a $41 million wind-asset impairment.
- Significant regulatory and environmental uncertainties include FERC proceedings over transmission-related tax assets, Conowingo license conditions that could increase costs, nuclear-support and capacity-market proceedings, and remediation obligations. Exelon disclosed that a court decision increased unrecognized tax benefits by about $71 million, of which approximately $20 million affected Q3 earnings. The Seventh Circuit affirmed the adverse decision in Exelon’s like-kind exchange tax litigation in October 2018; further appeal was under evaluation.
- Management’s dividend policy called for 5% annual increases through 2020, beginning with the March 2018 dividend; future dividends remain subject to board approval. The filing does not provide a clear quantified earnings forecast.
Most important facts for investors to verify
- Reconcile GAAP earnings and EPS with adjusted operating earnings, including exclusions for retirements, mark-to-market activity and nuclear trust investment gains or losses.
- Track Generation’s realized power prices, outage performance, hedge coverage and the outcome of Mystic and other nuclear-support proceedings.
- Confirm Oyster Creek sale approvals and final decommissioning terms, and monitor TMI shutdown costs and NRC funding requirements.
- Review FERC decisions, customer tax-savings pass-backs, pending utility rate cases and the potential for additional tax, environmental or litigation charges.
- Assess debt maturities, available credit capacity, collateral requirements and planned capital spending against actual operating cash flows.