Exelon Corporation — FY 2017 Form 10-K
Business context and reporting period
For the fiscal year ended December 31, 2017. Exelon combines competitive generation and energy marketing through Generation with regulated electric and gas delivery utilities, including the businesses acquired in the 2016 Pepco Holdings (PHI) merger. The 2016 comparison includes PHI only from March 24 through year-end, limiting comparability.
Financial results and position
| Metric | 2017 | 2016 |
|---|---|---|
| Operating revenues | $33.531 billion | $31.360 billion |
| Operating income | $4.260 billion | $3.112 billion |
| Net income attributable to common shareholders | $3.770 billion | $1.134 billion |
| Diluted GAAP EPS | $3.97 | $1.22 |
| Adjusted operating earnings (non-GAAP) | $2.471 billion; $2.60 per diluted share | $2.488 billion; $2.68 per diluted share |
| Cash from operations | $7.480 billion | $8.445 billion |
| Capital expenditures | $7.584 billion | $8.553 billion |
| Long-term debt, including financing trusts | $32.565 billion | $32.216 billion |
Revenue increased about 7%; adjusted operating earnings per share declined about 3%. The much larger increase in GAAP earnings reflects significant tax and other nonrecurring items. Cash from operations fell about 11%; cash from operations less capital expenditures was negative $104 million. Year-end assets were $116.700 billion, current assets $11.834 billion, current liabilities $10.796 billion, and shareholders’ equity $29.857 billion. Exelon reported $8.333 billion of available capacity under its principal credit facilities.
Material changes versus the prior period
- Generation’s results included a $1.299 billion income-tax benefit from remeasuring deferred taxes after enactment of the Tax Cuts and Jobs Act (TCJA), materially boosting GAAP earnings; management’s adjusted measure excludes the impact.
- Generation recorded a $460 million pre-tax impairment on EGTP assets held for sale and, after EGTP’s November Chapter 11 filing and deconsolidation, a $213 million pre-tax gain.
- Generation acquired the FitzPatrick nuclear station for $289 million and recorded a $233 million after-tax bargain-purchase gain.
- PHI contributed a full year of results in 2017 versus approximately nine months in 2016. Utility rate increases also supported revenue, while Generation’s net revenue after purchased power and fuel was pressured by lower realized prices and mark-to-market losses.
- Generation’s nuclear fleet capacity factor was 94.1%, versus 94.6% in 2016. TMI’s planned retirement led to $262 million of incremental 2017 pre-tax noncash expense, primarily accelerated depreciation and nuclear fuel amortization.
Outlook, commentary, risks and unusual items
- Management expects the TCJA to increase Exelon adjusted operating EPS by about $0.10 on a run-rate basis in 2019. Generation’s projected effective tax rate is approximately 22% for 2018–2020; management estimates Generation operating cash flows could rise $1.2–$1.6 billion over 2018–2021 from tax changes and full expensing.
- Utility rate regulators determine the amount and timing of tax savings passed to customers. Exelon estimates roughly $26 billion of utility infrastructure investment over five years, projected to add about $15 billion to rate base by the end of 2022. Exelon also targets an additional $250 million of cost savings by 2020, following a separate $400 million program expected to be fully realized in 2018.
- The board’s dividend policy calls for 5% annual increases from 2018 through 2020; the first-quarter 2018 dividend was declared at $0.345 per share.
- Oyster Creek retirement was announced in February 2018 for October 2018. Estimated 2018 charges include $25–$35 million pre-tax one-time costs and substantial incremental noncash depreciation and fuel amortization.
- Key risks include sustained low wholesale power prices, regulatory and market-design changes, challenges to Illinois and New York zero-emission credit programs, nuclear operating and decommissioning costs, environmental remediation, and uncertainty about TCJA implementation. The filing reports no material weakness in internal control; the independent auditor issued an unqualified opinion on Exelon’s financial statements.
Most important facts for investors to verify
- Reconcile GAAP EPS of $3.97 with adjusted EPS of $2.60, particularly the TCJA deferred-tax remeasurement, trust investment gains, EGTP impairment/deconsolidation, and acquisition gain.
- Track the IRS like-kind-exchange appeal: the filing estimates approximately $950 million net cash outflow after interest-related tax benefits, with about $300 million attributable to ComEd under Exelon’s hold-harmless agreement.
- Monitor ZEC program litigation and capacity-market treatment, as adverse outcomes could affect nuclear revenues and plant economics.
- Assess the financial effects of TMI and Oyster Creek retirements, including decommissioning funding, cash costs, and accelerated noncash charges.
- Check actual 2018 utility investment, customer pass-through of TCJA savings, cash generation, debt, and delivery of announced cost savings against management’s estimates.