Business context and reporting period
Exelon Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2020. Exelon combines competitive power generation and marketing with regulated electric and gas utilities, including ComEd, PECO, BGE and Pepco Holdings. Comparisons are with the corresponding 2019 periods. Amounts below are in millions of dollars unless noted.
Financial results and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $7,322 | $7,689 | $16,069 | $17,166 |
| Operating income | $565 | $841 | $1,784 | $2,060 |
| Net income attributable to common shareholders | $521 | $484 | $1,103 | $1,391 |
| Diluted EPS | $0.53 | $0.50 | $1.13 | $1.43 |
| Adjusted operating earnings, non-GAAP | $536 | $583 | $1,387 | $1,429 |
Q2 revenue fell about 5% year over year, while common-shareholder net income rose about 8%; the increase reflected, among other items, stronger NDT investment and mark-to-market results. Six-month revenue declined about 6% and common-shareholder net income fell about 21%. Adjusted operating earnings declined about 8% in Q2 and 3% year to date. Approximate operating margin was 7.7% in Q2 versus 10.9% in 2019, and 11.1% year to date versus 12.0%.
Six-month operating cash flow was $2,680, down from $2,898. Capital expenditures were $3,773, and cash, cash equivalents and restricted cash ended the period at $2,680, including $2,129 of cash and cash equivalents. At June 30, total debt was approximately $40,135, including short-term borrowings, current and long-term debt, and debt to financing trusts; long-term debt fair value exceeded its carrying amount. Current assets were $12,533 and current liabilities $11,065. Exelon reported $10.7 billion of aggregate credit-facility commitments, with $8.6 billion available to support commercial paper.
Material changes versus the prior comparable period
- Q2 operating income dropped $276; higher operating and maintenance costs, lower competitive-business revenue and reduced load weighed on results. Generation’s lower fuel and purchased-power costs and lower depreciation partly offset these pressures.
- Year-to-date common-shareholder earnings were down $288. Management cited the ComEd Deferred Prosecution Agreement payment, NDT investment losses, lower capacity revenue, COVID-related load reductions and costs, higher nuclear outage days, storm costs, and lower allowed electric-distribution ROE.
- Generation’s Q2 membership-interest earnings increased to $476 from $108, substantially affected by NDT and mark-to-market gains. Its six-month earnings rose to $521 from $472, while revenues net of purchased power and fuel expense declined to $3,967 from $4,009.
- ComEd recorded a Q2 net loss of $61 versus income of $186 a year earlier, including the $200 DPA charge. PECO’s six-month net income declined to $178 from $270; PHI’s fell to $202 from $223. BGE’s six-month income rose to $219 from $206, while ACE’s rose to $31 from $24.
Outlook, commentary, risks and unusual items
- COVID-19: Management estimated a net-income impact of approximately $100 at Generation and $50 at the Utility Registrants for the three and six months ended June 30; the filing’s wording does not clearly allocate these estimates between the quarter and year-to-date periods. It projected second-half load-related net-income reductions of $50–$100 at Generation and $10–$25 at the utilities. Generation also estimated second-half credit-loss expense could reduce net income by $15–$50. Management identified approximately $250 of cost savings it was pursuing to offset impacts. These are estimates, not formal earnings guidance.
- ComEd DPA: The July 17, 2020 agreement requires $200 to be paid to the U.S. Treasury and sets a three-year deferred-prosecution period with compliance obligations. The charge was recorded in Q2 operating and maintenance expense, is not recoverable from customers, and is excluded from adjusted operating earnings. The SEC investigation and related civil claims remained unresolved; potential losses were not estimable.
- Generation and market exposure: FERC’s expanded PJM minimum-offer-price rule may impair capacity revenues for state-supported nuclear plants unless alternative arrangements, such as an FRR mechanism, are implemented. Management warned of potential material adverse effects but said they could not be reasonably estimated. Dresden, Byron, Braidwood and LaSalle remained subject to economic-distress and potential impairment concerns.
- Liquidity and financing: Generation drew $1.5 billion on its revolving facility during March market disruption and repaid it in April. Exelon said the registrants had completed planned 2020 long-term debt issuance; approximately $600 of Exelon and Generation debt remained due in Q4. ComEd’s long-term issuer rating was lowered by S&P on July 21 from A- to BBB+; its senior secured and short-term ratings were affirmed.
- Other items: A federal tax settlement increased Exelon’s and Generation’s Q1 net income by $76 and $73, respectively. NDT investment volatility materially affected GAAP results. PG&E emerged from bankruptcy July 1 and was to honor Antelope Valley’s existing power purchase agreement. The filing states registrants were in compliance with debt covenants at June 30.
Important facts for investors to verify
- Reconcile GAAP earnings with adjusted operating earnings, particularly the effects of NDT returns, hedge marks, the tax settlement and the DPA charge.
- Track the DPA payment schedule, compliance requirements, ongoing SEC investigation and related litigation, including any new estimated contingencies.
- Monitor COVID-19 load, customer credit losses, disconnection moratoria, regulatory recovery timing and the realization of targeted cost savings.
- Review nuclear capacity-market outcomes, MOPR/FRR developments, and any impairment or early-retirement indicators for Generation assets.
- Assess debt maturities, financing costs, available facility capacity, collateral needs and the implications of ComEd’s rating downgrade.