Business context and reporting period
Exelon Corporation’s combined Form 10-Q covers the unaudited three months ended March 31, 2018, compared with the first quarter of 2017. Exelon operates competitive power generation and energy marketing businesses through Generation and regulated electric and gas utilities, including ComEd, PECO, BGE and Pepco Holdings’ utilities. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $9,693 | $8,747 | +$946 |
| Operating income | $1,101 | $1,308 | −$207 |
| Net income | $636 | $971 | −$335 |
| Net income attributable to common shareholders | $585 | $990 | −$405 |
| Diluted EPS | $0.60 | $1.06 | −$0.46 |
| Adjusted operating earnings, non-GAAP | $925; $0.96 per diluted share | $600; $0.64 per diluted share | +$325; +$0.32 per share |
| Cash from operating activities | $1,502 | $1,074 | +$428 |
| Capital expenditures | $1,880 | $2,009 | −$129 |
Operating margin was approximately 11.4%, versus 15.0% in Q1 2017; net margin attributable to common shareholders was approximately 6.0%, versus 11.3%. Adjusted operating earnings are a company-defined non-GAAP measure and are not directly comparable across issuers.
- Cash and liquidity: At March 31, cash and cash equivalents were $787, restricted cash was $209, and cash, cash equivalents and restricted cash as presented in the cash flow statement totaled $1,099. Current assets were $11,533 and current liabilities $10,153, a current ratio of about 1.14.
- Debt: Short-term borrowings were $1,654; long-term debt due within one year was $1,203; long-term debt was $32,905; and debt to financing trusts was $389. These categories total approximately $36.2 billion, up from approximately $35.6 billion at December 31, 2017.
- Cash uses and financing: Operating cash flow less capital expenditures was negative $378 million before other investing items. Exelon reported $333 million of common dividends paid. Financing activities included $1,130 million of long-term debt issuance and $1,241 million of long-term debt retirement.
- Available credit: The filing reports $8.0 billion of available capacity under credit facilities at March 31, 2018. Management said expected cash flows, capital-market access and credit facilities provide sufficient liquidity.
Material changes versus the prior comparable period
- Revenue rose 10.8%, led by competitive generation revenues and higher regulated utility revenues. Generation’s revenue net of purchased power and fuel expense, a non-GAAP measure, increased $139 million to $2,219 million.
- Despite higher revenue, GAAP operating income declined. Q1 2017 included a $226 million bargain purchase gain from the FitzPatrick acquisition; there was no comparable gain in 2018. Q1 2018 also had $178 million of pre-tax expense associated with the early retirement decisions for Oyster Creek and Three Mile Island.
- GAAP net income also reflected a $285 million year-over-year decline in “Other, net,” primarily because nuclear decommissioning trust investments had realized and unrealized losses in Q1 2018 versus gains in Q1 2017. Generation’s mark-to-market economic hedging losses were $266 million in Q1 2018, versus $49 million in Q1 2017.
- Management’s adjusted operating earnings increased to $925 million from $600 million. The reconciliation removes items including economic-hedge mark-to-market effects, decommissioning-trust investment losses, plant retirement and divestiture items, and other specified adjustments.
- Operating cash flow increased, partly reflecting changes in working capital and higher non-cash adjustments. Utility operating results varied: ComEd net income rose to $165 million from $141 million; PECO fell to $113 million from $127 million; BGE was $128 million versus $125 million; and PHI fell to $65 million from $140 million.
Outlook, management commentary, risks and unusual items
- Generation and nuclear policy: Generation recognized approximately $202 million of Illinois zero-emission credit revenue in Q1, including $150 million related to credits generated from June through December 2017. The Illinois program faces legal challenges; an adverse outcome could materially affect Generation and Exelon. A New Jersey zero-emission credit bill had passed both legislative houses by the filing date, but required further action and implementation.
- Plant closures and reliability: Oyster Creek was scheduled to cease operations by October 2018, and TMI on or about September 30, 2019. Generation notified ISO-NE of plans to retire Mystic units in 2022 absent market or regulatory reforms. No impairment was recorded for the New England asset group in Q1, but failure to secure reliability and fuel-security solutions could lead to a material future impairment. Management estimated early-retirement-related pre-tax expenses of $631 million in 2018 and $335 million in 2019; actual amounts may differ.
- Capital and cost plans: Exelon projected 2018 capital expenditures of $7.875 billion and approximately $26 billion of utility infrastructure investment over five years, expected to increase rate base by about $11 billion through 2022. Management said the remaining savings from a previously announced $400 million cost program were expected in 2018, and an additional $250 million of savings was targeted by 2020. These are plans and projections, not guaranteed outcomes.
- Dividends: The board’s policy provided for annual 5% dividend increases from 2018 through 2020, beginning with the March 2018 dividend. The Q2 2018 dividend was declared at $0.345 per share; future dividends remain subject to board approval.
- Tax and regulatory effects: The lower federal corporate tax rate reduced utility rates or was expected to be passed back to customers, limiting the direct earnings benefit for regulated utilities. Exelon estimated Generation’s operating cash flows could increase by approximately $1.2–$1.6 billion over 2018–2021 from TCJA effects, including tax-rate changes and capital expensing. Final tax adjustments and the timing and amount of customer refunds remain subject to further analysis and regulatory decisions.
- Other material exposures: A downgrade below investment grade would have required Generation to post an estimated $1.9 billion of additional collateral at quarter-end. Environmental remediation, including West Lake Landfill and the Anacostia River matters, and nuclear decommissioning obligations involve uncertain costs. The filing states that some potential losses cannot yet be reasonably estimated and could be material.
- Accounting and reporting: Exelon early adopted guidance to reclassify certain TCJA-related tax effects from accumulated other comprehensive income, increasing retained earnings and accumulated other comprehensive loss by $539 million retrospectively at December 31, 2017. The filing also corrected prior-period cash-flow classification errors deemed not material and retrospectively applied new revenue-recognition guidance.
Most important facts for investors to verify
- Reconcile the $585 million GAAP common-shareholder earnings figure with the $925 million non-GAAP adjusted operating earnings figure, including each adjustment and its tax and noncontrolling-interest effects.
- Track Generation’s hedge positions, mark-to-market volatility, collateral requirements and sensitivity to power prices, particularly the lower hedge coverage reported for 2020.
- Check developments in Illinois and New York zero-emission credit litigation, PJM capacity-market proposals, and ISO-NE’s plans for Mystic reliability and fuel security.
- Monitor retirement costs and decommissioning funding for Oyster Creek and TMI, and the potential timing and economics of any Mystic retirement.
- Review regulatory decisions on TCJA customer refunds, pending utility rate cases, and recovery of transmission-related tax regulatory assets.
- Assess the progress of projected capital spending and cost savings against cash generation, debt levels, dividend commitments and available credit capacity.