Exelon Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; filed August 4, 2021. Exelon combined competitive generation and energy businesses with six regulated utilities: ComEd, PECO, BGE, Pepco, DPL and ACE. Unless noted, amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Operating revenue | $7,915 | $7,322 | $17,805 | $16,069 |
| Operating income | $366 | $565 | $245 | $1,784 |
| Net income attributable to common shareholders | $401 | $521 | $112 | $1,103 |
| Diluted EPS | $0.41 | $0.53 | $0.11 | $1.13 |
| Adjusted operating earnings per diluted share (non-GAAP) | $0.89 | $0.55 | $0.83 | $1.42 |
Revenue increased 8% for the quarter and 11% year to date. GAAP operating margin was approximately 4.6% in Q2 versus 7.7% a year ago, and 1.4% year to date versus 11.1%. The filing attributes substantial earnings pressure to Generation, while regulated utilities generally reported higher year-over-year earnings.
Six-month operating cash flow was $1.14 billion, down from $2.68 billion. Capital expenditures were $4.04 billion; cash, restricted cash and cash equivalents totaled $2.01 billion at June 30. Balance-sheet borrowings comprised $1.87 billion of short-term borrowings, $3.63 billion of long-term debt due within one year, $35.08 billion of long-term debt and $390 million of debt to financing trusts. Exelon reported $10.5 billion of aggregate credit facilities, with $8.0 billion available to support additional commercial paper. Management said expected cash flows and credit access should cover operating and capital needs.
Material changes and unusual items
- Management estimated the February 2021 Texas extreme-cold-weather event reduced Exelon and Generation net income by about $880 million in the first half. The estimated full-year 2021 net-income reduction was $670–$820 million; management expected to offset $410–$490 million through enhanced revenue opportunities, deferred maintenance and primarily one-time cost savings. Final settlements, credit losses, legislation and litigation could change the impact.
- Generation recorded a $350 million impairment of its New England asset group and a $140 million impairment associated with the Albany Green Energy biomass sale. That sale closed June 30 for net proceeds of $36 million. Generation also completed the sale of a significant portion of its solar business for $810 million in stated purchase price, receiving $675 million cash net of assumed debt and adjustments and recording a $68 million pretax gain.
- Byron and Dresden were scheduled for retirement in September and November 2021; Mystic Units 8 and 9 were expected to retire in May 2024. Accelerated depreciation, nuclear-fuel amortization and related charges weighed on results. The filing reports $949 million of related net charges for the first half under one presentation; a broader MD&A projection table includes Mystic-related charges and reports $990 million. Byron’s contractual decommissioning offset was suspended, producing a $53 million second-quarter pretax charge.
- Generation reported an $854 million first-half loss attributable to its membership interest, compared with $521 million of income in 2020. The ERCOT segment’s first-half revenues net of purchased power and fuel expense were negative $1.10 billion, versus positive $177 million, reflecting the cold-weather event and market participant defaults.
- Exelon’s planned separation of regulated utilities from Generation was targeted for the first quarter of 2022, subject to board, SEC, regulatory and tax approvals; the filing cautions that completion and timing are not assured. Separation costs were $28 million pretax for the first half.
Outlook, regulatory matters and risks
- The utilities had multiple base-rate proceedings completed or pending. Pending cases included requested annual revenue-requirement increases of $246 million at PECO, $51 million at ComEd and $23 million at DPL; outcomes remained subject to regulatory approval. ACE’s approved rate increase was scheduled to take effect January 1, 2022.
- Generation’s capacity-market exposure remained material: Quad Cities did not clear PJM’s May 2021 capacity auction, and expanded minimum-offer-price rules could affect state-supported nuclear plants. Regulatory and market reforms were uncertain.
- Generation’s senior unsecured rating was downgraded by S&P to BBB- in February. A downgrade below investment grade could increase collateral needs; the company estimated about $1.9 billion of incremental Generation collateral in that scenario, while stating this was within its available revolver capacity.
- Texas-related litigation and regulatory proceedings remained unresolved. Generation recorded a $40 million liability for a gas-delivery dispute; the company had not recorded contingencies for other Texas weather-event lawsuits because losses were not considered probable or reasonably estimable. The ERCOT market-wide payment shortfall was estimated at $3.0 billion, with Generation’s recorded share about $17 million, payable over 83 years.
- ComEd’s Deferred Prosecution Agreement required a $200 million payment, made in November 2020. The SEC investigation and related lawsuits continued; no loss contingency was recorded because the outcome was not considered probable or reasonably estimable.
- Exelon stated disclosure controls were effective and reported no material second-quarter change in internal control over financial reporting.
Investor verification priorities
- Track final costs, settlements, customer and counterparty credit losses, and legal outcomes from the Texas event against management’s full-year estimate and offset plan.
- Review Generation’s earnings excluding non-GAAP adjustments, particularly mark-to-market and nuclear decommissioning trust fund effects, impairments and early-retirement charges.
- Monitor Byron and Dresden retirement execution, decommissioning funding and any resulting cash or collateral requirements.
- Confirm separation approvals, tax treatment, transaction costs and the targeted first-quarter 2022 timetable.
- Follow PJM capacity-market reforms and the consequences for Generation’s nuclear fleet, alongside pending utility rate cases and the ComEd SEC and customer litigation.
- Assess cash generation against capital spending, debt maturities, credit-facility availability and Generation’s collateral exposure.