Exelon Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 8, 2019. Although the request references 2018 Q4, this is an annual report covering the full year. The combined filing includes Exelon and its generation and regulated utility subsidiaries.
Business context
Exelon operates competitive power generation and marketing through Exelon Generation, alongside regulated electric and gas transmission and distribution utilities: ComEd, PECO, BGE, and Pepco Holdings’ Pepco, DPL, and ACE. Generation’s fleet had 32,463 MW of owned capacity and 5,184 MW under long-term power purchase contracts at year-end. Nuclear plants supplied 68% of Generation’s total electric supply in 2018; operated nuclear units had a 94.6% capacity factor.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Operating revenue | $35.985 billion | $33.565 billion |
| Operating income | $3.898 billion | $4.395 billion |
| Net income attributable to common shareholders | $2.010 billion | $3.786 billion |
| Diluted EPS | $2.07 | $3.99 |
| Adjusted operating earnings, non-GAAP | $3.026 billion; $3.12 per diluted share | $2.487 billion; $2.62 per diluted share |
| Cash flow from operations | $8.644 billion | $7.480 billion |
| Capital expenditures | $7.594 billion | $7.584 billion |
Revenue increased about 7%, while GAAP net income attributable to common shareholders fell about 47%. Operating margin was approximately 10.8%, down from 13.1%. Management’s non-GAAP adjusted operating earnings rose about 22%; this measure excludes specified items and is not a GAAP measure. Cash flow from operations less capital expenditures was approximately $1.05 billion, a simple calculation rather than a company-defined free-cash-flow measure.
At December 31, 2018, total assets were $119.666 billion and shareholders’ equity was $30.764 billion. Long-term debt, including current maturities and financing-trust debt, was approximately $35.8 billion; short-term borrowings were $714 million. Cash and cash equivalents were $1.349 billion, plus $247 million of restricted cash. The company reported $8.008 billion of available capacity under aggregate credit commitments of $9.704 billion.
Material changes versus the prior year
- Lower GAAP earnings primarily reflected the absence of the large 2017 deferred-tax remeasurement benefit under the Tax Cuts and Jobs Act (TCJA), 2018 unrealized losses on nuclear decommissioning trust (NDT) investments versus gains in 2017, lower realized energy prices, increased mark-to-market losses, and accelerated charges related to plant retirements.
- Generation reported $370 million of net income attributable to its membership interest, down from $2.710 billion in 2017. Its operating income increased to $975 million from $947 million, while revenue rose to $20.437 billion from $18.500 billion.
- Generation recorded $628 million of incremental pre-tax expenses in 2018 associated with early retirements of Oyster Creek and TMI. The NDT funds had $483 million of net unrealized losses on non-regulatory units in 2018, compared with $521 million of net unrealized gains in 2017.
- ComEd’s net income rose to $664 million from $567 million, supported by formula-rate earnings and investment. PECO’s net income increased to $460 million from $434 million, with favorable weather and delivery volumes; BGE’s rose to $313 million from $307 million. Pepco, DPL, and ACE reported net income of $210 million, $120 million, and $75 million, respectively, broadly little changed from 2017.
- Exelon operating cash flow increased $1.164 billion year over year. Investing cash outflow was $7.834 billion, and financing cash outflow was $219 million. Cash and restricted cash ended the year at $1.781 billion.
Outlook, management commentary, and key risks
- Investment and savings: Management estimated 2019 capital expenditures of $7.325 billion, including $1.950 billion at Generation and significant utility infrastructure investment. The utilities anticipated approximately $29 billion of investment over five years, projected to increase rate base by about $16 billion by the end of 2023. Exelon said its prior $400 million cost-reduction program was fully realized in 2018; it targeted a further $250 million of savings by 2020 and an additional approximately $200 million of annual ongoing cost reductions by 2021.
- Dividend: The board’s policy called for 5% annual increases from 2018 through 2020. The first-quarter 2019 dividend was declared at $0.3625 per share, versus $0.345 per quarter in 2018.
- Generation and retirement outlook: Oyster Creek permanently stopped operating in September 2018; its sale and transfer of decommissioning responsibilities to Holtec remained subject to regulatory and other closing conditions, with completion anticipated in the second half of 2019. TMI was scheduled to stop operating on or about September 30, 2019. Generation projected a further $240 million of incremental pre-tax retirement-related expenses in 2019. Dresden, Byron, and Braidwood faced heightened economic pressure after capacity-auction results; Mystic’s continued operation after 2022 depended on market and regulatory developments. The filing also describes potential early-retirement risk for Salem.
- Market and policy exposure: Generation remains exposed to wholesale power prices, fuel costs, competition, unhedged positions, and capacity-market rules. Expected generation hedging for relevant regions was 89%–92% for 2019, 56%–59% for 2020, and 32%–35% for 2021. Illinois and New York zero-emission credit programs supported nuclear revenues, but legal and market-design challenges could affect future compensation. New Jersey’s ZEC program was pending implementation and eligibility decisions.
- Other significant risks and contingencies: Nuclear decommissioning and spent-fuel obligations, environmental remediation, changing regulation and customer-rate recovery, storm damage, cybersecurity and physical security, credit downgrades and collateral calls, and market losses on pension and NDT assets could adversely affect results or liquidity. NDT assets were approximately $12.7 billion against nuclear AROs of approximately $10.0 billion. After year-end, PG&E filed for bankruptcy; this created an event of default for the Antelope Valley solar project’s nonrecourse debt, and possible PPA rejection could lead to substantial impairment. Exelon and Generation said the asset was not impaired at December 31, 2018.
- Governance and audit: Management concluded internal control over financial reporting was effective, with no material weaknesses reported. PwC issued unqualified opinions on Exelon’s and the principal registrants’ financial statements.
Important facts for investors to verify
- Reconcile the sharp GAAP earnings decline with the improvement in adjusted operating earnings, including the size and timing of TCJA-related and NDT effects.
- Review the 2019 earnings and cash-flow impact of nuclear plant retirements, especially TMI, the pending Oyster Creek transaction, and potential additional plant closures.
- Track the outcome of capacity-market and zero-emission-credit proceedings, including implications for Generation’s nuclear fleet and Salem.
- Assess utility capital-spending recovery, rate-case outcomes, TCJA customer refunds, and the extent of storm costs recovered through rates.
- Monitor liquidity, debt maturities, credit ratings, collateral requirements, and the PG&E bankruptcy’s implications for Antelope Valley and project financing.
- Review environmental and decommissioning estimates, NDT performance, and material legal or regulatory contingencies in the full notes to the financial statements.