Business context and reporting period
Exelon Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2017. Exelon combines competitive power generation and energy marketing with regulated electric and gas utilities, including the PHI utilities. Unless noted, figures below are consolidated Exelon amounts in U.S. dollars.
Year-over-year comparisons are affected by the March 2016 acquisition of Pepco Holdings (PHI): Exelon’s 2016 results include PHI only after the acquisition date, and PHI’s predecessor and successor periods are not directly comparable. Generation acquired the 838 MW FitzPatrick nuclear station on March 31, 2017.
Financial results and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $7.623B | $6.910B | $16.381B | $14.485B |
| Operating income | $232M | $647M | $1.528B | $1.130B |
| Net income attributable to common shareholders | $80M | $267M | $1.076B | $440M |
| Diluted EPS | $0.09 | $0.29 | $1.15 | $0.48 |
| Adjusted operating earnings, non-GAAP | $509M | $604M | $1.114B | $1.235B |
Q2 operating margin was approximately 3.0%, compared with 9.4% a year earlier, calculated as operating income divided by revenue. Six-month operating cash flow was $2.898B, down from $4.553B. Capital expenditures were $3.845B; net investing cash flow was $(3.980)B and net financing cash flow was $983M. Cash and cash equivalents were $536M at June 30, down from $635M at year-end 2016.
At June 30, Exelon reported $1.757B of short-term borrowings, $3.619B of long-term debt due within one year, and $30.315B of long-term debt, plus $641M of debt to financing trusts. Current assets were $12.232B versus current liabilities of $13.965B. The company reported $9.5B of aggregate credit-facility commitments, of which $8.2B was available.
Exelon declared dividends of $0.33 per common share in Q2 ($0.66 for the first half). The quarter-end balance sheet includes a $1.25B IRS deposit related to the like-kind exchange tax dispute.
Material changes versus prior comparable periods
- Q2 revenue increased 10%, but operating income and common-shareholder net income fell sharply. Exelon attributed the operating-income decline primarily to Generation’s $418M pre-tax impairment of EGTP assets held for sale and higher nuclear outage and other operating costs.
- Generation also recorded $71M of one-time TMI retirement charges and $37M of incremental pre-tax accelerated depreciation, nuclear-fuel amortization and related costs in Q2. Lower accelerated depreciation versus the prior-year Clinton and Quad Cities retirement charges partly offset the year-over-year expense increase.
- Six-month revenue rose 13%, while operating income increased 35% and common-shareholder net income more than doubled. Results included the $226M FitzPatrick bargain purchase gain; adjusted operating earnings, by contrast, declined 10%.
- Operating cash flow declined by $1.655B, reflecting, among other items, lower collateral receipts and larger working-capital outflows. Capital spending was lower than in the prior-year period, which included substantial PHI acquisition spending.
- Exelon issued approximately 33M treasury shares and received $1.15B upon settlement of a forward equity purchase contract. A $1.05B loss on reissuance of treasury shares was recorded directly in retained earnings, not as an operating expense.
Outlook, management commentary, risks and unusual items
- Exelon projected 2017 capital expenditures of $8.15B. Management also described approximately $25B of planned utility infrastructure investment over five years and targeted $350M in annual operating-cost savings plus $50M in capital-cost savings from its cost-management program; approximately 60% of run-rate savings were expected by the end of 2017 and full realization in 2018.
- Management cited market pressures on Generation from low wholesale power and capacity prices. Generation’s expected output was hedged 96%–99% for 2017, 71%–74% for 2018 and 39%–42% for 2019. Exelon expects TMI to cease operations around September 30, 2019; it also previously committed to close Oyster Creek by the end of 2019.
- Illinois and New York zero-emission credit programs support certain nuclear plants, but legal and regulatory challenges remain. Federal appeals concerning the Illinois program and potential challenges to New York’s program could affect revenues and plant economics. FERC proceedings may also seek to apply capacity-market minimum-offer rules to plants receiving ZEC support.
- EGTP entered an orderly asset-sale process after adverse market conditions and cash-flow seasonality; its secured debt was classified as due within one year. A sale outcome or valuation different from assumptions could affect results.
- Exelon expects to pay approximately $1.3B related to the like-kind exchange dispute when it appeals the adverse Tax Court ruling in the second half of 2017. After expected interest-related tax benefits, management estimated net cash outflow of about $950M, including approximately $300M attributable to ComEd, which Exelon agreed to protect from adverse equity effects. Appeal outcome remains uncertain.
- Other material uncertainties include nuclear decommissioning and funding requirements, environmental remediation and litigation, commodity and counterparty exposure, and collateral demands. Generation estimated that a downgrade below investment grade could require $1.8B of additional collateral.
- Management identified cash-flow statement classification errors for Q1 2017 at Exelon, Generation, ComEd, PECO and BGE. The errors were corrected in the six-month statements, were judged not material to previously issued statements, and are to be revised when Q1 2017 cash flows are next presented.
- Exelon disclosed that certain Exelon shares acquired through employee 401(k) plans may not have been properly registered. It filed a registration statement in June 2017, said it did not receive proceeds from those open-market purchases, and did not expect a material financial effect.
Most important facts an investor should verify
- Reconcile GAAP earnings with adjusted operating earnings, particularly the EGTP impairment, TMI costs and FitzPatrick bargain purchase gain.
- Track the like-kind exchange appeal, the expected second-half 2017 tax payment and the timing and recovery of ComEd’s related funding.
- Monitor the EGTP sale process, secured debt classification and any further impairment or cash-flow effects.
- Assess the durability of nuclear support programs, capacity-market outcomes and Generation’s remaining unhedged exposure, especially for 2019.
- Review utility rate-case decisions, regulatory recovery assumptions, capital spending and whether forecast cost savings are achieved.
- Confirm that the Q1 cash-flow classification corrections and the 401(k) share-registration matter are resolved as described.