- Exelon reported GAAP Net Income of $1.94 per share and $3.97 per share for the fourth quarter and full year 2017, respectively, and Adjusted (non-GAAP) Operating Earnings of $0.55 per share and $2.60 per share for the fourth quarter and full year 2017, respectively.
- Exelon introduces a 2018 Adjusted (non-GAAP) Operating Earnings guidance range of $2.90 - $3.20 per share, reflecting growth in Utilities, full year recognition of both Illinois and New York ZEC revenue and the impact of tax reform.
- Exelon's Board of Directors increased the annual dividend growth rate to 5 percent from 2.5 percent, effective in the first quarter of 2018.
- Exelon Utilities project capital expenditures of $21 billion over the next 4 years to improve service and benefit customers, supporting over 7 percent annual rate base growth.
- Exelon Generation projects free cash flow before growth capex of $7.6 billion over the next 4 years, supporting Exelon's priorities of Utility reinvestment and debt reduction.
- Quad Cities Units 1 & 2 and Clinton Unit 1 were winning bidders in Illinois ZEC procurement.
CHICAGO — Exelon Corporation (NYSE: EXC) today reported its financial results for the fourth quarter and full year 2017.
"Exelon had a strong 2017, with our utilities turning in first-quartile and in several cases best-ever performance in reliability and customer service, and our nuclear generation fleet producing the most power on record, all thanks to the great work of our people, who also set company records for volunteerism and charitable giving,” said Christopher M. Crane, Exelon’s president and CEO. “We will build on this momentum in 2018 with our new dividend growth rate of 5 percent annually over the next three years, tax reform that will benefit utility customers and reduce tax expenses at Generation, and movement on needed power price formation changes in PJM and broader resiliency reviews at FERC.”
“In 2017, Exelon delivered solid financial performance with $2.60 of Adjusted (non-GAAP) Operating Earnings, which is within our range,” said Jonathan W. Thayer, Exelon’s Senior Executive Vice President and CFO. “We are introducing 2018 operating earnings guidance of $2.90 - $3.20 per share which incorporates the benefits of U.S. tax reform, strong utility growth, a full-year of ZEC programs in New York and Illinois, and recognition of Illinois ZEC revenue from 2017.”
Fourth Quarter 2017
Exelon's GAAP Net Income for the fourth quarter 2017 increased to $1.94 per share from $0.22 per share in the fourth quarter of 2016; Adjusted (non-GAAP) Operating Earnings increased to $0.55 per share in the fourth quarter of 2017 from $0.44 per share in the fourth quarter of 2016. For the reconciliations of GAAP Net Income to Adjusted (non-GAAP) Operating Earnings, refer to the tables beginning on page 9.
Adjusted (non-GAAP) Operating Earnings in the fourth quarter of 2017 reflect higher utility earnings due to regulatory rate increases and weather, partially offset by a 2017 impairment of certain transmission-related income tax regulatory assets; and, at Generation, New York ZEC revenue and higher capacity prices, partially offset by lower realized energy prices.
Full Year 2017
For the full year 2017, Exelon's GAAP Net Income increased to $3.97 per share from $1.22 per share in 2016. Exelon's Adjusted (non-GAAP) Operating Earnings for 2017 decreased to $2.60 per share from $2.68 per share in 2016.
Adjusted (non-GAAP) Operating Earnings for the full year 2017 reflect higher utility earnings due to regulatory rate increases, partially offset by weather and a 2017 impairment of certain transmission-related income tax regulatory assets; and, at Generation, lower realized energy prices, the impacts of lower load volumes delivered due to mild weather in the third quarter 2017, the conclusion of the Ginna RSSA and the impact of declining natural gas prices on Generation's natural gas portfolio, partially offset by New York ZEC revenue and higher capacity prices.
Operating Company Results1
ComEd's fourth quarter 2017 GAAP Net Income was $120 million compared with $80 million in the fourth quarter of 2016. ComEd’s Adjusted (non-GAAP) Operating Earnings for the fourth quarter 2017 were $123 million compared with $81 million in the fourth quarter of 2016, primarily reflecting higher electric distribution and transmission formula rate earnings.
PECO’s fourth quarter 2017 GAAP Net Income was $107 million compared with $92 million in the fourth quarter of 2016. PECO’s fourth quarter 2017 Adjusted (non-GAAP) Operating Earnings of $95 million remained relatively consistent with fourth quarter 2016 Adjusted (non-GAAP) Operating Earnings of $94 million.
1Exelon’s five business units include ComEd, which consists of electricity transmission and distribution operations in northern Illinois; PECO, which consists of electricity transmission and distribution operations and retail natural gas distribution operations in southeastern Pennsylvania; BGE, which consists of electricity transmission and distribution operations and retail natural gas distribution operations in central Maryland; PHI, which consists of electricity transmission and distribution operations in the District of Columbia and portions of Maryland, Delaware, and New Jersey and retail natural gas distribution operations in northern Delaware; and Generation, which consists of owned and contracted electric generating facilities and wholesale and retail customer supply of electric and natural gas products and services, including renewable energy products and risk management services.
2For BGE, Pepco and DPL Maryland and beginning in 2017 for ComEd, customer rates are adjusted to eliminate the impacts of weather and customer usage on distribution volumes.
Heating degree days were up 6.1 percent relative to the same period in 2016 and were 7.2 percent below normal. Total retail electric deliveries were up 3.4 percent compared with the fourth quarter of 2016. Natural gas deliveries (including both retail and transportation segments) in the fourth quarter of 2017 were up 9.0 percent compared with the same period in 2016.
BGE’s fourth quarter 2017 GAAP Net Income was $76 million compared with $103 million in the fourth quarter of 2016. BGE’s Adjusted (non-GAAP) Operating Earnings for the fourth quarter 2017 were $82 million compared with $105 million in the fourth quarter of 2016, primarily due to a favorable 2016 settlement of a Baltimore City conduit fee dispute and a 2017 impairment of certain transmission-related income tax regulatory assets.
PHI’s fourth quarter 2017 GAAP Net Income was $4 million compared with $30 million in the fourth quarter of 2016. PHI’s Adjusted (non-GAAP) Operating Earnings for the fourth quarter 2017 were $48 million compared with $42 million in the fourth quarter of 2016, primarily due to regulatory rate increases, partially offset by a 2017 impairment of certain transmission-related income tax regulatory assets.
Generation's fourth quarter 2017 GAAP Net Income was $2,215 million compared with a GAAP Net Loss of $41 million in the fourth quarter of 2016. Generation’s Adjusted (non-GAAP) Operating Earnings for the fourth quarter 2017 were $252 million compared with $162 million in the fourth quarter of 2016, primarily reflecting New York ZEC revenue and higher capacity prices, partially offset by lower realized energy prices.
The proportion of expected generation hedged as of Dec. 31, 2017, was 85.0 percent to 88.0 percent for 2018, 55.0 percent to 58.0 percent for 2019 and 26.0 percent to 29.0 percent for 2020.
2For BGE, Pepco and DPL Maryland and beginning in 2017 for ComEd, customer rates are adjusted to eliminate the impacts of weather and customer usage on distribution volumes.
Initiates Annual Guidance for 2018
Exelon introduced a guidance range for 2018 Adjusted (non-GAAP) Operating Earnings of $2.90 to $3.20 per share. Adjusted (non-GAAP) Operating Earnings guidance is based on the assumption of normal weather, which is determined based on historical average heating and cooling degree days for a 30-year period in the respective utilities' service territories, except at PHI, where a 20-year period is used. The outlook for 2018 Adjusted (non-GAAP) Operating Earnings for Exelon and its subsidiaries excludes the following items:
- Mark-to-market adjustments from economic hedging activities;
- Unrealized gains and losses from NDT fund investments to the extent not offset by contractual accounting as described in the notes to the consolidated financial statements;
- Non-cash amortization of intangible assets, net related to commodity contracts recorded at the date of the acquisition of ConEdison Solutions in 2016 and FitzPatrick in 2017;
- Certain costs incurred related to the PHI and FitzPatrick acquisitions;
- Certain costs incurred related to plant retirements;
- Certain costs incurred to achieve cost management program savings;
- Other unusual items;
- Generation's noncontrolling interest related to CENG exclusion items; and
- One-time impacts of adopting new accounting standards.
Dividend Policy Update: On Jan. 30, 2018, the Board of Directors of Exelon announced an updated dividend policy targeting 5 percent annual dividend growth for the period covering 2018 through 2020. Since the last dividend policy of 2.5 percent annual growth was implemented in 2016, Exelon’s business position has continued to strengthen. The company has generated more earnings from regulated utilities following the PHI acquisition, recognized greater stability for its generation fleet with the Illinois and New York ZEC programs, and continued to focus on cost management and prudent balance sheet oversight. As a result of the strengthened outlook on earnings, Exelon is sharing the financial success with its shareholders through this updated dividend policy.
Utility Capex and Rate Base Update: Exelon Utilities plan to invest nearly $21 billion of capital to ensure reliable, more resilient and more efficient transmission and distribution of electricity and gas for our customers. The increased capital investments and impacts of tax reform are expected to drive annual rate base growth of 7.4 percent through 2021, exceeding the 6.5 percent growth expectations for 2017-2020 projected a year ago.
Generation and Free Cash Flow Outlook: Cumulatively from 2018 through 2021, Generation projects $7.6 billion of free cash flow before growth capex, which is $0.8 billion higher than the prior 4-year outlook from 2017 through 2020. This financial outlook accounts for the latest power price forwards, updated gross margins at Constellation, continued efforts to reduce O&M cost and capital expenditures, the planned closure of Three Mile Island and Oyster Creek, and the impact of tax reform
Exelon Nuclear Plants Selected in Illinois ZEC Procurement Event: On Jan. 25, 2018, the ICC announced that Clinton Unit 1 and Quad Cities Units 1 & 2 were winning bidders through the Illinois Power Agency's ZEC procurement event, which entitles them to compensation for the sale of ZECs. Generation executed the ZEC procurement contracts with Illinois utilities, including ComEd, effective January 26, 2018, and will begin recognizing revenue. In addition to recognizing ZEC revenue generated in the first quarter of 2018, Generation will also recognize ZEC revenue retroactive to June 1, 2017, which will contribute approximately $0.11 to Adjusted (non-GAAP) Operating Earnings. The $0.11 contribution to Adjusted (non-GAAP) Operating Earnings is higher than the $0.09 originally expected in 2017 due to the lower tax rate in 2018 at Generation as a result of the Tax Cuts and Jobs Act (TCJA).
Early Retirement of Oyster Creek Nuclear Facility: On Feb. 2, 2018, Generation announced that it will permanently cease generation operations at Oyster Creek Generating Station (Oyster Creek) at the end of its current operating cycle in October 2018. In 2010, Generation announced that Oyster Creek would retire by the end of 2019 as part of an agreement with the State of New Jersey to avoid significant costs associated with the construction of cooling towers to meet the State’s then new environmental regulations. Since then, like other nuclear sites, Oyster Creek has continued to face rising operating costs amid a historically low wholesale power price environment. The decision to retire Oyster Creek in 2018 at the end of its current operating cycle involved consideration of several factors, including economics and operating efficiencies, and avoids a refueling outage scheduled for the fall of 2018 that would have required advanced purchasing of fuel fabrication and materials beginning in late February 2018. Because of the decision to retire Oyster Creek in 2018, Generation will recognize certain one-time charges in the first quarter of 2018 ranging from an estimated $25 million to $35 million (pre-tax) related to a materials and supplies inventory reserve adjustment, employee-related costs, and construction work-in-progress impairment, among other items. The aforementioned one-time charges will be excluded from GAAP Net Income to arrive at Adjusted (non-GAAP) Operating Earnings in the first quarter 2018.
DOE Notice of Proposed Rulemaking: On Aug. 23, 2017, the United States Department of Energy (DOE) released its report on the reliability of the electric grid. One aspect of the wide-ranging report is the DOE’s recognition that the electricity markets do not currently value the resiliency provided by baseload generation, such as nuclear plants. On Sept. 28, 2017, the DOE issued a Notice of Proposed Rulemaking (NOPR) that would entitle certain eligible resilient generating units (i.e., those located in organized markets, with a 90-day supply of fuel on site, not already subject to state cost of service regulation and satisfying certain other requirements) to recover fully allocated costs and earn a fair return on equity on their investment. On Jan. 8, 2018, the FERC issued an order terminating the rulemaking docket that was initiated to address the proposed rule in the DOE NOPR, concluding the proposed rule did not sufficiently demonstrate there is a resiliency issue and that it proposed a remedy that did not appear to be just, reasonable and nondiscriminatory as required under the Federal Power Act. At the same time, the FERC initiated a new proceeding to consider resiliency challenges to the bulk power system and evaluate whether additional FERC action to address resiliency would be appropriate. Exelon has been and will continue to be an active participant in these proceedings, but cannot predict the final outcome or its potential impact, if any, on Exelon or Generation.
Fourth Quarter Highlights
Corporate Tax Reform: On Dec. 22, 2017, President Trump signed into law the TCJA. The Registrants remeasured their existing deferred income tax balances as of Dec. 31, 2017, to reflect the decrease in the corporate income tax rate from 35 percent to 21 percent, which resulted in a material decrease to their net deferred income tax liability balances. At Generation, this reduction in net deferred income tax liabilities resulted in a one-time credit to income tax expense of approximately $1.9 billion. The Utility Registrants offset virtually all similar reductions, totaling $7.3 billion, with net regulatory liabilities (rather than through earnings), given that changes in income taxes are generally passed through customer rates. The amount and timing of potential refunds of the established net regulatory liabilities will be determined by the Utility Registrants’ respective rate regulators, subject to certain IRS "normalization" rules.
Pursuant to TCJA, beginning in 2018, Generation is expected to have higher operating cash flows over the next five years reflecting the reduction in the corporate federal income tax rate and full expensing of capital investments. The TCJA is generally expected to result in lower operating cash flows for the Utility Registrants as a result of the elimination of bonus depreciation and lower customer rates. Increased operating cash flows for the Utility Registrants from lower corporate federal income tax rates is expected to be more than offset over time by lower customer rates resulting from lower income tax expense and the settlement of deferred income tax net regulatory liabilities established pursuant to TCJA, partially offset by the impacts of higher rate base. The Utility Registrants expect to fund any required incremental operating cash outflows using third party debt financings and equity funding from Exelon in combinations generally consistent with existing capitalization ratio structures. To fund any additional equity contributions to the Utility Registrants, Exelon would have available to it its typical sources, including, but not limited to, the increased operating cash flows at Generation referenced above, which over time are expected to exceed the incremental equity needs at the Utility Registrants.
The Utility Registrants continue to work with their state regulatory commissions to determine the amount and timing of the passing back of TCJA income tax savings benefits to customers; with filings either made, or expected to be made, at Pepco, DPL and ACE, and approved filings at ComEd and BGE. The amounts being passed back or proposed to be passed back to customers reflect the benefit of lower income tax expense beginning January 1, 2018 (Feb. 1, 2018 for DPL Delaware), and the settlement of a portion of deferred income tax regulatory liabilities established upon enactment of the TCJA. To date, neither the PAPUC nor FERC has yet issued guidance on how and when to reflect the impacts of the TCJA in customer rates.
EGTP Bankruptcy: On Nov. 7, 2017, EGTP and all of its wholly-owned subsidiaries filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware. As a result, Exelon and Generation deconsolidated EGTP’s net liabilities, which included the previously impaired assets and related debt, from their consolidated financial statements, resulting in a $213 million pre-tax gain. Concurrently with the Chapter 11 filings, Generation entered into an asset purchase agreement to acquire one of EGTP’s generating plants, the Handley Generating Station, for approximately $60 million, subject to a potential adjustment for fuel oil and assumption of certain liabilities. The acquisition was approved by the Bankruptcy Court in January 2018 and the transaction is expected to be completed in the first half of 2018.
Proposed Remedy for West Lake Landfill: On Feb. 1, 2018, the Environmental Protection Agency (EPA) announced a proposed remediation plan for the West Lake Landfill Superfund Site in Bridgeton, Missouri, for which Generation is one of the potentially responsible parties (PRPs). The proposed remediation plan includes a partial excavation of the site and an enhanced landfill cover and will be open for public comment through March 22, 2018, with the expectation that a Record of Decision will be issued during the third quarter of 2018. Thereafter, the EPA will seek to enter into a Consent Decree with the PRPs to effectuate the remedy, which Generation currently expects will occur in late 2018 or early 2019. The estimated total cost to fully execute the EPA’s proposed remedy is approximately $340 million, including cost escalation on an undiscounted basis, which will be allocated among the final group of PRPs. Generation increased its previous liability to reflect management’s best estimate of Generation’s allocable share of the cost of the proposed remedy among the PRPs, which could materially change in the future. The aforementioned 2017 charge has been excluded from GAAP Net Income to arrive at Adjusted (non-GAAP) Operating Earnings.
ComEd Electric Distribution Rate Case: On Dec. 6, 2017, the ICC issued its final order approving ComEd’s 2017 annual distribution formula rate update. The final order resulted in an increase to the revenue requirement of $96 million, reflecting an increase of $78 million for the initial revenue requirement for 2017 and an increase of $18 million related to the annual reconciliation for 2016. The increase was set using an allowed return on rate base of 6.47 percent for the initial revenue requirement and 6.45 percent for the annual reconciliation (inclusive of an allowed ROE of 8.40 percent for 2017 less a reliability performance metric penalty of 6 basis points for the 2016 reconciliation). The rates took effect in January 2018.
Pepco District of Columbia Electric Distribution Rate Case: On Dec. 19, 2017, Pepco filed an application with the DCPSC to increase its annual electric distribution base rates by $66 million, reflecting a requested ROE of 10.1 percent. By mid-February, Pepco will update its current distribution rate case to reflect the TCJA impacts. Pepco expects a decision in the matter in the fourth quarter of 2018, but cannot predict how much of the requested increase the DCPSC will approve.
Pepco Maryland Electric Distribution Rate Case: On Jan. 2, 2018, Pepco filed an application with the MDPSC to increase its annual electric distribution base rates by $41 million, reflecting a requested ROE of 10.1 percent. On Feb. 5, 2018, Pepco filed with the MDPSC an update to its current distribution rate case to reflect approximately $31 million in TCJA tax savings, thereby reducing the requested annual base rate increase to $11 million. Pepco expects a decision in the matter in the third quarter of 2018, but cannot predict how much of the requested increase the MDPSC will approve.
DPL Maryland Electric Distribution Rate Case: On July 14, 2017, DPL filed an application with the MDPSC to increase its annual electric distribution base rates by $27 million, which was updated to $19 million on Nov. 16, 2017, reflecting a requested ROE of 10.1 percent. On Dec. 18, 2017, DPL, the MDPSC Staff and Maryland’s Office of People’s Counsel filed a settlement agreement with the MDPSC that would provide DPL a rate increase of $13 million, and a ROE of 9.5 percent solely for purposes of calculating AFUDC and regulatory asset carrying costs. By mid-February, DPL is planning to file with the MDPSC seeking approval to pass back to customers beginning in 2018 approximately $13 million in annual tax savings resulting from the enactment of the TCJA through a reduction in electric distribution rates. DPL expects a decision in the matter in the first quarter of 2018, but cannot predict whether the MDPSC will approve the settlement agreement as filed or how much of the requested increase will be approved.
FERC Transmission-Related Regulatory Asset Order: On Nov. 16, 2017, FERC issued an order rejecting BGE’s proposed revisions to its transmission formula rate to recover certain transmission-related income tax regulatory assets. ComEd, Pepco, DPL and ACE have similar transmission-related income tax regulatory assets also requiring FERC approval separate from their transmission formula rate mechanisms. Pursuant to the FERC order, management of each company concluded that the portion of the total transmission-related income tax regulatory assets that would have been previously amortized and recovered through rates had the transmission formula rate provided for such recovery was no longer probable of recovery; and recorded impairment charges to Income tax expense of $35 million, $3 million, $5 million, $27 million, $14 million, $6 million and $7 million at Exelon, ComEd, BGE, PHI, Pepco, DPL and ACE, respectively. Nevertheless, each company believes there is sufficient basis to support full recovery of all existing transmission-related income tax regulatory assets, and intends to further pursue such full recovery with FERC.
Nuclear Operations: Generation’s nuclear fleet, including its owned output from the Salem Generating Station and 100 percent of the CENG units, produced 47,528 gigawatt-hours (GWhs) in the fourth quarter of 2017, compared with 44,834 GWhs in the fourth quarter of 2016. Excluding Salem, the Exelon-operated nuclear plants at ownership achieved a 95.3 percent capacity factor for the fourth quarter of 2017, compared with 94.2 percent for the fourth quarter of 2016. Excluding Salem, the number of planned refueling outage days in the fourth quarter of 2017 totaled 60, compared with 71 in the fourth quarter of 2016. There were 18 non-refueling outage days in the fourth quarter of 2017, compared with 32 days in the fourth quarter of 2016.
Fossil and Renewables Operations: The dispatch match rate for Generation’s gas and hydro fleet was 98.4 percent in the fourth quarter of 2017, compared with 99.7 percent in the fourth quarter of 2016. The lower performance in the quarter was primarily due to outages at gas units in Texas and Alabama. The reported performance includes the EGTP sites, which Exelon maintained and operated through the quarter, but does not include Wolf Hollow II or Colorado Bend II, the two new CCGT units that went into full commercial operation in the second quarter. Energy capture for the wind and solar fleet was 96.2 percent in the fourth quarter of 2017, compared with 95.7 percent in the fourth quarter of 2016.
- On Nov. 28, 2017, ExGen Renewables IV, an indirect subsidiary of Exelon and Generation, entered into an $850 million non-recourse senior secured term loan credit facility agreement scheduled to mature on Nov. 28, 2024. The net proceeds of $785 million, after the initial funding of $50 million for debt service and liquidity reserves as well as deductions for original discount and issuance costs, were distributed to Generation for general corporate purposes. The term loan bears interest at a variable rate equal to LIBOR plus 3.00 percent, subject to a 1.00 percent LIBOR floor. As of Dec. 31, 2017, $850 million was outstanding. In addition to the financing, ExGen Renewables IV entered into interest rate swaps with an initial notional amount of $636 million at an interest rate of 2.32 percent to manage a portion of the interest rate exposure in connection with the financing.
GAAP/ADJUSTED (NON-GAAP) OPERATING EARNINGS RECONCILIATIONS
Adjusted (non-GAAP) Operating Earnings for the fourth quarter of 2017 do not include the following items (after tax) that were included in reported GAAP Net Income: