Exelon (EXC) is a holding company whose unregulated generation segment, Exelon Generation, provides the growth and return, particularly with its nuclear and renewables electricity generation sought after by many state governments and regulators. The companyâ€™s six regulated utilities serving the mid-Atlantic and Chicago are operational and demand ballast.
Although somewhat impacted by the Covid-19 pandemic shutdown effects on electricity demand, Exelonâ€™s stable dividend and mostly zero-carbon electricity offer a good platform for dividend (3.9% yield) and ESG (environmental, social, governance) investors. The company expects continued strong growth in its generation segment and moderate growth in its regulated utilities segments.
Electricity demand is divided into three sectors: residential, commercial (like hotels and schools) and industrial. According to the Energy Information Administration’s (EIA) Short Term Energy Outlook estimates from July 7, 2020, stay-at-home orders are expected to lead to a huge overall drop of -4.2% in U.S. electricity demand in 2020 compared to 2019. This comprises:
*flat residential demand (lower 1Q heating offset by higher 2Q from at-home mandates)
*-7.0% in commercial demand
*-5.6% in industrial demand.
From the lower 2020 base, the EIA predicts a 1.5% demand increase in 2021.
Exelon is headquartered in Chicago, Illinois. Its companies buy and sell natural gas and generate, transmit, and sell electricity. The eight component operating companies are Constellation, Exelon Generation, and six utilities: Atlantic City Electric, BG&E, ComEd, Delmarva, PECO, and PEPCO. Exelon serves ten million gas and electric customers.
Exelon Generation division competes with other electricity providers throughout the country, such as independent power producer Vistra (VST).
Exelon is part of the 15-stock, price-weighted Dow Jones Utility Average Index (DJU). Although regulated utilities have their own territories and so donâ€™t compete directly, they do compete for investment. Other diversified (gas and electric) utilities in the index I have reviewed in the last several months are Dominion (D), NiSource (NI), Public Service Enterprise Group (PEG), and Sempra (SRE).
In 2018, Exelon was the largest producer of zero-carbon (primarily nuclear-powered) electricity of all companies at 169.4 million megawatt-hours (MWh). It was followed by NextEra (NEE) at 94.9 million MWh and Duke at 84.9 million MWh.
In the second quarter of 2020, Exelon earned $0.53/share. More than half of operating revenues ($3.9 billion out of $7.3 billion) came from Exelon Generation (ExGen), as did most of net income ($476 million out of $521 million).
Operationally, the company noted that ExGenâ€™s nuclear fleet capacity factor of 95.4% was the highest second-quarter value in over a decade, and the CEO commended the companyâ€™s strong overall operational performance.
Credit: Exelon, Seeking Alpha
As shown above, Exelonâ€™s earnings per share (EPS) were $0.53 in the second quarter of 2020, ahead of the $0.50/share in the second quarter of 2019.
Also note that the adjusted operating earnings of $0.55 for the quarter, a non-GAAP measure, includes a much smaller contribution from ExGen and a positive contribution from ComEd.
Parsing the terms:
*ExGen is Exelon Generation, the biggest contributor and non-regulated;
*BGE and PECO (Baltimore Gas & Electric and Philadelphia Electric once upon a time) were, with ComEd (was Commonwealth Edison, still serves Chicago) the pre-2016 components of Exelon;
*PHI stands for Pepco Holdings Inc., which merged with Exelon in 2016. Pepco Holdings includes Pepco (was Potomac Electric Power Company), Atlantic City Electric, and Delmarva Power.
*HoldCo is corporate.
Management expects full-year adjusted operating earnings of $2.80-3.10/share, down by -$0.20/share from earlier estimates due to smaller earnings from PECO, ComEd, and ExGen.
Also of interest in the presentationâ€™s adjusted operating earnings waterfall diagram comparing the first six months ($1.47 in 2019 vs. $1.42 in 2020) is an estimate in the ExGen segment of reduced earnings of -$0.06/share in 2020 due to the Covid pandemic and mild first-quarter weather. Capacity revenues in 2020 are also lower by -$0.17/share. These are partially offset by lower income taxes and lower operating expense, among other factors.
Exelon has oversight from and reporting responsibilities to public utility commissions in every state in which its regulated utilities operate. In rate cases, it answers to and is subject to input from a wide variety of customer-stakeholders.
The company’s regulated utilities serve six states in Illinois (Chicago/northern Illinois) and the mid-Atlantic (New Jersey, Delaware, Maryland, Washington D.C., and southeastern Pennsylvania around Philadelphia).
In three of these states, governments and public utility commissions have adopted clean electricity (nuclear plus renewables for generation) targets for which Exelon Generationâ€™s nuclear and renewable capacity is especially well-suited:
*District of Columbia: 100% clean-fueled electricity by 2032;
*New Jersey: 50% clean-fueled electricity by 2030; 100% clean-fueled electricity by 2050;
*Maryland: 50% clean-fueled electricity by 2030.
Exelon Generation operates a fleet of 21 nuclear reactors in 12 locations in Illinois, Maryland, New York, and Pennsylvania with a capacity of 18,700 megawatts. It also operates 12,200 megawatts of wind, solar, hydro, natural gas and oil generation facilities in 17 states and Canada.
As the chart above shows, 62% of Exelon Generationâ€™s fleet is nuclear, 20% is natural gas, and 16% is a combination of hydro, oil, oil/gas, solar, and wind. However, this varies dramatically by state, with ExGen’s capacity in Illinois at 97% nuclear, yet in Texas at 83% natural gas and 17% wind.
So in addition to serving its own utilities, ExGen is able to sell electricity generated from a variety of sources to utilities in other locations.
ExGen’s market for alternative, renewable, and low-carbon energy sources may have fallen due to PG&Eâ€™s bankruptcy and the Covid-19-caused demand declines, but it is supported by zero-carbon targets of many state public utility commissions, both inside and outside of Exelonâ€™s utility service territories.
The company forecasts the utility portion of its earnings per share will grow 6-8%/year between 2019 and 2023. The non-regulated generation segment is expected to contribute free cash flow that will fund debt reduction, the dividend, and utility growth.
On August 4, 2020, Institutional Shareholder Services (ISS) ranked Exelonâ€™s overall governance as a 3, with sub-scores of audit & risk oversight (5), board structure (3), shareholder rights (3), and compensation (1). On the ISS scale, 1 represents lower governance risk and 10 represents higher governance risk.
As of July 15, 2020, shorted shares were a tiny 0.91% of floated and outstanding shares. Insiders own an even smaller percentage (0.26%) of the outstanding stock.
Exelonâ€™s beta is low at 0.45: the stock moves directionally with the overall market but with less volatility, as is typical for utilities.
Finally, during its earnings call, the company’s executives noted:
ComEd reached an agreement with U.S. Attorney’s office in Illinois, that concludes — includes a three-year deferred prosecution agreement and a payment of $200 million, which ends the investigations into ComEd and Exelon.
We have taken robust actions to identify and address deficiencies, including enhancing our compliance governance to prevent this type of conduct. We apologize for the past conduct that did not live up to our values. These new policies and oversight will ensure it won’t happen again.â€ť
Trailing twelve monthsâ€™ earnings per share (EPS) is $2.71 for a price-earnings ratio of 14. Analystsâ€™ average estimated 2020 EPS for Exelon is $2.92 for 2021 giving a forward price-to-earnings ratio for 2021 of 13.3.
Trailing twelve-month return on assets is 2.1% and return on equity is 7.3%.
The companyâ€™s market capitalization is $37.9 billion at an August 7, 2020, stock closing price of $38.93 per share. Exelonâ€™s 52-week price range is $29.28-50.54 per share, so its closing price is 77% of its one-year high. The companyâ€™s average one-year target price is $47.38/share, putting its most recent closing price at 82% of that level.
Trailing twelve monthsâ€™ operating cash flow was $6.4 billion while levered free cash flow was -$229 million.
At June 30, 2020, Exelon had $91.4 billion in liabilities and $126.3 billion in assets, resulting in a very steep-but-utility-standard liability-to-asset ratio of 72%.The companyâ€™s debt maturity profile, shown below, shows the biggest near-term obligations to be $3.1 billion in 2022.
Recall that a sizable part of free cash flow will be allocated to debt retirement.
Enterprise value (EV) is $75.6 billion and the ratio of enterprise value/EBITDA is 8.3. This is below the preferred maximum of 10 or less, suggesting a discount.
The companyâ€™s dividend of $1.53/share represents a 3.9% yield to its current price.
Overall, the companyâ€™s mean rating from seventeen analysts is 1.9 or â€śbuy,â€ť leaning very slightly toward â€śstrong buy.â€ť
The companyâ€™s market value per share of $38.93 is near its book value per share of $33.56, indicating neutral investor sentiment.
The biggest Covid-19 risk appears to be in the ExGen revenues more than from reduced electricity demand at its six utilities. However, I should note that in my previous report on Exelon, I did warn precisely of the national nature of a disruption (actually the pandemic is international) that could occur. To wit, â€śExelonâ€™s service in two different geographic areas (MidWest and MidAtlantic) does not mean the economies of the two regions will necessarily balance one another out or move counter-cyclically to one another. They could instead reinforce one another, with both being strongly negative or strongly positive due to national rather than regional factors such as regulatory concerns, tax policy, or interest rate changes.â€ť
For the future, potential investors should nonetheless consider regional economic growth, state regulatory environments and bond rate changes as the factors most likely to affect Exelonâ€™s utility growth. Particularly since electricity use is tied directly to economic activity and Chicago has some economic challenges, the companyâ€™s ComEd utility could be in for a continued uphill battle.
The increasing emphasis on clean power sources goes to Exelonâ€™s strength in nuclear generation.
With a liability-to-asset ratio of 72%, Exelon, like the utility sector generally, is more exposed to interest rate increases than companies in other sectors. However, interest rates appear unlikely to increase soon.
Exelon stock is at the midpoint of its 52-week range and offers a forward P/E of 13.3. Its enterprise value/EBITDA ratio indicates a company on the somewhat discounted side.
Investors looking for a low-beta 3.9%-dividend stock with growth from its generation unit or ESG investors looking for companies to supply the growing demand for zero-carbon-source electricity will find Exelon of interest.
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Disclosure: I am/we are long NEE, SRE, VST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.