Exelon Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Exelon Corporation is a leading utility company engaged in energy generation, transmission, and distribution businesses, primarily in the Mid-Atlantic and Midwest regions. It faces a mix of regulated and competitive operations, often leading to complex financial analysis.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Exelon Corporation (EXC) is a major player in the U.S. energy sector, primarily engaged in generating, transmitting, and distributing electricity and natural gas. It operates through six regulated utilities that serve approximately 10 million customers. These utilities operate primarily in Illinois, Pennsylvania, Maryland, and Delaware. Here’s a breakdown of key aspects:

Revenue Distribution:

  • Exelon’s revenue streams are diverse, stemming from both regulated and competitive segments. Regulated operations involve the distribution and transmission of electricity and natural gas, often under a fixed-rate structure regulated by state and federal authorities. Competitive operations involve the sale of electricity in competitive markets, and are dependent on power prices and the company’s bidding strategy.
  • The regulated operations provide relatively stable revenues, while competitive operations are subject to greater volatility. As of 2022, the utilities segment accounted for a majority of the revenue, while generation and trading divisions comprised most of the remaining.

Industry Trends:

  • The energy industry is currently undergoing massive changes, including the shift to renewable energy sources, increasing regulations related to climate change, and rising costs due to inflation.
  • There is a growing emphasis on the development and deployment of clean energy technologies such as wind, solar, and battery storage. This transition, however, demands large scale investments and upgrades of the energy grids to accommodate the influx of intermittent resources.
  • Regulatory scrutiny is on the rise, putting pressure on rates and emphasizing investments in grid modernization and reliability.
  • Demand for electricity is relatively stable due to inelastic demand with a high reliance on the grid structure, making utility companies important.

Competitive Landscape:

  • Exelon’s regulated utilities have local monopolies within their defined service territories. However, the company’s generation business is subject to competition in certain regions.
  • The shift toward renewable energy and decarbonization are bringing new players into the space.
  • Competition is intense in the wholesale markets where companies compete for long-term power contracts at prices that could turn out to be beneficial or detrimental.

What Makes Exelon Different:

  • Exelon is the largest regulated utility operator by customer base.
  • The company has significant scale and geographical diversity, but is still focused around certain regions and not a nationwide presence.
  • Exelon is moving from fossil fuel production towards carbon-free power, and is among the largest producers of nuclear power in the US.

Financial Analysis:

Income Statement

  • Revenues have been growing steadily, driven by rate increases in the regulated utility divisions and sales from its generation business. In 2022, revenues grew by about 20% over 2021, which is not necessarily a sign of good organic growth, but more of inflation effects on energy prices.
  • However, operating expenses are also increasing (due to inflation, investments in capacity and labor) resulting in mixed picture for net income.
  • Exelon’s earnings often have many non-recurring items, making the underlying operating profitability difficult to assess.
  • For the three months ended March 31, 2023, they saw an increase in income driven by revenues but there were also offsetting increases in costs and operating expenses, and interest expense was higher too.
  • The company is guiding for $2.27-2.43 EPS in 2024, after $1.96 in 2023, meaning a significant improvement in profitability.

Balance Sheet:

  • Exelon has a lot of debt on its balance sheet, mostly to finance its capital expenditure needs, but still has a pretty manageable debt-to-equity ratio.
  • Their total debt is about 44B as of Q1 2024 while equity is at 51B. As a high capital intensive business, they need large sums of money to fund their assets, and they are managing it responsibly with a proper debt-to-equity ratio and low rates.
  • The company also has a significant amount of non-current liabilities and regulatory liabilities.
  • They also had a significant amount of cash-like investments which are categorized in non-operating assets. This shows they are able to generate money beyond their immediate requirements.

Cash Flow:

  • Exelon’s cash flow from operations is generally positive and supports investments. However, it can be volatile due to market prices and seasonality.
  • The company usually uses most of its cash flow to reinvest into the company or repay debt.

Moat Analysis:

Moat Rating: 2 / 5

  • Exelon’s competitive advantages are derived mainly from the regulated nature of its utility businesses, which provide a stable and predictable revenue stream within certain regions. The utilities have a “limited monopoly” within their geographies, creating economic advantages from barriers to entry. The company also benefit from their size and scale.
  • However, the competitive generation business does not possess any kind of moats, and therefore has lower margins and are vulnerable to the market forces of competitors.
  • The increasing transition to renewable power and decentralized generation is a key risk that can erode the company’s competitive advantages if the company fails to adopt new business models or strategies.

Risks to the Moat & Resilience:

  • Regulatory Risks: Changes in regulations or unfavorable rate cases could impact Exelon’s profitability. The company must also maintain a good relationship with regulators to approve price increases and get the benefit of cost-recovery.
  • Technological Disruption: Disruptive technologies such as renewable generation and distributed energy resources can put competitive pressure on the traditional utility businesses.
  • Increased Competition: The competitive generation segment is already vulnerable, and has been negatively impacted by fluctuating power prices and competition. It is likely that future revenues will be more dependent on volatile market factors than their regulated utilities.
  • Cybersecurity Risks: As they have a lot of critical infrastructure, the company is highly vulnerable to malicious attacks and cyber warfare that can damage their ability to supply and distribute power.
  • Climate Change: The company is vulnerable to severe weather events that can disrupt their operations. Also, government policies that mandate more renewable energy generation will force more investments into newer technology, which will affect their overall profitability.

Business Resilience:

  • Exelon benefits from its essential services (electricity and gas) that have steady demand, providing a good base-case for operations.
  • The company is also well positioned to capitalize on renewable energy transition through their existing regulated utilities. However, they are still susceptible to technological disruption in the power market.

Understandability:

Understandability Rating: 2 / 5

  • Exelon’s business model is fairly straightforward when looking at its retail operations, delivering power to its customers, it gets much more complicated once the generation and competitive businesses are also brought into picture.
  • Its financial statements are complex due to the large number of operating and nonoperating items, making it challenging for the general public to fully understand.
  • While understanding the broad strategy of the company is not difficult, assessing the company’s future performance requires deep insights into the regulatory landscape, energy markets and technology.

Balance Sheet Health:

Balance Sheet Health Rating: 3 / 5

  • The company has a decent level of debt with a manageable debt-to-equity ratio, along with high amounts of cash-like investments that provide stability to its balance sheets.
  • The company maintains a decent amount of current assets which can meet most of its short term liabilities.
  • However, the company does have a decent level of unfunded liabilities and some complex regulatory assets that needs to be accounted for in their valuations.

This analysis demonstrates that while Exelon has established an important presence in the utilities space, its complex business structure and the shifting energy landscape creates some level of vulnerability and uncertainty.