Exelon has narrowed its focus to transmission and delivery and is working to prepare itself for a carbon-neutral future.
Exelon (NYSE: EXC) is the United States’ largest electric delivery company, serving as the electric and often natural gas company in several large population centers in the country. Those major cities include Chicago, Baltimore, Washington DC, and Philadelphia. As the largest player in its industry, it is well in tune with the changing regulatory environment surrounding electricity generation. Indeed, it plans to reduce its carbon emissions by half by 2030 and get to net zero carbon emissions by 2050.
According to the company’s 2022 Path to Clean report, by 2050 its actual carbon emissions will be cut substantially, and what emissions remain will be handled by offsets. Given that the company is in the business of delivering natural gas, getting to absolutely zero emissions will likely not be feasible, but an offset plan gets more realistic as a company’s primary emissions decline.
Why its path seems realistic -- if you just look at its own direct operations
A key advantage Exelon has over actual power-generating companies is that it is just in the business of transmission and delivery. It doesn’t actually produce any of the power it sells to its consumers. Instead, that part of the power business now sits with Constellation. As a result, Exelon can achieve its goals by focusing on things like electrifying its service vehicles, replacing leaky natural gas infrastructure, and making its transmission lines more energy efficient.
When it comes to the energy flowing through its transmission systems, on the other hand, there appears to be a way to go before a more carbon-neutral business becomes a reality. According to Exelon’s 2022 sustainability report, about 20% of the power flowing through its lines comes from coal and 40% from natural gas. Nuclear provides most of the rest at 33%, while wind and solar deliver around 5%.
Solar, wind, and nuclear are all electricity-generating methods that can mostly avoid direct carbon emissions while producing power, although the sourcing of that capacity still carries a carbon footprint. Of course, each of those methods brings with them other sources of environmental impact. Nuclear has the well-known problem of radioactive waste, while wind and solar are both intermittent and require a fairly large amount of real estate to get utility-scale generation.
Those realities -- along with “Not In My Backyard” resistance to new capacity-generating stations of virtually all types -- make it difficult to build new infrastructure. That, along with the construction, permitting, and buildout times themselves, make de-carbonization efforts of actual electric generation a longer-term goal that will require much more substantial investment. Yet with its current transmission and delivery structure, Exelon won’t have to directly cover those costs.
What do you get with today’s Exelon?
All that said, it wasn’t until February of 2022 that Exelon shed its actual power generation business. So the company’s operations today look different than they did about a year and a half ago. With today’s Exelon, investors get a valuation of just under 17 times the company’s anticipated earnings. Given that it is expected to increase its earnings by around 6.3% annualized over the next five years and has a fairly predictable revenue base, that seems like a reasonable price to consider paying for its shares.
Exelon does have somewhere in the neighborhood of $41 billion in debt, vs. about $25 billion in shareholders’ equity. That’s a reasonable debt load for a business that is in the investment-heavy business of owning and maintaining energy transmission and distribution capacity. As long as it can continue to pass on the costs of maintaining that capacity to its customers, it should be able to service that debt and keep rewarding its shareholders.
Speaking of the rewards it hands its shareholders, Exelon currently pays its shareholders a $0.36 per share per quarter dividend, giving it a yield of around 3.6%. That yield consumes around 65% of the company’s earnings. That payout ratio means the company should be able to increase its dividend over time about in line with the rate of its earnings growth, but investors shouldn’t expect faster dividend increases than that.
Put it all together, Exelon looks like a company that is doing a reasonable job of preparing its operations for the future of energy, while still rewarding its shareholders for the risks they take by investing. It’s a tough balancing act, but it’s one that Exelon looks well prepared to handle.
In our latest EasyResearch feature, we have the awesome Chuck Saletta (contributor to Motley Fool) sharing some fantastic insights on Exelon. Just to keep you in the loop, at the time of publication, Chuck did not own shares of Exelon or Constellation.
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