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Exelon Reports COVID-Related Declines In Gross Margin In Constellation Business
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During an earnings call, Exelon detailed the impact from COVID-19 on gross margin and load at its Constellation business
Exelon noted that Constellation load (retail and wholesale) was 210 TWh in 2019, with 70% of that total being retail
Using 2019 as an example of how its load is constituted, Exelon noted that, of the 2019 Constellation retail load, 90% was C&I and 10% was residential
Of the 90% of 2019 Constellation retail C&I load, 70% was fixed price, and 30% was indexed price.
It's the margin from fixed price C&I load which is most being impacted by COVID, from several factors. Reduced volumes for fixed price customers not only means a loss in the unit margin on such lost volumes, but a reduced amount of MWh under which Constellation can recover various fixed ISO costs that are priced to customers on a volumetric ($ per MWh) basis, as well as being long on potentially above-market power supplies (prior hedges based on normal load volumes)
For the balance of 2020, approximately 125 TWh of Constellation load is fixed price, reflecting the normal annualized load exposed to COVID-related demand destruction
Exelon listed Balance of Year Sensitivities for Constellation C&I and residential fixed price volumes as follows:
Exelon said that preliminary April data suggests a 10-15% C&I load reductions in PJM, with slightly lower reductions in ERCOT. Residential load is up ~5-7% across most regions, Exelon said
For the last nine months of the year, Exelon forecasts Constellation load being down 6% in total, with C&I down 9% and residential load increasing 2%
Exelon reported its 2019 Retail Power Load Served by Region as follows:
"In 2020, where C&I load is significantly displaced, we are seeing pressure on our gross margin, which is reflected in our guidance," said Joseph Nigro Chief Financial Officer for Exelon Corporation
Exelon Generation 2020 Adjusted Operating Earnings Guidance is now $1.10 - $1.20 per share, versus the earlier guidance of $1.20 - $1.30 per share. Apart from decreases in C&I load, bad debt was cited as a factor driving the revised ExGen guidance, with ExGen bad debt expense estimated based on impacts seen in the in 2008-09 recession and current analysis by customer class
Discussing Exelon Generation Gross Margin, Nigro said, "In 2020, total gross margin is down $300 million [versus the 2020 total provided as of December 31, 2019]. $100 million is due to Q1 weather, which can be pretty evenly split between lower volumes on our power and gas customer businesses. As a reminder, our gas business makes most of its margin in the winter. We then are $200 million lower due to the impacts of COVD-19 on the balance of the year."
Nigro said that the drop in profits is to be limited to the period of time that the pandemic drives very wide differences in actual and assumed usage. Looking to the future, Constellation will return to profitability levels similar to those seen under normal conditions, Nigro said
In noting recent developments, Exelon said that Constellation, "Executed a combined $150M and $100M of power and non-power new business in 2020 and 2021, respectively."
Executives noted that enrollments of retail customers has slowed due to current conditions
Exelon affirmed its commitment to its C&I-focused strategy for Constellation despite the current headwinds
Exelon said that C&I load better aligns with its baseload generation portfolio, since C&I load is much more predictable and stable than residential load, as C&I load is less exposed to weather fluctuations
Exelon further said that it can achieve scale in serving C&I load that is not possible with residential customers
While residential gross margins are higher, Exelon said that these gross margins don't account for residential customer acquisition costs, which are higher than acquisition costs for C&I customers
In focusing on the C&I market, Exelon also cited the opportunity to provide a full suite of innovative products, commodities, and clean energy solutions to highly rated counterparties in multiple locations
Asked about potential retail acquisitions due to challenges faced by other retail suppliers, Exelon executives said that the company would continue to look for any attractive books that come to the market, and reiterated its previously reported strategy that, for any retail acquisition, Exelon is seeking books that can easily fit into its platform
In discussing financing activities, Exelon reported that, on April 8, 2020, NewEnergy Receivables LLC, a bankruptcy remote, special purpose entity, which is wholly owned by Exelon Generation, entered into an accounts receivable financing facility
with a number of financial institutions and a commercial paper conduit to sell certain customer
accounts receivables. Generation received approximately $500 million of cash in accordance
with the initial sale of approximately $1.2 billion receivables.
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Remains Committed To C&I Strategy For Constellation
Continues To Look For Attractive Retail Books Which May Come To Market
May 8, 2020
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Reporting by Paul Ring • ring@energychoicematters.com
Balance of Year Sensitivities Operating Net
Income ($M)
C&I Load Volumes (+/- 1%) +/- $15M
Residential Load Volumes (+/- 1%) +/- $7M
Constellation Retail Power Load Served By Region
2019 TWh
Mid-Atlantic 52
ERCOT 14
New York 17
Midwest 42
New England, South and West 25
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