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Exelon Reports COVID-Related Declines In Gross Margin In Constellation Business

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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Copyright 2010-20
Reporting by Paul Ring •

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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:

Balance of Year Sensitivities     Operating Net
                                   Income ($M)
C&I Load Volumes (+/- 1%)            +/- $15M
Residential Load Volumes (+/- 1%)    +/-  $7M

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:

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

"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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