Debt and the industry
The power utilities business is a capital intensive business. A lot of capital is needed to build up big power plants and lay large transmission and distribution networks. The networks spread thousands of miles. This is why utility companies’ debt is higher than other industries.
Exelon’s debt position and leverage
Exelon (EXC) has a total debt of $20.12 billion on its books. Most of the debts are long-term obligations. Exelon’s short-term debt obligations are less than $2 billion. Exelon raised these debts through many financial instruments like bonds, notes, and debentures.
The above chart shows that Exelon has healthy debt ratios compared to its competitors. This implies that its operations are underleveraged compared to the industry. Exelon has a debt-to-equity ratio of less than one. The only company maintaining a lower debt-to-equity ratio than Exelon is Public Service Enterprise Group Inc. (PEG) at 0.75x.
Another important metric in the power industry is the debt-to-asset ratio. The ratio is a result of the business’ rich asset base. Exelon has the lowest debt-to-asset ratio in the industry at 0.25x. Among its competitors, Calpine Corporation (CPN) is the most leveraged company. NRG Energy’s (NRG) debt metrics are in line with the industry average.
These leverage ratios are important for the Utilities Select Sector SPDR (XLU). They allow XLU to give the right weight to utility stocks in its portfolio. It explains the riskiness of the business.
Room for leveraged acquisition
A lean debt metric leaves enough room for Exelon to take on debts to fund acquisitions. This year, Exelon announced two large acquisitions to grow the company inorganically. It failed to register growth from its own operation. These acquisitions will bring Exelon’s leverage closer to its competitors.