Exelon Has The Power To Excel

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 |  About: Exelon Corporation (EXC)
by: Real Estater

Summary

Incremental earnings derived from regulated power should improve Exelon’s balance and lead to lower costs of debt.

Capital costs should be able to be passed off to consumers, who rely on utilities as insurance to local solar.

Emission-free nature of nuclear plants should receive positive regulatory treatment in future.

Company Description

According to management, "As the leading U.S. competitive power generator, Exelon owns approximately 35,000 megawatts of power generation, including the nation's largest nuclear fleet of more than 19,000 megawatts. In addition, the new company is the nation's second-largest regulated distributor of electricity and gas, with more than 7.8 million customers in Maryland, Illinois and Pennsylvania. The three Exelon utilities - BGE, ComEd and PECO - remain headquartered in Baltimore, Chicago and Philadelphia, respectively, and are focused on safety, customer service, reliability and continued infrastructure investment in their service areas. Exelon remains headquartered in Chicago and trades on the NYSE under the ticker symbol (NYSE:EXC)."

Exelon is made up of four operating divisions. Exelon Generation is their merchant generation fleet and crown jewel asset, consisting of the largest collection of nuclear power plants in the US. ComEd, PECO, and BGE are the three utilities operating divisions, serving Northern Illinois, Southeastern Pennsylvania, and Central Maryland respectively. They own distribution monopolies within their regions. ComEd distributes electricity, while PECO and BGE distribute electricity and natural gas.

History

EXC Chart

EXC data by YCharts

Exelon was created in 2000 through the merger of PECO Energy Company and Unicom, which owned Commonwealth Edison. Thereafter, Exelon merged with Constellation Energy Group in March 2012, adding 3 merchant nuclear plants to its existing 11. On April 30, 2014, Exelon announced an acquisition proposal for Pepco Holdings.

Commentary on Q2 Results

  • Delivered adjusted operating earnings of $0.51/share exceeding guidance range of $0.40-$0.50/share. BGE continues to under contribute due to increased bad debt expense and labor, contracting, and materials.
  • Management guidance remained at $2.25-$2.55/share for the year and $0.60-$0.70/share for Q3/2014.
  • Overall, increased distribution revenue from utilities was offset by lower realized energy prices from generation.

Investment Rationale

  • Pepco acquisition criticism: EXC has slid since announcing the Pepco acquisition. Criticism has focused on the limited earnings accretion, which would be $0.1-$0.2, and high execution risk. While the deal would make Exelon the dominant player in the region, payoff is viewed as limited. I believe that the incremental earnings derived from regulated power should improve Exelon's balance and lead to lower costs of debt. Further, a strong balance sheet would also allow management to explore acquisitions in the unregulated market, which should be well received by investors.
  • Undue pessimism surrounding the utilities industry: The argument is that the combination of local solar panels and backup NatGas should be able to provide sufficient electricity to allow homeowners and offices to avoid paying for utilities. However, I believe that utilities would engage in litigation to find a way to pass off their high capital costs. They have a high probability of winning regulatory disputes versus local solar users, who don't pay utilities, to avoid swallowing stranded costs. Thus, capital costs should be able to be passed off to consumers, who rely on utilities as insurance to local solar.
  • Regulatory changes regarding carbon emissions: Exelon currently owns several nuclear power plants in Chicago that are FCF negative. As a result, the company was in discussion with regulators to improve the FCF profile for these power plants. So far, the firm has been able to eliminate DOE nuclear waste fees. I believe that the emission-free nature of nuclear plants should receive positive treatment in future.

Comparables Table

(NYSE:PPL) (NYSE:ETR) (NYSE:D) (NYSE:NEE) (NYSE:FE) (NYSE:DUK) (NYSE:CNP) (NYSE:AEE) (NYSE:AES)
Company Name: EXELON CORP PPL CORPORATION ENTERGY CORP DOMINION RES/VA NEXTERA ENERGY FIRSTENERGY CORP DUKE ENERGY CORP CENTERPOINT ENER AMEREN CORP AES CORP
Latest Fiscal Year: 12/2013 12/2013 12/2013 12/2013 12/2013 12/2013 12/2013 12/2013 12/2013 12/2013
Latest Available Period Date: 6/30/2014 6/30/2014 6/30/2014 6/30/2014 6/30/2014 6/30/2014 3/31/2014 6/30/2014 6/30/2014 3/31/2014
52-Week High 37.73 35.56 82.48 73.75 102.51 38.92 75.13 25.75 42.24 15.65
52-Week High Date 6/6/2014 6/30/2014 7/1/2014 4/30/2014 6/30/2014 11/8/2013 4/29/2014 6/30/2014 2/21/2014 6/30/2014
52-Week Low 26.45 28.95 60.22 56.58 78.81 29.98 64.16 22.46 32.61 12.38
52-Week Low Date 1/3/2014 12/18/2013 12/10/2013 9/4/2013 9/18/2013 8/5/2014 9/4/2013 12/18/2013 9/11/2013 8/19/2013
Daily Volume 11,411,071 8,253,502 2,524,047 5,188,573 4,520,283 6,625,639 7,066,803 9,841,033 2,739,980 6,789,614
Current Price: 31.18 31.94 70.82 64.91 92.35 31.48 69.84 23.56 36.98 14.36
52-Week High % Change -17.4% -10.2% -14.1% -12.0% -9.9% -19.1% -7.0% -8.5% -12.5% -8.2%
52-Week Low % Change 17.9% 10.3% 17.6% 14.7% 17.2% 5.0% 8.9% 4.9% 13.4% 16.0%
Total Common Shares (NYSE:M) 857.00 630.3 178.4 581.0 435.0 418.6 706.0 429.0 242.6 722.5
Market Capitalization 26,789.8 21,220.3 12,716.0 37,821.0 40,297.6 13,232.4 49,393.5 10,126.0 8,972.6 10,386.1
Total Debt 21,449.0 21,931.0 13,691.5 24,418.0 29,950.0 21,754.0 41,622.0 8,507.0 6,737.0 21,485.0
Preferred Stock 193.0 - 304.8 134.0 - - - - - 78.0
Minority Interest 1,183.0 - - - - 2.0 80.0 - 142.0 3,448.0
- Cash and Equivalents 1,362.0 1,269.0 650.1 419.0 622.0 76.0 1,537.0 1,015.0 46.0 2,034.0
Current Enterprise Value 48,252.8 41,882.3 26,062.2 61,954.0 69,625.6 34,912.4 89,558.5 17,618.0 15,805.6 33,363.1
Valuation Average Median
Total Revenue LFY 24,888.0 11,860.0 11,390.9 13,120.0 15,136.0 14,917.0 24,598.0 8,106.0 5,838.0 15,891.0 14,574.5 14,018.5
LTM 25,938.0 10,050.0 12,249.4 13,060.0 15,727.0 15,368.0 25,324.0 8,871.0 5,973.0 16,133.0 14,869.3 14,214.0
FY+1 24,639.6 11,484.6 12,535.1 13,229.0 16,183.1 15,184.8 25,867.5 8,616.1 6,122.6 17,758.2 15,162.1 14,206.9
FY+2 24,476.1 12,035.7 12,426.1 13,679.3 16,960.5 15,117.3 26,231.8 8,605.3 6,279.1 18,463.8 15,427.5 14,398.3
EV/Total Revenue LFY 1.70x 3.33x 2.15x 4.60x 4.31x 2.30x 3.59x 2.14x 2.62x 2.05x 2.9x 2.5x
LTM 2.08x 4.40x 2.29x 5.04x 4.71x 2.52x 3.57x 2.08x 2.80x 2.07x 3.2x 2.7x
FY+1 1.96x 3.65x 2.08x 4.68x 4.30x 2.30x 3.46x 2.04x 2.58x 1.88x 2.9x 2.4x
FY+2 1.97x 3.48x 2.10x 4.53x 4.11x 2.31x 3.41x 2.05x 2.52x 1.81x 2.8x 2.4x
EBITDA LFY 7,425.0 4,419.0 3,665.0 4,706.0 6,062.0 4,096.0 8,626.0 1,964.0 1,921.0 4,321.0 4,720.5 4,370.0
LTM 6,556.0 4,447.0 4,212.0 4,409.0 6,187.0 3,480.0 8,974.0 1,888.0 2,075.0 4,357.0 4,658.5 4,383.0
FY+1 5,966.6 4,183.5 3,657.4 5,223.8 6,568.9 4,012.9 8,797.2 1,982.5 2,025.3 4,713.3 4,713.2 4,448.4
FY+2 6,499.5 4,268.9 3,470.8 5,693.0 7,204.8 4,487.4 9,449.7 1,996.7 2,152.5 4,972.3 5,019.5 4,729.8
EV/EBITDA LFY 5.68x 8.93x 6.69x 12.81x 10.76x 8.36x 10.24x 8.82x 7.96x 7.55x 8.8x 8.6x
LTM 7.36x 9.42x 6.19x 14.05x 11.25x 10.03x 9.98x 9.33x 7.62x 7.66x 9.3x 9.4x
FY+1 8.09x 10.01x 7.13x 11.86x 10.60x 8.70x 10.18x 8.89x 7.80x 7.08x 9.0x 8.8x
FY+2 7.42x 9.81x 7.51x 10.88x 9.66x 7.78x 9.48x 8.82x 7.34x 6.71x 8.5x 8.3x
EPS LFY 1.78 2.58 5.36 3.09 4.75 3.00 4.40 1.20 2.10 1.42 2.97 2.79
LTM 2.14 3.45 6.78 2.71 4.65 1.97 4.87 1.19 2.46 1.71 3.19 2.58
FY+1 2.40 2.25 6.13 3.51 5.32 2.49 4.57 1.17 2.39 1.33 3.16 2.45
FY+2 2.51 2.25 5.32 3.74 5.68 2.95 4.76 1.24 2.57 1.44 3.25 2.76
P/E LFY 15.41x 11.65x 11.80x 20.95x 18.04x 10.99x 15.68x 19.32x 17.22x 10.19x 15.1x 15.5x
LTM 14.57x 9.25x 10.45x 23.99x 19.84x 15.98x 14.34x 19.72x 15.03x 8.40x 15.2x 14.8x
FY+1 13.00x 14.18x 11.55x 18.51x 17.35x 12.63x 15.28x 20.07x 15.47x 10.80x 14.9x 14.7x
FY+2 12.42x 14.19x 13.30x 17.36x 16.26x 10.68x 14.67x 19.08x 14.37x 9.97x 14.2x 14.3x
Revenue Growth 1 Year 6.0% -3.5% 10.6% 0.2% 6.2% -2.3% 25.3% 8.8% 1.0% -7.4% 4.5% 3.5%
5 Year 8.4% 15.6% 3.9% -3.7% 1.3% 2.2% 17.4% 3.7% -2.9% 6.0% 5.2% 3.8%
EBITDA Growth 1 Year 13.4% 0.5% 6.9% 81.1% 20.1% -6.8% 34.2% -16.1% 0.9% -8.1% 12.6% 3.9%
5 Year -0.5% 10.9% 0.9% -0.6% 6.6% -2.3% 14.6% -0.2% -1.8% 0.3% 2.8% 0.1%
EBITDA Margin LTM 25.28% 44.2% 34.4% 33.8% 39.3% 22.6% 35.4% 21.3% 34.7% 27.0% 31.8% 34.1%
FY+1 24.22% 36.4% 29.2% 39.5% 40.6% 26.4% 34.0% 23.0% 33.1% 26.5% 31.3% 31.1%
FY+2 26.55% 35.5% 27.9% 41.6% 42.5% 29.7% 36.0% 23.2% 34.3% 26.9% 32.4% 32.0%
Click to enlarge

Source: Bloomberg

Conclusions

The comparables analysis above shows that EXC trades at lower EV/EBITDA and EV/Revenue ratios than its peers, but demonstrated greater YoY EBITDA growth and revenue growth. This discrepancy is reflective of the market's view towards the Pepco acquisition. Given the rational that I have illustrated, I nevertheless believe that this phenomenon will reverse, making EXC a compelling long idea within the power and utilities space.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.