Exelon: On Track To De-Risk Its Business Operations

| About: Exelon Corporation (EXC)

Summary

Growing exposure to regulated utility business, as merchant business suffers from weak power prices.

Company should opt to retire its uneconomical nuclear power assets.

Cost-cut measures will support its earnings growth in the near term.

Exelon Corp. (NYSE:EXC) is among the leading utility companies in the U.S., which is expanding its regulated assets, as merchant power market stays weak. The company is expanding its rate base, through mergers and acquisitions, and capital investments. As the company will continue to expand its regulated rate base, its business fundamentals will improve, which will support its future growth rate. The company plans to spend nearly $25 billion on capital expenditures through 2020, which will help it to increase its regulated business exposure to 70% of the consolidated operations. Also, the company's bottom-line growth in the upcoming quarters will be positively affected by its cost-cut measures. I believe, as the company will continue to execute its growth plans, the stock valuations will expand. The stock is currently trading at a valuation discount in contrast to its peers.

Financial Performance and Catalysts

EXC has been delivering healthy financial performance, and the momentum is expected to continue in the future. The company is systematically divesting its non-core assets, expanding its natural gas and renewable generation capacity and matching generation fleet with its load business, which will support its long-term performance. EXC reported a solid performance for 3Q16. It posted adjusted EPS of $0.91 for 3Q16, up 9% YoY. Also, adjusted EPS for the quarter came ahead of the management's guidance range of $0.65 to $0.75. Also, the company reported revenues of $8.83 billion for the quarter, ahead of the consensus estimate of $8.69 billion. The company's performance for the quarter was positively affected by regulatory rate increases and favourable weather conditions. Also, the company raised its EPS guidance for 2016 from $2.4-2.7 to $2.55-2.75.

The company's utility business remains strong, which will support its long-term growth. Also, the company has a plan to make capital investments of $25 billion to strengthen its utility infrastructure, which will positively affect its rate base; its rate base is expected to grow at a healthy rate of 6% per annum. Also, the company's utility business EPS is expected to grow to $1.84 in 2020 from $1.38 in 2016. However, its merchant power business is anticipated to stay challenging, as power prices are weak. EXC's generation capacity in the PJM region remains uneconomical at current forward prices; therefore, I think, EXC should opt to retire its unprofitable nuclear power plants.

The company is expecting clarity soon on the future of its nuclear power plants in Illinois and New York, and I think, by the end of 2016, it will make a decision regarding the faith of its nuclear power stations. The company should opt to retire its uneconomical power plants, which will help EXC to improve its risk profile. However, despite the challenging environment for the company's merchant business operations, the merchant operations will continue to generate strong cash flows, which can be used to expand the regulated utility base and repay debt.

Furthermore, the company's cost-cut measures will support its bottom-line growth. EXC is working to improve its cost structure and improve regulatory returns of the recently acquired Pepco. EXC has a strong track record and experience of integrating the operation of acquired companies. Also, EXC announced incremental cost savings of $225 million for 2018 and 2019. As the company will continue to execute its growth plans and integrate operations of Pepco, its future earnings growth will become more visible. Also, in the future years, once the company decides the faith of its uneconomical nuclear assets and complete the integration of Pepco, it can opt for another acquisition to grow its regulated utility assets, which will bode well for the stock valuations.

Summation

The company is correctly growing its exposure to regulated utility business, as merchant business suffers from weak power prices. Also, the company should opt to retire its uneconomical nuclear power assets, which will positively affect its long-term growth. The company has a robust capital expenditure plan of $25 billion, which will result in rate base growth of 6% per year and support bottom-line growth. Also, its cost-cut measures will support its earnings growth in the near term. Moreover, EXC current valuations are attractive, as the stock is trading at a forward P/E of 12.5x, in contrast to its industry average forward P/E of 18x.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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