By revenue measures, Exelon is the larger company with revenue of more than $36 billion, far outstripping NextEra’s nearly $17 billion. But NextEra has been much more successful in turning that revenue into income. On an earnings per share basis, NextEra reported 2018 full-year earnings of $13.88 per share, compared to Exelon’s $2.07 per share (GAAP).
While Exelon has grown slowly through its regulated utilities, NextEra has forged ahead by leveraging its non-regulated NextEra Energy Resources business.
The rapid earnings growth of the company explains why the market has assigned NextEra’s market cap at a level approaching twice the level of Exelon, although Exelon stock has been outperforming NextEra recently.
With these metrics, and similar forward-looking dividend yields (NextEra at 2.43 percent and Exelon at 3.03 percent), why would any investor choose Exelon over NextEra? Isn’t it an open and shut case?
The Heart of Each Utility
Here is how NextEra Energy describes itself on its website:
“As one of America's largest capital investors in infrastructure, and with more than $40 billion in new infrastructure investments planned through 2020, we're helping ensure that the next energy to power our dreams will be American energy.”
(Source: Exelon website)
Contrast that with Exelon’s description of itself:
“Exelon's family of companies represents every stage of the energy value chain. Exelon’s six utilities deliver electricity and natural gas to approximately 10 million customers in Delaware, the District of Columbia, Illinois, Maryland, New Jersey and Pennsylvania through its Atlantic City Electric, BGE, ComEd, Delmarva Power, PECO and Pepco subsidiaries. Exelon is one of the largest competitive U.S. power generators, with more than 32,700 megawatts of nuclear, gas, wind, solar and hydroelectric generating capacity comprising one of the nation’s cleanest and lowest-cost power generation fleets. The company’s Constellation business unit provides energy products and services to approximately 2 million residential, public sector and business customers, including more than two-thirds of the Fortune 100.”
(Source: NextEra website)
Both companies have both regulated utilities as well as an unregulated subsidiary, but the contrast between the emphasis on their non-regulated business is stark.
NextEra’s non-regulated group (NextEra Energy Resources) contributed 70 percent of the company’s EPS for 2018, while Exelon’s non-regulated group (Exelon Generation) contributed only 18 percent towards its 2018 EPS.
(Source: NextEra Energy's 4th Quarter 2018 Slide Presentation)
(Source: Exelon's 4 Quarter 2018 Slide Presentation)
NextEra’s ability to rapidly expand its non-regulated activities through the development of the renewable energy (solar and wind farms) business has been the key to the company’s success.
The challenge is whether NextEra Energy can continue to outpace Exelon.
The argument for Exelon
Despite recent history, there are several reasons to consider that Exelon may outperform NextEra over the coming decade.
Actual Stock Performance
There is no question that NextEra remains the darling of utility investors. Ironically, purely from a stock price perspective, while NextEra has outpaced Exelon’s stock performance over the past 5 years, the story has shifted over the past year.
5-Year Stock Chart for NextEra Energy and Exelon
(Source: Yahoo Finance)
1-Year Stock Chart for NextEra Energy and Exelon
(Source: Yahoo Finance)
(Source: Seeking Alpha)
(Source: NextEra Energy's 4th Quarter 2018 Slide Presentation)
(Source: Exelon's 4th Quarter 2018 Slide Presentation)
Regulated Utilities vs. Non-regulated Power Generation
Exelon’s strength is in its regulated utilities, comprising of ComEd (servicing the Chicago-Northern Illinois region) and three companies servicing the mid-Atlantic region (BGE, PECO, and PHI).
While these are slower growing than non-regulated generation, their revenues are more dependable and can be reliably forecasted.
NextEra began developing its non-regulated renewables business when it saw that other utilities were slow to jump onto wind and solar power.
That time is coming to an end, and as regulated utilities move to increase the amount of renewables in their fuel mix and the price of developing wind and solar power continues to decline, older, non-regulated renewable wind and solar farms will have to sell their power at lower prices, making it harder to justify their financing costs.
I suspect that even though NextEra would not say it outright, the company's interest in Gulf Power reflects its recognition that regulated utilities might become more important to secure its future.
Some people might expect me to focus on PG&E’s (PCG) bankruptcy and its impact on NextEra, but I am less concerned about the impact of the bankruptcy on both NextEra and Exelon. Both groups sell power to PG&E based on long-term contracts, but I don’t think it should be a determining factor for investing in either company.
Instead, there is more general evidence that the money has been made in the non-regulated power generation business and the future belongs more to regulated utilities. That would explain not only NextEra’s purchase of Gulf Power, but also Dominion’s purchase of SCANA.
While NextEra’s Energy Resources generates electricity in a large number of states, so does Exelon. In addition, NextEra’s regulated utilities are concentrated in Florida.
Florida has been an economically growing state, and that is unlikely to change, but it is also a state that has repeatedly suffered from natural disasters - and not only from critical events such as hurricanes. Longer term, it must deal with the problems of rising sea levels and a depletion of its drinking water.
(Source: Florida Power & Light)
The state (and by connection Florida Power & Light (FP)) will have to deal with these longer-term adverse natural changes.
Being spread out in different geographic areas (the Midwest as well as the Mid-Atlantic), Exelon is less likely to be hit by any one disaster that will tax its resources. A storm in Chicago is unlikely to also knock out power in Baltimore or the Washington, D.C., area and vice versa.
A Non-Fossil Fuel Future
As with NextEra, Exelon has embraced non-fossil fuel generation, although mainly through the use of nuclear power rather than renewables, with 62 percent of its energy generated by nuclear and only 3 percent by oil.
There are certainly risks in being dependent on nuclear power, and most of utility investors recognize this possible hazard, which I don’t want to minimize, but FPL is also partially dependent on nuclear power - although to a lesser extent.
While NextEra has developed its reputation for power generation based on renewable energy sources, it has been slower to embrace renewable energy in its regulated utility, FPL.
FPL just recently announced the installation of more than 30 million solar panels by 2030, with solar facilities expected to be built across the state. The company, which plans to eliminate its last coal-fired plant by the end of this year, currently has about 5 million solar panels installed.
According to its news release, “FPL's planned renewable energy generation and storage, combined with its nuclear power plants in St. Lucie and Miami-Dade counties, is projected to generate more than 40 percent of its electricity emissions-free by 2030.”
In truth, NextEra has been slow to bring renewable energy generation to its home territory.
As of December 31, 2017, FPL owned 34 units that used fossil fuel with a generating capacity of 21,978 MW, compared to 5 solar generation facilities with a generating capacity totaling 259 MW. In fact, the utility had more generating capacity in coal units (888 MW) than in solar in the state. (Source: NextEra 2017 Annual Report)
Based on past history, I can certainly understand why NextEra investors continue to believe in the superiority of NextEra over any other utility, but NextEra investors have to ask whether the future will mimic the past.
With more utilities embracing renewable energy sources, and if interest rate increases make financing more difficult, companies based on the regulated utility model may well outperform the non-regulated power generation sector.
In that scenario, diverse electric utility companies located in good economic regions of the country will have a strong investment case.
It is time to consider easing up on your NextEra Energy holdings and adding Exelon to your portfolio mix.
Disclosure: I am/we are long EXC. 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.