Only five utilities in the U.S. have enterprise values of $40 billion or more, and they are called the "40-plus" club. They are Southern (SO), Dominion Resources (D), NextEra Energy (NEE), Duke Energy (DUK) and Exelon (EXC). Since last August, shares of the group have climbed 14.2%, and four out of the five have done well. The fifth, Exelon, has been a disappointment and is dragging the overall performance of the group. It's time to look under the hood to see what's going on.
Within the 40-plus club, Exelon is unique. It's the only member that owns electric and gas utilities in restructured states. It also recently completed a challenging acquisition of another utility, Constellation Energy Group. Year-over-year analysis is difficult, as is understanding how all the subsidiaries work together. These concerns and uncertainties about costs and organizational effectiveness may be the reason Exelon's stock has taken a pounding. But uncertainties may be fading.
When you lift the hood of the new Exelon, you'll be surprised. On its website, the company provides a comprehensive picture in a presentation that erases all doubt (PDF).
When you review the slides, you'll see a solid company with an impressive strategy. Exelon smartly rearranged all the pieces and built a first-class utility. More important, it has become the industry's cost leader, and cost leaders always win.
What catches the eyes of investors is how the company has attacked the value chain. Unlike any other electric utility, the new Exelon owns most of the value chain. Its assets are sophisticated and forward-thinking, and they provide investors with long-term value. Further, because Exelon owns the entire value chain, Exelon can hedge positions using their own assets.
The new Exelon has become a national utility. It now operates in 47 states and serves two-thirds of the nation's Fortune 100 companies.
The new Exelon strategically straddled their assets. Approximately 50% of its earnings before interest, taxes, depreciation and amortization comes from the regulated side of the utility industry; the other 50% comes from the competitive side.
The new Exelon has become the leader in the power-marketing business. Power-marketing is a discipline that uses physical assets to create financial benefits. The power-marketing business is all about strategic economics, and Exelon owns those economics. It will be difficult to wrestle away a high-valued industrial or commercial customer from Exelon, as most competitors lack the assets and the capability to hedge these deals.
There's much more under the hood. At the front end of the value chain, Exelon owns natural gas assets. The estimated proved reserves owned by Exelon are approximately 295 billion cubic feet, which can produce 55 to 70 million cubic feet per day.
Think about Exelon's fuel position. This company doesn't care that natural gas prices are at historically low levels. When low fuel costs are fed into its hungry generators, that means higher gross margins at the other end of the value chain. Should fuel costs migrate back to higher levels, the company can sell its gas into other markets. Exelon cannot lose.
Exelon's other dominant position in the front end of the value chain is its huge fleet of power plants. The company owns 19,000 megawatts of nuclear, 10,000 megawatts of natural gas, 2,000 megawatts of hydro, 2,000 megawatts of oil, 1,000 megawatts of coal and 1,000 megawatts of renewables.
Approximately 63% of Exelon's generation is carbon-free, and the balance of its fleet is either low carbon or on standby as reserve capacity. As a result, there's no Environmental Protection Agency issue with this new company.
It gets better. Exelon's fleet of nuclear power plants are one the nation's safest and most economic, and they're very reliable. Frankly, the performance of Exelon's nuclear fleet is nothing short of stunning. At about $18 per megawatt hour, their production costs are lower than the industry's average of $22. The company's capacity factor, 93.6%, is a market-leading position. Low production costs and high capacity factors don't come by accident. They're indicative of a competent and dedicated management team.
Finally, look at Exelon's dividend. It's at well above 5%, and Exelon's management is committed to the payout rate of $2.10. It's an easy commitment to keep -- this company has got the management team, the strategy and the assets to deliver.