Exelon: Ready To Move Higher

September 15, 2012  | 8 comments  |  about: EXC

By Efsinvestments
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Edited by Adam Isaac

Exelon Corporation (EXC) is the largest nuclear energy producer in the U.S. In my previous article, I analyzed the company's ability to continuewith its healthy divided payments. Exelon operates through different segments, and it is extremely important to understand each segment in order to understand the business and prospects of the company. In this article, I take a look at Exelon's segments, and the contribution of each segment towards revenues, cash flows and debt of the parent company.

Exelon operates through four segments: Exelon Generation Co. LLC (ExGen) is in the energy generation business, while commonwealth Edison (ComEd), PECO Energy Co. (PECO) and Baltimore Electric and Gas Company (BEG) are in the energy delivery business. The four segments of the company are discussed below:

Exelon Generation Co. LLC (ExGen)

The capacity of Exelon Generation has increased significantly thanks to the merger with Constellation. This segment now provides 170 terawatt per hour. The firm expects a healthy growth in its residential and commercial markets by 2014. Despite the lower power prices, business profile of Exelon is strong. ExGen uses efficient hedging techniques to manage its exposure to the commodity prices. The current hedging program adds significant value to the firm. ExGen had approximately $7.2 billion of debt, while Exelon Corporation had total debt of about $18.4 billion at the end of the second quarter.

ExGen revenues amount for more than 50% of total revenues of the parent company. According to the most recent earnings announcement, ExGen operating cash flows were $1.866 billion, significantly higher than the same quarter last year. Furthermore, total cash and cash equivalents also increased substantially from the same quarter last year, and stood at $930 million as compared to $109 million from the same quarter last year. ExGen has an independent credit line of $2.84 billion and the firm should not face any liquidity concerns. Moreover, the firm should also be able to generate significant synergies from the merger and bring down costs.

Commonwealth Edison (ComEd)

ComEd is engaged principally in the purchase and regulated retail sale of electricity to customers in northern Illinois. ComEd's territory has an area of about 11,400 square miles and a population of roughly 9 million. The service area includes the City of Chicago, an area of around 225 square miles with a population of 3 million. ComEd has about 3.8 million customers.

ComEd is the second largest contributor towards the total revenues of the company. Revenues from ComEd amount to almost 30% of the total revenues of the Exelon Corporation. At the end of the second quarter of 2012, ComEd generated operating cash flows of $722 million; the operating cash flows for ComEd increased many folds, as it only contributed $77 million for the same quarter last year.

In addition, cash and cash equivalents for the quarter came down to $29 million from $94 million for the second quarter of 2011. However, the reason for the decline in cash was due to the retirement of debt worth $450 million, which took most of the cash generated through operations. ComEd has total long-term debt of $5.4 billion and current liabilities of about $1.9 billion. The segment has strong liquidity position; the firm has strong FFO and it also has a credit line of $1 billion.

PECO Energy Co. (PECO)

PECO is engaged principally in the purchase and regulated retail sale of electricity to customers in southeastern Pennsylvania, including Philadelphia. The company also processes and sells natural gas to retail customers in the Pennsylvania counties nearby Philadelphia.

PECO's combined territory has an area of around 2,100 square miles and an estimated population of 4.0 million. PECO provides service in an area of around 1,900 square miles, with a populace of about 3.9 million, including 1.5 million in the City of Philadelphia. PECO distributes electricity to about 1.6 million customers and natural gas to around 494,000 customers.

PECO is the third major segment of Exelon Corporation and contributes about 20% to the total revenues of the corporation. However, revenues from PECO have declined by 30% from the year ago levels. PECO showed a slight improvement in operating cash flows as compared to the year ago figures. Operating cash flows for the second quarter of 2012 stood at $409 million for PECO, while for the same quarter last year, operating cash flows were $359 million.

Cash and cash equivalents from the segment decreased to $272 million from the year-ago figure of $319 million. PECO spent $179 million on capital expenditures and $172 million on dividend payments. On the other hand, PECO carries a relatively small level of long-term debt at $1.78 billion and has strong liquidity position. The segment also has an independent credit line of $.6 billion to meet its liquidity needs.

Baltimore Electric and Gas Company (BEG)

Baltimore Electric and Gas Company (BEG) is the smallest contributor towards the revenues; revenues for the second quarter were $614 million, which came down from levels of $672 million for the second quarter last year. Furthermore, there was also a decline in the operating cash flows for BGE. Operating cash flows for the second quarter were $369 million, down from $473 million generated in the second quarter of 2011. In addition, cash and cash equivalents also came down to $53 million at the end of the quarter from year ago levels of $121 million.

Summary

I am a big fan of utility companies. These stocks are slow, but steady upside movers. In fact, shareholders of diversified utilities experienced double digit returns in the past 10 years. With a market cap of almost $30 billion, Exelon is one of the largest utility providers in the U.S. Among the utility space, only Duke Energy Corporation (DUK), Southern Company (SO), and Dominion Resources, Inc. (D) have market caps more than that of Exelon's. Compared to these companies, Exelon is trading at lower valuation multiples.

Exelon owns critical infrastructure assets that offer vital services and works as a natural monopoly. The merger of Exelon and Constellation has created a giant energy provider. The combined entity has one of the industry's cleanest, lowest-cost power generation armada. The arrangement will integrate two complementary upstream and downstream businesses, matching Exelon's power generation fleet with Constellation's customer-facing business.

Exelon also has one of the top management teams in the industry and this reflects in its operating results. The stock is still trading way below its heyday valuations, but I think it is ready to move higher.