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2001 BW 50

SPRING 2002

STREET WISE

Exelon: A Bright Light in Energy
A buying spree made it the top U.S. nuclear-power generator. After Enron, it's cutting debt and stressing the transmission biz


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A year ago, when the California energy crisis was helping nuclear power regain its popularity, Exelon (EXC ), the nation's largest nuclear-plant operator, rode the wave. Shares of the Chicago-based utility hit a yearly high of $70 in late April, 2001.

Today, the fallout from Enron's collapse, not the Golden State's power shortage, is rocking the energy sector. But Exelon's stock is holding its own at $52. And the company, No. 12 on this year's BusinessWeek 50 list of top-performing companies, still expects to grow. Add to that a sound balance sheet as Exelon shifts from acquiring generating assets to maximizing distribution assets, and you have an energy company that could be worth plugging into.

TRADITIONAL CORE.  Exelon was created in October, 2000, following the merger of PECO (Philadelphia Electric Co.) and Unicom of Chicago. The deal created one of the nation's largest utilities, serving about 5 million electricity and natural-gas customers in Illinois and Pennsylvania.

Since the merger, Exelon has ventured into a variety of businesses and projects, including spearheading technology development that would allow for the construction of new reactors more cheaply and quickly than is now possible. But Exelon's core, accounting for two-thirds of $15 billion in annual revenues, remains the traditional utility business -- generating and delivering electricity and natural gas.

So how did Exelon become a leader in nuke power? Corbin A. McNeill Jr., one of the company's two co-CEOs, is a large part of the answer. In the mid-1990s, when electric-market deregulation was under way, McNeill, then an executive at PECO, saw an opportunity to buy nuclear assets on the cheap and eventually turn lemons into lemonade. Nuclear plants back then were associated with operating problems and low margins. But McNeill snatched up some troubled nuclear assets and used PECO's operating experience to bring them up to snuff.

PLENTY OF JUICE.  PECO "got its act together and leaped ahead of a lot of the other companies," says David Schanzer, an analyst for Janney Montgomery Scott and a former PECO employee. McNeill has announced that he will retire on Apr. 23, making co-CEO John W. Rowe the sole chief at the company's helm.

Exelon's fleet of nuclear-powered generating assets comprises 10 stations and 17 reactors, which represent roughly 20% of the U.S. nuke-power capacity (the country has more than 100 operating nuclear plants). This makes Exelon the top U.S. producer of nuke power and the third-largest globally, with a generating capacity of more than 17,000 megawatts, enough juice for some 15.3 million homes per hour.

Apart from nukes, Exelon's other power sources include hydro and fossil fuels, boosting its fully owned total generating capacity to 22,000 megawatts -- sufficient for powering some 19.8 million homes per hour. The outfit's closest U.S. competitors include Dominion Resources (D ) in Richmond, Va., which also has a strong natural-gas focus.

CLOSER SCRUTINY.  Now, Exelon appears to be shifting its focus toward transmission and distribution assets -- and away from acquiring generation assets. The Enron debacle has made accumulating generating assets less attractive, explains Paul O'Rourke, energy-practices vice-president at consultancy Charles River Associates. Investors have begun to scrutinize balance sheets more closely in the post-Enron era. And Exelon has racked up a fair amount of debt as it gobbled up generating assets. In response, it has recently reduced its debt-to-capital ratio to 47%, down from the 50% range.

Even before Enron's fall, moreover, Rowe thought investments in generating assets were creating a bubble that would burst. As a New England Electric System executive before moving to Unicom, Rowe had won a reputation for selling assets some 50% above book value. Now, word on Wall Street is that he wants to get out of the generation side and focus on being a so-called wires business -- a utility heavy on distribution and transmission assets.

Exelon CFO Ruth M. Gillis explains: "We want to sharpen our focus in the utility business." And she adds that the company will continue to look for strategic acquisitions, possibly in the Southeast or Southwest, that would complement Exelon's current distribution hubs in Chicago and Philadelphia and create a triangular geographic reach. "The addition of one or more distribution hubs would be very interesting to us," says Gillis. Ultimately, both Rowe and McNeill see the need to be big to survive in the deregulating power market. But "the more conservative [strategic] approach is winning out," says Paul Fremont, an analyst at Jefferies & Co.

GROW TO SURVIVE.  Exelon is targeting annual earnings growth of 5% to 7% on average over the next few years, with up to two percentage points of that coming from the company's core utility business, says Gillis. The remaining portions would come from selective acquisitions and from cutting costs by at least $100 million for 2002. And in yet another sign that Exelon wants to home in on being a traditional utility under Rowe's vision, the company recently raised its dividend 4.1%, to $1.76 from $1.69. Utility investors have commonly been attracted to the sector's regular dividends.

Exelon shares remain 25% short of their 52-week high of $70 in 2001, when nukes were hot. But at a time when energy prices may be under pressure, a utility offering habitual dividends and stable growth prospects doesn't look bad at all. And the stock, trading at 11 times 2002 earnings per share of $4.63, is affordable. For investors who want to be in this industry, Exelon could be a steady ride.


MARCH 25, 2002



By Heesun Wee

Edited by Beth Belton

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