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2001 BW 50



Q&A with Exelon's John Rowe
The CEO says the nuclear-energy powerhouse is focusing on fundamentals: "This business starts with keeping the lights on"

In October, 2000, Unicom Chairman and CEO John W. Rowe merged his Chicago-based electric utility with Philadelphia's Peco Energy to form Exelon (EXC ), a nuclear superpower with 17 reactors -- nearly a fifth of the nation's atomic-energy fleet. The nukes may still stir up some activists, but they're unquestionably a valuable asset. Nuclear power is the cheapest source of electricity, giving Exelon an edge over competitors. And the company, No. 12 on this year's BusinessWeek 50 list of top performers, has been making the most of these plants: They ran at 94% of capacity in 2001.

After the merger and a flurry of acquisitions, however, Exelon sat out the M&A game for most of 2001, inking only one midsize deal: The $443 million purchase of two large gas-fired power plants in Texas from TXU (TXU ) in December. Indeed, Rowe confides that Exelon's board has told management to reanalyze its previous deals to reassure directors that the money had been smartly spent. On top of that, Corbin A. McNeill Jr., Peco's former chief who has shared the CEO post at Exelon with Rowe, announced on Feb. 26 that he would retire early in April. By all accounts, McNeill has been the one pushing harder on dealmaking.

Still, Rowe, who has been hailed a "fissionary," insists that the $15.1 billion Chicago company remains committed to its growth-by-acquisition strategy. One reason is that prices of power plants are retreating, which makes a purchase more affordable. Also, Exelon has been strengthening its balance sheet by shedding speculative investments in such areas as wireless telecom. Rowe, who will be Exelon's chairman, president, and CEO as of Apr. 23, talked recently with BusinessWeek Correspondent Michael Arndt. Here are edited excerpts of their conversation:

Q: Let's review 2001. Your pro forma earnings were up 15%. Is some of that due to the spectacular jump in electricity prices we saw a year ago?
A: Yes, but that was offset by a collapse in electricity prices in the second half. So, on the whole, it wasn't an especially great year for wholesale electricity prices. Our big drivers were an absolutely astonishing performance by our nuclear group, which had a 94% capacity factor for the year and was more than $100 million underbudget, and a very fine performance by our delivery group, which was well under budget and improved reliability at the same time.

Q: Let's talk more about the distribution business. It takes a lot of money to keep those wires and transformers and substations up all the time. Is it worth the capital investment to do that, especially since prices are regulated?
A: The way I look at it is very simple: This business starts with keeping the lights on. If you don't do that really well, all your other plans for making money aren't worth a bag of oatmeal. Obviously, you have to try to get the best service you can with the least capital. But it doesn't respond to a simple return-on-investment criteria. California is a wonderful example of this: If you don't provide good service and reasonably stable prices, bad things happen to the whole value chain of your business.

Q: Looking at the rest of the value chain, if you will, one of the strong points of Exelon is its big nuclear fleet. What do you see in the future for nuclear?
A: It's my opinion that someday, there'll be a new generation of nuclear plants, but I don't believe that day is close at hand because natural gas is very cheap again. And I think that every analysis of the commodity markets suggests that over the next 10 years, natural gas will be cheap many more years than it is expensive. As long as that's the case, economics drives new plants to be gas-driven.

Q: Has what has happened after September 11 entered into this equation too? Have new fears of terrorism made people think twice about nuclear power?
A: I think it's fair to say we've been on a trend for the past three years where more and more people have been accepting nuclear than had been the case a decade ago. I do think the events of September 11 have caused people to ask more questions again about the security of the plants and the transportation of radioactive materials. There has been some increase in questioning post-September 11. But at least to date, most of the suggestions for improved security can be met without materially affecting the economics of the existing plants.

Q: You have built a very large power-generation company by creating Exelon -- and then adding on through your other deals. But in the last year, there wasn't anything big. Is that because you've stopped looking? Or is it because you didn't find anything you liked?
A: The prices were too high last year in the generation business, and we didn't find an integrated company that we wanted who wanted us. Obviously, this year, with the crash in prices of many generation companies, it's possible we will see a larger and attractive option. It's also the case, however, that my board of directors has asked us to go back and review our acquisitions to make certain we had the level of financial analysis and discipline that we should and to give them some recommendations on priorities as we go forward. We think we've been disciplined all along, but we're trying to put a capital D in that word.

Q: Is that post-Enron related?
A: It's post-Enron. It's a recognition that the marketplace isn't changing as fast as we thought. It's a recognition that wholesale power prices are very low at the moment. This is a good time to recognize that capital is very precious and to use it accordingly. We're not alone. The larger issues of Enron affect all of Corporate America. They're causing everybody to look more sharply at the quality of their balance sheet, to emphasize the fundamentals more than growth. We have a very good balance sheet compared to most of our neighbors. I'm a very conservative fellow and wouldn't have been allowed into the clubs that Enron belonged to anyway.

Q: On another topic, your co-CEO, Corbin McNeill, said he would be leaving the company earlier than originally planned. What was the reason for that?
A: I'm not able to comment on every reason, but the essence of it was that Corbin and the board decided that it was time for one CEO. Corbin and I both feel that we did something pretty remarkable by putting two companies together and then working together for 16 months. But co-CEO situations are very challenging, and Corbin and the board decided that it was time to go ahead with a different structure.

Q: And what are you seeing in the economy?
A: We thought we saw a swallow last month. We don't know if it's a harbinger of spring or simply a poor lost bird. We don't see any very dramatic improvement, but at this point, we don't see any further weakening, and we hope there just might be a little sunshine.

MARCH 3, 2002

Edited by Beth Belton

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