Why Exelon’s stock is popping
Exelon CEO Chris Crane is having a moment.
Thanks to intervention by the bureaucrats who oversee the nation’s power grid, prices are firming up in key markets where Exelon’s nuclear plants sell juice to electric utilities. Crane has restored part of a dividend cut he was forced to impose in 2013. And after a 23-month struggle, he closed an acquisition last month that made Exelon the country’s largest electricity delivery company.
Investors seem encouraged by these signs that Exelon’s prospects may not be as gloomy as they have appeared for most of Crane’s four-year tenure. Exelon stock is up 25 percent in 2016, far outpacing the broader stock market and industry peers.
The stock is still down 13 percent since Crane took office in March 2012, while the S&P 500 Utilities Index has risen 38 percent.
Still, Crane is making clear progress rewiring a company designed for a different era. Under his predecessor, John Rowe, Exelon bet heavily on nuclear power at a time when electricity prices were relatively high and big profits beckoned in deregulated wholesale markets. Rowe amassed the biggest fleet of atomic reactors in the U.S. to ride that wave. Only the wave dissipated when new drilling techniques cracked open vast reserves of low-priced natural gas that made gas-fired power plants cheaper to operate. Wholesale electricity prices fell, squeezing profits at Exelon’s nuclear plants.
Rowe’s nuclear arsenal had become an albatross by the time he retired. Since taking over, Crane has worked on two fronts to shore up the nuclear unit while reducing Exelon’s reliance on unregulated wholesale markets. He took a big step in that direction with his $6.8 billion acquisition of Pepco Holdings, which owns regulated utilities serving New Jersey, Maryland, Delaware and Washington, D.C. Exelon already owned Chicago’s Commonwealth Edison and utilities in Pennsylvania and Maryland.
“By next year, the regulated utility unit will be contributing north of 50 percent of earnings” at Exelon, says analyst Travis Miller at Morningstar in Chicago.
NOT OUT OF THE WOODS YET
Meanwhile, skies have brightened for Exelon’s power-generation business. Recent “capacity auctions” conducted by the entity overseeing Exelon’s service territory in Midwestern and Mid-Atlantic markets have boosted prices.
“In the past year Exelon has achieved multiple milestones in our strategy to grow through investments in our core businesses,” spokesman Paul Adams says, pointing to the Pepco merger, $3.7 billion in infrastructure upgrades, clean power projects and growth at retail power-marketing unit Constellation.
Challenges remain, of course. Persistently low natural gas prices will keep pressure on wholesale electricity markets. Exelon stock still fetches a lower price/earnings multiple than industry peers, and its profit margins lag those of rivals that focus exclusively on regulated businesses. Both numbers could rise if Crane capitalizes on opportunities to boost regulated profits by upgrading newly acquired Pepco systems.
