Utilities are a fail-safe backup investment plan – even in 2012.
Through flood, fire, rain and snow, Exelon (EXC) has paid to go. Though their 4th quarter conference call (see transcript here) had an upbeat note, CEO John Rowe covered a few of the setbacks for this profitable power company: heat waves, pricey July storms, a hurricane, and a “freak fall snowstorm”. Yes, the company absorbed the cost and still managed to roll out an operations profit at $0.82 per share. That’s been enough to cover a decent 5.59% dividend yield rate over the last five years, even though their 5-year revenue growth rate has hovered at a little lower than 4%. However, will that be enough to cover the 15% drop in 2011’s natural gas usage, 2012 storms, and the nearly $8 billion buyout of Constellation Energy Group?
Under the umbrella of one ticker symbol, Exelon Corporation (EXC) is a holding company for utilities, including Exelon Generation Company (or Generation), Commonwealth Edison Company (or ComEd), and PECO Energy Company (or PECO)…and soon, Constellation Energy Group (current ticker symbol is CEG). Under John Rowe’s leadership, this is the fourth attempted buyout over the last nine years. Apparently, this deal would also be Rowe’s swan song, ushering out the “longest-serving utility CEO in the country” with a blaze of glory. His replacement would be Chris Crane, current president of Exelon. Constellation would retain some say in the combined company via Mayo Shattuck as executive chairman.
Constellation (CEG) would bring in added retail sales of power blocks to both business and residential customers, but the deal isn’t yet out of the woods. Shattuck was subpoenaed in November 2011 to give testimony about the merger in Maryland, and during the 11-day hearing, both Exelon’s management and his background of investment banking came under the microscope. Government officials had concerns about the merged company becoming a monopoly; once Exelon and Constellation combine forces, they’ll be the largest utility and power generation company in the United States. So, three of Constellation’s plants in Baltimore must be sold before the Justice Department’s antitrust division is satisfied. All going well, Maryland’s utility regulators will also give the go-ahead by February 17th, 2012. In John Rowe’s words, “2011 was a very active year in the regulatory and legislative arena”. He also says that Exelon has taken a tip from the Fukushima disaster
Exelon is cozying up to environmentally conscious customers and the EPA by developing $5 billion’-worth of clean energy (including solar power), consistent with their 2020 goals of massively reducing their indirect greenhouse gases. However, the majority of their power currently comes out of Generation’s nuclear plants and PECO’s natural gas, though they are closing down some “fossil units” powered by coal. Nor did PECO’s $650 million investment in smart meters come completely at company cost – $200 million was granted by the Department of Energy.
The legal cases outline Exelon’s competition problem – there isn’t enough. Of course, there are more than 75 gas utility companies spread across the United States, but even the largest tend to serve only one of the four U.S. quadrants (East, South, Midwest and West), and natural gas is only one of the energy solutions provided by Exelon. Once the merger finalizes, the Justice Department estimates the combo’s assets at $72 billion, with $33 billion in annual revenues. Ameren Corporation (AEE) and PPL Corporation (PPL) seem to be their second and third-largest competitors. Ameren’s 3Q transcript revealed that their free cash flow got eaten by outstanding debt, so they only issued a $0.40 per share dividend increase to their shareholders, significantly less than Exelon’s $0.525 quarterly dividend increase, which they have promised through the Constellation merger. PPL turned in an impressive $0.76 per share earnings increase for the quarter (see their 3Q transcript), more than $0.20 higher than the previous quarter, but “special items” (including corporate tax hikes in the UK) neutralized the increases down to zero.
Exelon’s website is right – their “growth proposition remains the best in the industry”.