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News

Will Natural Gas Overpower Exelon Corporation (EXC)’s Nuclear Power Business?

Published on June 27, 2013 at 12:12 pm by The Motley Fool in News
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Until five years ago, Exelon Corporation (NYSE:EXC) was an excellent investment. It was providing stable capital appreciation and dividends to its investors. After slashing its dividend by 40% in the beginning of the year, Exelon Corporation (NYSE:EXC) lost most of its charm. The company has also been affected by the fall in natural-gas prices due to which electricity prices fell.

Exelon Corporation (NYSE:EXC)

Exelon Corporation (NYSE:EXC) is trying to expand its production capacity from gas but its main source of energy production is still nuclear, which is about 55% of the company’s total capacity. The production of energy from nuclear plants does not come cheap as the initial set up costs are huge. Moreover, due the nature of nuclear plants, it is not feasible to stop production as and when desired.

The drop in gas prices has affected Exelon in a major way because of the company’s concentration being mainly toward nuclear energy. Further, natural-gas generators are cheaper to construct and operate than a nuclear plant, making power generation more profitable especially when gas prices are low. If the same situation continues, Exelon Corporation (NYSE:EXC) will find it hard to survive as electricity will be available from other sources.
A few analysts believe that the scenario might change in Exelon’s favor if the energy department approves for more export terminals to ship gas overseas. With increased exports, what would happen is that gas prices would increase. If gas prices become inflated,  the operating cost of energy generation from natural gas would increase without affecting Excelon’s cost of production. I strongly believe that there won’t be any major approval for export terminals that can potentially prove a boon for Exelon in the near future.

Exelon Corporation (NYSE:EXC)‘s dividend cut no doubt was strategic, as it gave the company a margin of safety and improved its debt-to-equity ratio initially, thereby helping it retain its credit rating. However, investors will not put up with a continuous decline in earnings and return in the long run.

Amidst competition

Though Exelon has slashed dividends, another utility player and competitor, PPL Corporation (NYSE:PPL), is currently paying a yield of 5%, which makes it a safe bet for income investors. The company has a long history of increasing its dividend payments gradually, so investors can be sure that their dividend income is here to stay.
While Exelon is currently returning 8.4% operating margins to its total sales, PPL Corporation (NYSE:PPL) enjoys a 28.2% margin. In the last couple of years PPL has had some major regulatory wins in the U.S. and U.K. that have improved its position and further, its ongoing earnings too have surged 19%.
Compared to Exelon Corporation (NYSE:EXC), PPL Corporation (NYSE:PPL) is less concentrated towards nuclear energy placing and is concentrated more into wind energy and natural gas. The company is thus in a better position to extract some additional benefits of falling natural-gas prices. It is moving more toward clean and renewable energy as it has completed a hydroelectric expansion project in Montana, which increases its capacity by around 70% of its current renewable capacity. PPL no doubt is headed strong into the future.
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