What Is Pulling up This Utility Stock?

Will Exelon continue to rally in the near future? Does its current valuation make the stock worth holding?

Mar 25, 2014 at 1:50PM

Recently, Exelon (NYSE:EXC) has benefited from colder than normal weather, mainly throughout the Midwest and Northeast. So, how has the weather improved the company's operations in the first quarter of 2014? And how does Exelon measure up to other leading utility companies such as FirstEnergy (NYSE:FE) and American Electric Power (NYSE:AEP)

Colder than normal weather
The extreme cold weather was reflected in the rise in heating degree days, which measure the amount of energy needed to heat a building to the base temperature of 65 degrees fahrenheit. According to the U.S. Energy Information Administration, the 2013 to 2014 winter is likely to reach the highest heating degree days of the past several years. This colder than normal winter is expected to lead to a 10% increase in expenditures on natural gas year over year, and a 5% gain on electricity. 

The cold weather also resulted in a spike in the price of natural gas; at one point, the price of natural gas reached its highest level in years. This rally pressured electricity prices throughout the U.S., mainly in the Northeast and Midwest -- the two regions where Exelon operates. Obviously, these regions have experienced colder than normal weather as compared to other areas.

FirstEnergy and American Electric Power also operate in the Midwest and were helped by the cold weather. But the main difference is that Exelon relies on nuclear power, around 55%, while most of American Electric Power and FirstEnergy power plants are coal-fueled, totaling almost 60% for each company. This difference is likely to improve Exelon's profitability and hurt the other companies' profit margins.

The cost of nuclear power doesn't fluctuate like the price of coal or natural gas. Furthermore, the rise in the price of natural gas has pulled up coal prices by roughly 1.6% in the first quarter of 2014. The higher coal prices could reduce American Electric Power and FirstEnergy's profitability.  

The spike in natural gas prices helped a couple of Exelon's subsidiaries mainly PECO and BGE, which deliver natural gas. In 2013, PECO's revenue from natural gas was roughly 20%. BGE's natural gas revenue was also around 20% of its total revenue last year. Moreover, the company recently acquired ETC ProLiance Energy, a supplier of natural gas. This purchase is likely to increase Exelon's exposure to natural gas in the near future.

While natural gas revenue only accounts for about 5% of Exelon's total revenue in 2013, the sharp rise in natural gas prices is likely to increase its total revenue. After all, during the first quarter of 2014 (up to date), the average price of natural gas reached $4.76. Back in the first quarter of 2013, the price was $3.5 -- this represents a nearly 37% increase.

If Exelon's natural gas operations still account for 5% of its total revenue, the 37% gain in the price of natural gas will lead to a 1.8% increase in the company's total revenue this year. This back of the envelope calculation only goes to show how the elevated prices of natural gas are likely to have a strong positive effect on Exelon's revenue. Conversely, FirstEnergy and American Electric Power aren't expected to benefit from the recovery of natural gas because they don't distribute this commodity.  

Bottom line
The higher demand for electricity and natural gas is likely to pull up Exelon's revenue in the first quarter of 2014. Exelon's reliance on nuclear power is likely to improve its profit margin compared to other utility companies that faced higher coal prices. With these tailwinds, Exelon might be worth a closer look.

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Lior Cohen has no position in any stocks mentioned. The Motley Fool recommends Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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