It's been a year since Exelon (EXC 0.56%) merged with Constellation Energy to become the nation's largest competitive integrated energy provider. Economies of scale can provide a simple solution to maximize margins, but synergies aren't always what they're made up to be. Let's see how this utility's union is doing.
Happy birthday to you(tilities)
Q1 results are in, marking the last quarter before Exelon stock put Constellation on its books. At the time of its merger, Exelon released a fact sheet comparing the two companies 2011 assets and revenues as a teaser for market share and profits to come:
Source: Exeloncorp.com
According to 2011 statistics, Constellation's addition would more than double sales, but also increase assets by a substantial 25%.
| Before Merger ($B) | After Merger ($B) | % Increase | |
|---|---|---|---|
| Assets | 55.1 | 68.9 | 25% |
| Revenue | 18.9 | 38.3 | 103% |
With Q1 results in, here's how Exelon's advancements actually stand:Source: Exeloncorp.com, Author's calculations. Note: 2011 assets and sales
|
|
Q1 2012 Before Merger ($B) |
Q1 2013 After Merger ($B) |
% Increase |
|---|---|---|---|
|
Assets |
77.6 |
78.2 |
1% |
|
Revenue |
4.69 |
6.89 |
47% |
Source: SEC filings, e*trade.com, author's calculations
Exelon's March merger was followed close behind by Duke Energy's (DUK 0.77%) Progress Energy merger. Another mega move, this merger turned Duke into the largest U.S. utility by asset class. Not to be left behind, the company produced its own fact-sheet for income-hungry investors:
Source: Duke-energy.com
Compared to Exelon stock, Duke's merger went heavy on assets accumulation and light on revenue gains.
|
|
Before Merger ($B) |
After Merger ($B) |
% Increase |
|---|---|---|---|
|
Assets |
57.9 |
90.6 |
56% |
|
Revenue |
12.7 |
22.7 |
79% |
Source: Duke-energy.com, author's calculations. Note: 2010 assets, 2009 sales
With Q1 earnings hot off the press, Duke's assets have progressed beyond Progress' projections, but sales haven't lived up to expectations.
|
|
Q1 2012 Before Merger ($B) |
Q1 2013 After Merger ($B) |
% Increase |
|---|---|---|---|
|
Assets |
61.8 |
113.7 |
84% |
|
Revenue |
3.63 |
5.89 |
62% |
Source: SEC filings, e*trade.com, author's calculations.
Are mergers worth it?
Exelon stock and Duke stock both lay claim to "largest utility" titles, but there are plenty of behemoths already around. As a quasi-control group, let's compare adjusted EPS growth between Exelon, Duke, FirstEnergy (FE 0.47%), National Grid (NGG -0.03%), and American Electric Power (AEP 0.95%). For Duke and Exelon stock, we'll compare year-over-year Q1 growth to 2012 annual growth for FirstEnergy and National Grid. Here's how the companies compare:
|
Total Assets ($B, most recent available) |
Adjusted EPS Growth | |
|---|---|---|
|
Exelon |
78.2 |
(17.7%) |
|
Duke Energy |
113.7 |
(10.5%) |
|
FirstEnergy |
50.4 |
(16.7%) |
|
National Grid |
33.5 |
14.0%* |
|
American Electric Power |
54.4 |
(35.3%) |
Source: Yahoo! Finance, e*trade.com, nationalgrid.com. *2012/2011 Half-Year Results
For investors, Duke and Exelon's mergers haven't hit home for EPS. However, FirstEnergy's and American Electric Power's results show that they aren't alone when it comes to recent rough patches. With the smallest assets around, National Grid has managed to pull up adjusted EPS 14% in its most recent report.
Do mergers maximize wealth?
Anxious investors were salivating for major margin gains this quarter, but mergers don't make money overnight. As Exelon's CEO Christopher Cane recently said, "2012 was a difficult year on the economic front for our sector." Exelon's merger added much-needed diversity to its generation fleet, while Duke enjoys steadier sales from an influx of regulated subsidiaries.
Q1 results are in, but the jury's still out on the ultimate earnings from Exelon's and Duke's mergers. Size is no replacement for excellent management and competitive advantage, and investors would do well to consider more than size alone when picking their next dividend stocks.
