What Is Pulling Up This Utility Company?

Exelon (NYSE:EXC) has benefited from the recent colder than normal weather mainly throughout Midwest and Northeast. Let’s examine how the weather may have improved the company’s operations in the first quarter of 2014; also, 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 has 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 Energy Information  Administration, the 2013/2014 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 homes expenditures on natural gas (year over year), and a 5% gain on electricity.

The cold weather also resulted in spike in the price of natural gas; at one point, the price of natural gas reached its highest level in years. This rally also pressured up the prices of electricity throughout the U.S mainly in the Northeast and Midwest — the two regions where Exelon operates; these two regions have experienced a much colder than normal weather than other regions have. FirstEnergy and American Electric Power also operate in the Midwest and benefited from the extreme cold weather. But the main difference is that Exelon heavily relies on nuclear power  (55%), while most of American Electric Power  and FirstEnergy  power plants are coal-fueled — nearly 60% for each company. This difference is likely to improve Exelon’s profitability and inch down the other companies’ profit margin: The cost of nuclear power doesn’t fluctuate as the price of coal or natural gas do. Furthermore, the rise in the price of natural gas has pulled up coal  prices by roughly 1.6% in the first quarter of 2014, year over year. The higher prices of coal could reduce American Electric Power and FirstEnergy’s profitability.

The spike in natural gas prices benefited a couple of Exelon’s subsidiary 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 during last year. Moreover, the company has recently acquired ETC ProLiance Energy, a supplier of natural gas. This purchase is likely to only further increase Exelon’s exposure to natural gas in the near future. Albeit the natural gas revenue account for roughly 5% of Exelon’s total revenue in 2013, the sharp rise in natural gas prices is still 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 represent nearly 37% jump. Assuming all things equal, and under the assumption Exelon’s natural gas operations will 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 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. Finally, the rise in the price of natural gas could also improve the company’s revenue. Finally, Exelon’s reliance on nuclear power is likely to improve its profit margin compared to other utility companies that faced higher coal prices.

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