Three Things You Need to Know About Exelon’s Growth

By Matthew DiLallo - September 6, 2012 | Tickers: DOM, EXC, NEE, SO | 0 Comments

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Dividends are great; those quarterly paychecks are why most of us invest.  The bigger the paycheck is the bigger our smile and if they can give us a raise every year or so even better.  I recently took a look at the nation’s largest nuclear power generator Exelon (NYSE: EXC) and focused in on whether they were about to generate a growing dividend.  I came away concerned that they lacked the capacity to grow it because of their large capital expense budget. 

It is important for investors to understand where those dollars are being spent to know what portion is going to grow the business and what’s being spent just to maintain.  In Exelon’s case they break down their CapEx budget into Utilities ($2.95 billion) and Generation ($3.925 billion) which for 2012 totals $6.875 billion.  Of that $2.25 billion is growth CapEx or about a third of the budget.  I want to focus on three areas of the total capital spend from their generation budget that I think investors need to know.

Uprates

Building a new nuclear power plant is a pricy proposition.  Southern Company’s (NYSE: SO) Vogtle Units 3 and 4 will cost upwards of $14 billion dollars to complete.  It’s also a time consuming process as this project will end up taking more than a decade from conception to completion.  Increasingly nuclear power generators are turning to uprates to increase capacity without breaking the bank.  NextEra Energy’s (NYSE: NEE) Florida Power & Light for example is spending $3 billion of their five year $15 billion dollar CapEx budget on nuclear uprates. 

Uprates are where a “utility will refuel a reactor with either slightly more enriched uranium fuel or a higher percentage of new fuel. This enables the reactor to produce more thermal energy and therefore more steam, driving a turbine generator to produce electricity. In order to accomplish this, components such as pipes, valves, pumps, heat exchangers, electrical transformers and generators must be able to accommodate the conditions that would exist at the higher power level. For example, a higher power level usually involves higher steam and water flow through the systems used in converting the thermal power into electric power. These systems must be capable of accommodating the higher flows.”

For a company like Exelon they can add enough additional capacity through uprates to equal the capacity of a new reactor.  Over the next three years they’ll be spending just over $400 million per year on these uprates.  The projects which began in 2010 will be completed by 2017.  By growing their nuclear capacity through uprates they can shave about half of the cost and about a third of the time to market.  This is money well spent for Exelon and will yield 85 MWs of additional generation this year and another 850 MWs over the next six years. 

Nuclear Fuel

On the subject of nuclear energy it’s important to note that nuclear fuel is actually counted as a capitalized expense instead of a cost of goods sold or other expense.  This is because it has a life of roughly five years in a reactor.  In that case of Exelon that’s important because they are spending roughly a sixth of their capital budget each year on nuclear fuel.  When you look at the cash flow Exelon generates each year they will be diverting a fairly consistent amount of it toward the purchase of nuclear fuel.  This is important to note when making comparisons because it isn’t capital spent to grow generation capacity.

Renewables

Where Exelon will be adding to their generation pie is by growing their renewable generation.  They are spending $1.15 billion on wind and $1.475 billion on solar over the next three years or about $400 million on each annually.  In 2012 they’re constructing 404 MWs of wind projects with another 500 MWs to 1000 MWs to be developed or acquired over the next five years.  Solar has them adding 100 MW this year and another 150 MW next year.  They’ll still be a far cry from NextEra in terms of wind or solar capacity and won’t be catching them anytime soon either.  NextEra will be spending twice what Exelon has budgeted over the next three years at around $6 billion on wind and solar expansion.  Still, Exelon’s renewable expansion represents a bulk of their growth capex over the next few years.

Bottom Line

One thing I found interesting about how Exelon’s spending is there is no real push into increasing their natural gas generation capacity.  Gas represents 28% of their generation capacity and it’s well known to be both abundant and cheap here in the United States.  However they are focused on adding more nuclear and renewable capacity to their generation feet.  Not that there is anything wrong with that, it did stick out to me.  However, it is interesting to note how each generating company is going about adding capacity.  Dominion (NYSE: DOM) for example is spending heavily to add gas generating capacity.  With that they expect to grow earnings by 5% to 6% annually and have traditionally grown their dividend by at least that amount over the past five years. 

Exelon’s though it should be noted has one of the best dividend yields in the utility sector at 5.75%, and their management is committed to keeping the existing dividend rate.  While the company will spend nearly $7 billion on capex projects this year, just over $2 billion will be spend for growth.  So sit back and enjoy those checks and as while you wait for those growth projects begin to come online and the full benefits of the merger kick in.  When they do, you’ll be glad you did. 

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