Student Investment Fund Stock Report Analysts: Kevin Nincehelser, David Packard Recommendation: BUY Market Cap: $28.98 billion Current Price: $44.58 Sector: Utilities Dividend Yield: 4.7% 12 month target price: $65.68 Sub Sector: Diversified Utilities P/E Ratio:.75 Beta: 0.9 Highlights Investment Thesis EXC is focused on highmargin nuclear power generation, has ownership interest in 19 operating nuclear reactors and is the largest nuclear operator in U.S., with 18% of total US nuclear output. EXC is the industry leader in capacity factor and generating costs among nuclear fleets in the U.S. EXC s market cap is the largest in the diversified utilities industry. EXC s operations produce the lowest amount of carbon emission, achieving the lowest carbon intensity in the industry. Exelon has produced a total shareholder return of 75% since 2000, compared to +5% for the Philadelphia Utility Index and % for the S&P 500 With plants dispersed throughout the Eastern U.S. and customer bases in Pennsylvania and Illinois, the company s revenues are well balanced geographically. EXC has a sizeable gross margin advantage over its peers in the electric utilities industry, which flows to their bottom line profit, resulting in a strong net margin for the company as well. Carbon regulations debated among policymakers will improve Exelon s margins Exelon s average Return on Equity of 19.84% consistently beats that of its competitors. In addition, Exelon s debt to equity ratio is much lower than the industry average. The recent market downturn, in which EXC s price corrected sharply, presents an opportunity for future market beating returns. Year Returns Business Summary Exelon is a vertically integrated, diversified utility, involved in electricity generation, transmission and distribution. They derive their industry advantage through emphasis on nuclear generation efficiency and environmental stewardship.
Macroeconomic Thesis Carbon Emissions The future trend in electricity generation will be away from carbon producing plants as environmental awareness increases and renewable energy becomes more prominent. Companies in all industries are attempting to reduce carbon emissions, and Exelon is ahead of the game. Exelon s low carbon strategy includes the following components: 1. The Exelon 2020 program integrates a company wide strategy to reduce, offset or displace more than 15 million metric tons of greenhouse gas emissions per year by 2020. 2. A collaborative effort across the Exelon family of companies to reduce energy consumption at its commercial buildings achieved overall energy savings approximately equal to the energy used each year by 1,000 average single family American homes. This represents a 16% reduction from 2001 and a significant step toward the 25% target by 2012. 3. Exelon s subsidiaries ComEd and PECO will spend more than $350 million through 2011 to implement a portfolio of leading edge energy efficiency and demand response programs that will help customers reduce their energy consumption by more than 1.6 million megawatt hours (MWh) and reduce peak load by 226 megawatts (MW). Exelon expects its customer based programs to reduce the per year equivalent of 3.5 million metric tons of carbon dioxide. The graph depicts the low level and low intensity of Exelon s carbon emissions compared to the industry. The bubble size for each company represents carbon intensity, expressed in terms of metric tons of carbon dioxide per megawatt hour generated. Gross power generation on the X axis is compared to total CO2 emissions on the Y axis. Exelon s nuclear plants are not only able to produce a
significant amount of power while emitting the smallest amount of CO2 in the industry, but also achieve this with the lowest carbon intensity. This demonstrates that Exelon s operations are environmentally friendly, and that the company is in a great position regarding future carbon emission regulations. Fossil Fuel Prices This graph shows the historical relation between Exelon s performance and crude oil prices. Although EXC does not generate power using fossil fuels, this relation exists because fossil fuel powered plants are usually the marginal generators, meaning they account for the majority of overall electricity Dollars per million BTU $25 $20 $15 $ $5 $0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 20 2013 2016 2019 2022 2025 2028 2031 2034 Crude Oil Natural Gas Coal generation. Changes in the price of fossil fuel inputs significantly influence the price of electricity, which affects Exelon s ability to generate revenue. The Energy Information Administration forecasts that fossil fuel prices will increase in the long run, which creates long term potential for Exelon. The price of Crude Oil is expected to reach $224 per barrel by 2035, or $133 per barrel in 2008
dollars. This will cause a general increase in the price of electricity and, coupled with the trend toward carbon free power generation, will allow Exelon to maintain high margins and remain profitable in the long run. Regional Demand Growth The growth of total electricity output in the US overall since 1990 has been 1.62% per year. The growth of output in the states of Illinois, Pennsylvania, New Jersey and Texas combined has been 1.87% per year, indicating the Exelon s main markets are growing slightly faster than the industry average. This demand growth, combined with Exelon s low emissions, gives the company a sustainable competitive advantage. Business Segments Exelon, through its operating 1.90% 1.85% 1.80% 1.75% 1.70% 1.65% 1.60% 1.55% 1.50% 1.45% Electricity growth per year 1.87% IL, PA, NJ, TX 15% higher rate than the total US average 1.62% company Exelon Generation, is one of the world s largest power producers and wholesale marketers, providing low cost, reliable energy to customers in the Midwest, Mid Atlantic and Texas. With a diverse mix of nuclear, fossil, hydroelectric, solar, landfill gas and wind generation facilities, Exelon Generation has access to more than 31,000 megawatts (MW) of electricity one of the largest generation portfolios in the nation. When necessary, a portion of this electricity is purchased via supply contracts to supplement in house generation. ComEd is an energy delivery subsidiary of Exelon Corporation and one of the largest utilities in the United States. ComEd provides service to approximately 3.8 million customers across Northern Illinois, or about 70% of the state s population. ComEd s Total Electricity generation growth since 1990
business consists of the purchase and regulated retail sale of electricity and the provision of transmission and distribution services. PECO is an energy delivery subsidiary of Exelon Corporation. It is the largest electric and natural gas utility in Pennsylvania, serving approximately 1.6 million electric customers and 486,000 natural gas customers in southeastern Pennsylvania. Approximately 90% of Revenue Sources PECO s customers are residential and the remaining % are commercial and industrial. PECO s business also consists of the purchase and regulated retail sale of electricity and the provision of transmission and distribution services. Geographic dispersion With plants dispersed throughout the Eastern U.S. and customer bases in Pennsylvania and Illinois, the company s revenues are geographically wellbalanced. This allows Exelon to diversify its risk exposure to regional changes in external industry and macroeconomic factors.
EXC s Sustainable Competitive Advantage 92% of Exelon s power generation comes from nuclear plants. Exelon has ownership interest in 19 nuclear reactors, is the largest nuclear operator in the US with 18% of total US nuclear output, and is the third largest nuclear operator worldwide. Nuclear power is one of the most cost effective forms of generation. In addition, nuclear power plants have zero carbon emissions. This provides a basis for long term nuclear asset value and sustainably high margins. Average Capacity Factor compares a power plant s actual output over a period of time to its potential output, had the plant had been operating at full capacity the entire time. EXC consistently leads the industry in average capacity factor at 93%, which implies a cost structure superior to that of the industry, and allows Exelon to capture a greater portion of its revenues as profit. To further increase its advantage, Exelon plans to add the equivalent of half a nuclear power plant by 2017 through efficiency improvements at existing plants. Increasing output at existing plants is currently a main driver of growth for Exelon because the plants they own are already producing near capacity output.
Exelon s capacity factor advantage is driven by the company s lower refueling outage duration. Low refueling outage reduces the opportunity cost associated with the time that plants spend offline. This is yet another advantage of being focused in nuclear generation reduced outage duration yields higher margins through cost efficiencies. Industry Comparisons Exelon consistently earns a higher return on equity (ROE) than the industry average, which follows from the company s efficient cost structure, as discussed above. While a high ROE might lead one to believe that EXC might be more heavily financed with debt (making it easier to earn a return on a small amount of equity), the historical debt to equity ratios show that EXC is also less leveraged than the industry. This demonstrates that the advantage in their return on equity is truly a result of an operational competitive advantage. 5 year historical ROE 9.72% 19.84% 0% 5% % 15% 20% 25% 5 year historical Debt Equity ratio 2.88 1.15 0% 50% 0% 150% 200% 250% 300% 350%
Gross Margin Price/Earnings ratio 0% 40 80% 60% 40% 20% 30 20 0% 2005 2006 2007 2008 2009 0 2005 2006 2007 2008 2009 EXC Industry EXC Industry Exelon s cost structure has allowed the company to achieve a historically higher gross margin than the industry, and this advantage flows all the way down to net profit margin. Exelon s forecasted gross profit margin is about 78.6% Historically, EXC has traded at a premium compared to the industry. It now trades at a small relative discount. An analysis of this valuation ratio concludes that, based on Exelon s strong ROIC (forecasted between 83 88%) and long term growth potential, the stock should be able to achieve a multiple greater than the currently traded.75. Expansion of the P/E is expected to be another source of EXC s above average future stock returns.
Financial Analysis and Valuation Model Key assumptions Compared to 5 year historical revenue growth of 3% per year on average, we conservatively forecast revenue growth starting out at 4% per year and tapering down to a long term horizon growth rate of 2% per year. This is consistent with the slow, steady forecasted growth in electricity demand expected by analysts and regulatory pressure to continue moving towards carbon free power generation. Forecasted Growth A regression analysis of Exelon s weekly returns against the returns to the S&P500 produced a 0.87 historical beta. We slightly increased this in the model to 0.9, again demonstrating our conservative modeling process. Our dividend growth forecast is 5.7% per year, which is slightly lower than the historical average of 6.7% We conservatively forecast an increase in Property, Plant, and Equipment as a percentage of sales, starting at 9% and increasing to % in the long term, compared to a historical average of 8.3%. Exelon is much less asset heavy than its peers in the utilities industry, Westar and Duke Energy, (26% and 57% respectively). Net PPE/Sales 80% 60% 40% 20% 0% Net PPE/Sales 2005 2006 2007 2008 2009 EXC WR DUK
Value Creation Metrics Exelon s Return on Invested Capital is very strong historically, averaging nearly 0% per year. Their Weighted Average Cost of Capital is only 7.2%, creating a value creation spread of over 90%. The wide spread demonstrates Exelon s ability to return significant value to its shareholders both historically and in our forecasts. 140% 120% 0% 80% 60% 40% 20% 0% ROIC vs WACC ROIC WACC Market Value Added and Economic Value Added are both historically strong and both increase in the forecast. The slight decrease displayed for 20 is a result of conservative modeling in the first forecasted year. As the data moves from historical to forecasted time periods, many of the metrics take a hit because of our conservative approach. However, even after being decreased through the ratcheting down of forecasting assumptions, the Economic Value Added and Market Value Added show evidence of being able to grow vigorously over the forecast horizon.
Net Operating Profit After Tax and Free Cash Flow values also indicate strong value creation both historically and in the forecast. Both of these metrics reach values just above $3 billion in the long term, demonstrating that Exelon s operations allow the company to return significant amounts of value to shareholders, in addition to having plenty of funds left over to reinvest. Investment Risks 1. A surge of renewable energy development in wind or solar in the Midwest could hurt margins for Exelon's nuclear plants by driving down the price of electricity. These technologies require no fuel for operation. Also, Exelon s performance is inherently dependent on volatile utility prices and could be negatively affected by future fluctuations. 2. An overall decline in the US economy has decreased manufacturing, and therefore the demand for electricity to keep manufacturing plants running near capacity. As an electric utilities company, Exelon depends on consistent robust demand for electricity. 3. Nuclear plants are a potential target of environmentalists, and the disposal of nuclear waste is an important political issue. Also, the current political environment limits construction of new plants, which hinders Exelon s growth potential. However, the current administration has shown more openness to nuclear plant construction compared to the attitudes that have prevailed over the past 30 years.
EXC is trading at $44.58, which is approximately $21 below our estimated 20 DCF price of $65.68. Our analysis suggests that, with robust growth in NOPAT, FCF, EVA and MVA, EXC is well positioned to grow its stock price over the long run. Other Analyst Recommendations Argus, S&P and Morningstar analysts all recommend a strong buy for Exelon.
Recommendation Summary With a healthy dividend yield of 4.7%, a great position in the industry with nuclear operations producing high margins and low carbon emissions, a wide and sustainable ROIC to WACC spread, strong and growing value creation fundamentals such as NOPAT and Free Cash Flow, and our portfolio currently being underweight in utilities, we recommend a Strong Buy for Exelon Corporation.
Exelon Financial Analysis, Page 1 of 8 1 2 3 4 5 6 7 8 9 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 A B C D E F G H I J K L M N Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the Enter Firm Ticker EXC manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future. Enter first financial statement year in cell B6 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 Average Manual Total revenue 15,357 15,655 18,916 18,859 17,318 Revenue Growth 1.9% 20.8% -0.3% -8.2% 3.0% Cost of goods sold 3,162 2,683 5,282 4,270 3,215 COGS % of Sales 20.6% 17.1% 27.9% 22.6% 18.6% 21.4% Gross profit 12,195 12,972 13,634 14,589 14,3 Fuel Expense 2,508 2,549 2,360 2,312 2,066 Fuel Exp % of Sales 16.3% 16.3% 12.5% 12.3% 11.9% 13.9% Operations and Maintenance 3,694 3,868 4,289 4,566 4,634 Oper & Maint % Sales 24.1% 24.7% 22.7% 24.2% 26.8% 24.5% Depreciation/Amortization 1,334 1,487 1,520 1,634 1,834 D&A % of Sales 8.7% 9.5% 8.0% 8.7%.6% 9.1% Interest expense (income), operating 0 0 0 0 0 Inc. Exp. Oper. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Non-recurring expenses 1,207 776 0 0 41 Exp. Non-rec 7.9% 5.0% 0.0% 0.0% 0.2% 2.6% Other operating expenses 728 771 797 778 778 Other exp. 4.7% 4.9% 4.2% 4.1% 4.5% 4.5% Operating Income 2,724 3,521 4,668 5,299 4,750 Interest income (expense), non-operating 0 0 0 0 0 Int. inc. non-oper. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Gain (loss) on sale of assets 0 0 0 0 0 Gain (loss) asset sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other income, net 134 266 460 (407) 426 Other income, net 0.9% 1.7% 2.4% -2.2% 2.5% 1.1% Income before tax 1,895 2,796 4,172 4,034 4,418 Income tax 944 1,206 1,446 1,317 1,712 Tax rate 49.8% 43.1% 34.7% 32.6% 38.8% 39.8% Income after tax 951 1,590 2,726 2,717 2,706 Minority interest 0 0 0 0 0 Minority interest 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity in affiliates 0 0 0 0 0 Equity in affiliates 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% U.S. GAAP adjustment 0 0 0 0 0 U.S. GAAP adjust. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Net income before extraordinary items 951 1,590 2,726 2,717 2,706 Extraordinary items, total 28 (2) () (20) (1) Extrordinary items Net income 923 1,592 2,736 2,737 2,707 Total adjustments to net income 0 0 0 0 0 Adjustments to NI Basic weighted average shares 669 670 670 658 659 Share growth 0.1% 0.0% -1.8% 0.2% -0.4% Basic EPS excluding extraordinary items 1.42 2.37 4.07 4.13 4.11 Basic EPS including extraordinary items 1.38 2.38 4.08 4.16 4.11 Diluted weighted average shares 676 676 676 662 662 Diluted share growth 0.0% 0.0% -2.1% 0.0% -0.5% Diluted EPS excluding extraordinary items 1.41 2.35 4.03 4. 4.09 Diluted EPS including extraordinary items 1.37 2.36 4.05 4.13 4.09 Dividends per share -- common stock 1.60 2.05 1.82 1.53 2.11 Gross dividends -- common stock 1,070 1,372 1,219 1,007 1,388 Dividend growth 28.2% -11.2% -17.4% 37.8% 6.7% 5.7% Retained earnings (147) 220 1,517 1,730 1,319 Data Source: Thomson/Reuters values in millions Historical Income Statements Forecasting Percentages
Exelon Financial Analysis, Page 2 of 8 1 2 3 4 5 6 7 8 9 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 O P Q R S T U V W X Y Z Revenues grow at the same rate each year unless a growth value is manually entered in the cell above the forecast year, in which case the year-by-year value overrides the historical or manual average. It makes sense to start tapering the growth forecasts 5 or 6 years into the forecast period. Year-by-year revenue growth 4.00% 4.00% 4.00% 3.00% 3.00% 3.00% 3.00% 3.00% 2.50% 2.50% Forecasted Income Statements -- Years year 20E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E Total revenue 18,011 18,731 19,480 20,065 20,667 21,287 21,925 22,583 23,148 23,726 Cost of goods sold 3,849 4,003 4,163 4,288 4,417 4,549 4,686 4,826 4,947 5,071 Gross profit 14,162 14,728 15,317 15,777 16,250 16,737 17,240 17,757 18,201 18,656 Fuel Expense 2,496 2,595 2,699 2,780 2,864 2,949 3,038 3,129 3,207 3,287 Operations and Maintenance 4,409 4,586 4,769 4,912 5,059 5,211 5,368 5,529 5,667 5,808 Depreciation/Amortization 1,638 1,704 1,772 1,825 1,880 1,936 1,994 2,054 2,5 2,158 Interest expense (income), operating 0 0 0 0 0 0 0 0 0 0 Non-recurring expenses 470 489 509 524 540 556 572 590 604 619 Other operating expenses 8 843 876 903 930 958 986 1,016 1,041 1,068 Operating Income 4,338 4,512 4,692 4,833 4,978 5,127 5,281 5,439 5,575 5,715 Interest income (expense), non-operating (626) (629) (634) (626) (619) (627) (625) (625) (621) (620) Gain (loss) on sale of assets 0 0 0 0 0 0 0 0 0 0 Other income, net 191 199 207 213 219 226 233 240 246 252 Income before tax 3,904 4,081 4,265 4,420 4,578 4,726 4,889 5,054 5,200 5,347 Income tax 1,554 1,624 1,697 1,759 1,822 1,881 1,946 2,011 2,070 2,128 Income after tax 2,350 2,457 2,567 2,661 2,756 2,845 2,943 3,042 3,131 3,219 Minority interest 0 0 0 0 0 0 0 0 0 0 Equity in affiliates 0 0 0 0 0 0 0 0 0 0 U.S. GAAP adjustment 0 0 0 0 0 0 0 0 0 0 Net income before extraordinary items 2,350 2,457 2,567 2,661 2,756 2,845 2,943 3,042 3,131 3,219 Extraordinary items, total 0 0 0 0 0 0 0 0 0 0 Net income 2,350 2,457 2,567 2,661 2,756 2,845 2,943 3,042 3,131 3,219 Total adjustments to net income 0 0 0 0 0 0 0 0 0 0 Basic weighted average shares 657 654 652 649 647 644 642 639 637 635 Basic EPS excluding extraordinary items 3.58 3.76 3.94 4. 4.26 4.42 4.59 4.76 4.91 5.07 Basic EPS including extraordinary items 3.58 3.76 3.94 4. 4.26 4.42 4.59 4.76 4.91 5.07 Diluted weighted average shares 659 655 652 648 645 642 638 635 632 628 Diluted EPS excluding extraordinary items 3.57 3.75 3.94 4. 4.27 4.43 4.61 4.79 4.96 5.12 Diluted EPS including extraordinary items 3.57 3.75 3.94 4. 4.27 4.43 4.61 4.79 4.96 5.12 Dividends per share -- common stock 2.23 2.37 2.52 2.67 2.83 3.00 3.19 3.38 3.59 3.81 Gross dividends -- common stock 1,467 1,551 1,639 1,733 1,831 1,936 2,046 2,163 2,286 2,416 Retained earnings 883 906 928 928 925 909 897 880 845 803
Exelon Financial Analysis, Page 3 of 8 1 2 3 4 5 6 7 8 9 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 AA AB AC AD AE AF AG AH AI AJ AK AL AM AN Enter Firm Ticker EXC values in millions Historical Balance Sheets year 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 Average Manual Assets Cash & equivalents 140 224 311 1,271 2,0 Cash % of Sales 0.9% 1.4% 1.6% 6.7% 11.6% 4.5% Short term investments 0 0 0 0 0 ST Invest. % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Receivables, total 2,195 2,209 2,652 2,252 2,049 Receivables % Sales 14.3% 14.1% 14.0% 11.9% 11.8% 13.2% Inventory, total 662 731 723 843 757 Inventory % of Sales 4.3% 4.7% 3.8% 4.5% 4.4% 4.3% Prepaid expenses 0 0 0 0 0 Pre. Exp. % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other current assets, total 1,640 1,828 894 764 625 Other CA % of Sales.7% 11.7% 4.7% 4.1% 3.6% 6.9% Total Current Assets 4,637 4,992 4,580 5,130 5,441 Property, plant and equipment (net) 1,200 1,245 1,524 1,500 1,721 Net PPE % of Sales 7.8% 8.0% 8.1% 8.0% 9.9% 8.3% Goodwill 3,475 2,694 2,625 2,625 2,625 Goodwill % of Sales 22.6% 17.2% 13.9% 13.9% 15.2% 16.6% Intangibles 0 0 0 0 76 Intangibles % of Sales 0.0% 0.0% 0.0% 0.0% 0.4% 0.1% Long term investments 813 8 731 715 724 LT Invest. % of Sales 5.3% 5.2% 3.9% 3.8% 4.2% 4.5% Notes receivable -- long term 0 0 0 0 0 Notes Rec. % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other long term assets, total 11,891 13,048 13,272 13,263 12,973 Other LT ass. % Sales 77.4% 83.3% 70.2% 70.3% 74.9% 75.2% Total Utility Plant, Net 20,781 21,530 22,629 24,313 25,620 Total Util Plnt % Sales 135.3% 137.5% 119.6% 128.9% 147.9% 133.9% Total assets 42,797 44,319 45,361 47,546 49,180 Liabilities and Shareholders' Equity Accounts payable 1,467 1,382 1,450 1,416 1,345 Acc. Payable % Sales 9.6% 8.8% 7.7% 7.5% 7.8% 8.3% Payable/accrued 0 0 0 0 0 Pay/accured % Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Accrued expenses 1,005 1,180 1,240 1,151 923 Acc. Exp. % of Sales 6.5% 7.5% 6.6% 6.1% 5.3% 6.4% Notes payable/short term debt 1,290 305 616 211 155 Notes payable % Sales 8.4% 1.9% 3.3% 1.1% 0.9% 3.1% Current portion of LT debt/capital leases 914 829 1,6 348 1,054 Curr. debt % of Sales 6.0% 5.3% 5.8% 1.8% 6.1% 5.0% Other current liabilities 1,887 2,099 1,217 685 761 Other curr liab % Sales 12.3% 13.4% 6.4% 3.6% 4.4% 8.0% Total Current Liabilities 6,563 5,795 5,629 3,811 4,238 Long term debt, total 11,847 11,998 12,052 12,679 11,472 LT debt % of Sales Deferred income tax 5,078 5,340 5,081 4,939 5,750 Def. inc. tax % Sales 33.1% 34.1% 26.9% 26.2% 33.2% 30.7% Minority interest 1 0 0 0 0 Min. Int. % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other liabilities, total,183 11,179 12,462 15,070 15,080 Other liab. % of Sales 66.3% 71.4% 65.9% 79.9% 87.1% 74.1% Total Liabilities 33,672 34,312 35,224 36,499 36,540 Preferred stock (redeemable) 0 0 0 0 0 Preferred stock (unredeemable) 0 0 0 0 0 Common stock 7,987 8,314 8,579 8,816 8,923 Additonal paid-in capital 0 0 0 0 0 Retained earnings (accumluated deficit) 3,206 3,426 4,930 6,820 8,134 Treasury stock -- common (444) (630) (1,838) (2,338) (2,328) ESOP Debt Guarantee Other equity, total (1,624) (1,3) (1,534) (2,251) (2,089) Total Shareholders' Equity 9,125,007,137 11,047 12,640 Total Liabilities and Shareholders' Equity 42,797 44,319 45,361 47,546 49,180 Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future. Forecasting Percentages The model uses the more conservative diluted common shares number for total shares outstanding. Diluted weighted average shares 676 676 676 662 662 Diluted share growth 0.0% 0.0% -2.1% 0.0% -0.5% Total preferred shares outstanding Preferred share growth
Exelon Financial Analysis, Page 4 of 8 1 2 3 4 5 6 7 8 9 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 AO AP AQ AR AS AT AU AV AW AX AY AZ Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49 Total Utility Plant, Net PPE/Sales 9.00% 9.00% 9.00% 9.00% 9.00%.00%.00%.00%.00%.00% Forecasted Balance Sheets -- Years year 20E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E Assets Cash & equivalents 804 837 870 896 923 951 979 1,009 1,034 1,060 Short term investments 0 0 0 0 0 0 0 0 0 0 Receivables, total 2,384 2,480 2,579 2,656 2,736 2,818 2,903 2,990 3,065 3,141 Inventory, total 780 811 843 869 895 921 949 978 1,002 1,027 Prepaid expenses 0 0 0 0 0 0 0 0 0 0 Other current assets, total 1,251 1,302 1,354 1,394 1,436 1,479 1,523 1,569 1,608 1,649 Total Current Assets 5,220 5,429 5,646 5,815 5,990 6,170 6,355 6,545 6,709 6,877 Property, plant and equipment (net) 1,621 1,686 1,753 1,806 1,860 2,129 2,193 2,258 2,315 2,373 Goodwill 2,982 3,2 3,226 3,322 3,422 3,525 3,630 3,739 3,833 3,929 Intangibles 16 16 17 18 18 19 19 20 20 21 Long term investments 803 836 869 895 922 950 978 1,007 1,033 1,058 Notes receivable -- long term 0 0 0 0 0 0 0 0 0 0 Other long term assets, total 13,550 14,092 14,656 15,096 15,549 16,015 16,496 16,991 17,415 17,851 Total Utility Plant, Net 24,1 25,075 26,078 26,860 27,666 28,496 29,351 30,231 30,987 31,762 Total assets 48,303 50,235 52,245 53,812 55,427 57,302 59,021 60,792 62,312 63,870 Liabilities and Shareholders' Equity Accounts payable 1,488 1,548 1,6 1,658 1,708 1,759 1,812 1,866 1,913 1,961 Payable/accrued 0 0 0 0 0 0 0 0 0 0 Accrued expenses 1,155 1,201 1,249 1,287 1,326 1,365 1,406 1,448 1,485 1,522 Notes payable/short term debt 563 585 609 627 646 665 685 705 723 741 Current portion of LT debt/capital leases 901 938 975 1,004 1,034 1,065 1,097 1,130 1,159 1,188 Other current liabilities 1,446 1,504 1,564 1,611 1,660 1,7 1,761 1,814 1,859 1,905 Total Current Liabilities 5,554 5,776 6,007 6,188 6,373 6,564 6,761 6,964 7,138 7,317 Long term debt, total,350,399,464,311,184,309,265,264,173,143 Deferred income tax 5,527 5,748 5,978 6,157 6,342 6,532 6,728 6,930 7,3 7,281 Minority interest 0 0 0 0 0 0 0 0 0 0 Other liabilities, total 13,349 13,883 14,438 14,871 15,318 15,777 16,250 16,738 17,156 17,585 Total Liabilities 34,781 35,807 36,888 37,527 38,216 39,183 40,005 40,896 41,571 42,326 Preferred stock (redeemable) 0 0 0 0 0 0 0 0 0 0 Preferred stock (unredeemable) 0 0 0 0 0 0 0 0 0 0 Common stock 8,923 8,923 8,923 8,923 8,923 8,923 8,923 8,923 8,923 8,923 Additonal paid-in capital 0 0 0 0 0 0 0 0 0 0 Retained earnings (accumluated deficit) 9,017 9,923,851 11,779 12,704 13,614 14,511 15,390 16,235 17,037 Treasury stock -- common (2,328) (2,328) (2,328) (2,328) (2,328) (2,328) (2,328) (2,328) (2,328) (2,328) ESOP Debt Guarantee 0 0 0 0 0 0 0 0 0 0 Other equity, total (2,089) (2,089) (2,089) (2,089) (2,089) (2,089) (2,089) (2,089) (2,089) (2,089) Total Shareholders' Equity 13,523 14,429 15,357 16,285 17,2 18,120 19,017 19,896 20,741 21,543 Total Liabilities and Shareholders' Equity 48,303 50,235 52,245 53,812 55,427 57,302 59,021 60,792 62,312 63,870 Total common shares (diluted) 659 655 652 648 645 642 638 635 632 628 Total preferred shares outstanding AFN (interactive with 3 items below) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Adjustment to LT Debt (iterate or use Goal Seek (1,121.5) 48.9 64.8 (153.7) (127.0) 125.2 (44.1) (1.1) (90.6) (29.7) Issue Common Stock to Fund AFN Set Balance Sheet Cash Lower to Fund AFN
Exelon Financial Analysis, Page 5 of 8 BA BB BC BD BE BF BG BH BI BJ BK BL BM BN BO BP 1 Enter Firm Ticker EXC 2 3 values in millions Historical Ratios and Valuation Model Forecasted Ratios and Valuation Model -- Years 4 2005 2006 2007 2008 2009 20E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 5 6 7 8 9 11 12 13 14 15 16 17 Liquidity Current Quick Net Working Capital to Total Assets Asset Management Days Sales Outstanding Inventory Turnover Fixed Assets Turnover Total Assets Turnover Debt Management Long-Term Debt to Equity Total Debt to Total Assets Times Interest Earned 0.71 0.61 (0.05) 52.17 23.20 12.80 0.36 129.8% 30.7% N/A 0.86 0.74 (0.02) 51.50 21.42 12.57 0.35 119.9% 27.8% N/A 0.81 0.69 (0.02) 51.17 26.16 12.41 0.42 118.9% 27.9% N/A 1.35 1.12 0.03 43.59 22.37 12.57 0.40 114.8% 27.1% N/A 1.28 1.11 0.02 43.19 22.88.06 0.35 90.8% 23.6% N/A 0.94 0.80 (0.01) 48.32 23. 11.11 0.37 76.5% 22.6% 6.9 0.94 0.80 (0.01) 48.32 23. 11.11 0.37 72.1% 21.9% 7.2 0.94 0.80 (0.01) 48.32 23. 11.11 0.37 68.1% 21.2% 7.4 0.94 0.80 (0.01) 48.32 23. 11.11 0.37 63.3% 20.3% 7.7 0.94 0.80 (0.01) 48.32 23. 11.11 0.37 59.2% 19.5% 8.0 0.94 0.80 (0.01) 48.32 23..00 0.37 56.9% 19.2% 8.2 0.94 0.80 (0.01) 48.32 23..00 0.37 54.0% 18.6% 8.5 0.94 0.80 (0.01) 48.32 23..00 0.37 51.6% 18.0% 8.7 0.94 0.80 (0.01) 48.32 23..00 0.37 49.0% 17.5% 9.0 0.94 0.80 (0.01) 48.32 23..00 0.37 47.1% 17.0% 9.2 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 Profitability Gross Profit Margin 79.4% 82.9% 72.1% 77.4% 81.4% 78.6% 78.6% 78.6% 78.6% 78.6% 78.6% 78.6% 78.6% 78.6% 78.6% Operating Profit Margin 17.7% 22.5% 24.7% 28.1% 27.4% 24.1% 24.1% 24.1% 24.1% 24.1% 24.1% 24.1% 24.1% 24.1% 24.1% Net After-Tax Profit Margin 6.2%.2% 14.4% 14.4% 15.6% 13.0% 13.1% 13.2% 13.3% 13.3% 13.4% 13.4% 13.5% 13.5% 13.6% Total Assets Turnover 0.36 0.35 0.42 0.40 0.35 0.37 0.37 0.37 0.37 0.37 0.37 0.37 0.37 0.37 0.37 Return on Assets 2.2% 3.6% 6.0% 5.7% 5.5% 4.9% 4.9% 4.9% 4.9% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Equity Multiplier 4.69 4.43 4.47 4.30 3.89 3.57 3.48 3.40 3.30 3.22 3.16 3. 3.06 3.00 2.96 Return on Equity.4% 15.9% 26.9% 24.6% 21.4% 17.4% 17.0% 16.7% 16.3% 16.0% 15.7% 15.5% 15.3% 15.1% 14.9% NOPAT per share 2.02 2.96 4.51 5.39 4.39 3.97 4.15 4.33 4.49 4.65 4.81 4.98 5.16 5.31 5.48 EPS (using diluted shares, excluding extraordinary items 1.41 2.35 4.03 4. 4.09 3.57 3.75 3.94 4. 4.27 4.43 4.61 4.79 4.96 5.12 DPS (dividends per share) 1.58 2.03 1.80 1.52 2. 2.23 2.37 2.52 2.67 2.83 3.00 3.19 3.38 3.59 3.81 FCF (free cash flow) per share 2.78 3.52 4.21 2.93 5.97 3.97 4.15 4.34 4.49 4.32 4.81 4.98 5.16 5.32 Valuation Metrics Trend Analysis (NOPAT, EVA, MVA, FCF and Capital in millions) Forecasted Valuation Metrics -- Years 2005 2006 2007 2008 2009 20E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E NOPAT (net operating profit after tax) 1,367 2,002 3,050 3,569 2,909 2,612 2,716 2,825 2,909 2,997 3,087 3,179 3,275 3,356 3,440 ROIC (return on invested capital) 79.2% 8.4% 121.0% 8.2% 68.2% 88.6% 88.6% 88.6% 88.6% 88.6% 83.5% 83.5% 83.5% 83.5% 83.5% EVA (economic value added) 1,242 1,868 2,867 3,330 2,600 2,398 2,494 2,594 2,671 2,752 2,819 2,903 2,990 3,065 3,142 FCF (free cash flow) N/A 1,880 2,377 2,790 1,939 3,935 2,598 2,702 2,814 2,898 2,772 3,068 3,160 3,258 3,340 Weighted Average Cost of Capital 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% Net Operating Working Capital (NOWC) 525 602 996 1,799 2,548 1,325 1,378 1,433 1,476 1,520 1,566 1,613 1,661 1,703 1,745 Operating Long Term Assets 1,200 1,245 1,524 1,500 1,721 1,621 1,686 1,753 1,806 1,860 2,129 2,193 2,258 2,315 2,373 Total Operating Capital 1,725 1,847 2,520 3,299 4,269 2,946 3,064 3,186 3,282 3,380 3,695 3,805 3,920 4,018 4,118 Valuation (in millions where appropriate) -- through year 2019E 2009 20E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E Long-term Horizon Value Growth Rate (user-supplied) 2.00% PV of Forecasted FCF, discounted at 7.25% $53,422 $53,360 $54,630 $55,888 $57,126 $58,369 $59,828 $61,096 $62,365 $63,627 $64,900 Value of Non-Operating Assets $2,0 $804 $837 $870 $896 $923 $951 $979 $1,009 $1,034 $1,060 Total Intrinsic Value of the Firm $55,432 $54,165 $55,467 $56,758 $58,022 $59,292 $60,779 $62,076 $63,374 $64,661 $65,960 Intrinsic Market Value of the Equity $43,805 $43,252 $44,482 $45,686 $47,085 $48,463 $49,805 $51,126 $52,405 $53,765 $55,075 Per Share Intrinsic Value of the Firm $66.17 $65.68 $67.90 $70. $72.63 $75.15 $77.63 $80.11 $82.54 $85.13 $87.66 MVA (market value added) $31,165 $29,729 $30,054 $30,329 $30,799 $31,252 $31,685 $32,9 $32,508 $33,024 $33,532 Weighted Average Cost of Capital Calculations Capital Asset Pricing Model Item Value Percent Cost Weighted Cost Risk Free Rate 4.25% ST Debt (from most recent balance sheet) 155 0.38% 3.41% 0.01% Beta 0.90 LT Debt (from most recent balance sheet) 11,472 28.25% 5.86% 1.00% Market Risk Prem. 5.00% MV Equity (look up stock's mkt. cap and enter in cell BB53 28,980 71.37% 8.75% 6.24% Cost of Equity 8.75% Weighted Average Cost of Capital 7.25%
Exelon Financial Analysis, Page 6 of 8 BQ BR BS BT BU BV BW BX BY BZ CA CB CC CD CE CF CG CH 1 2 3 4 5 6 In this section we are going to examine historical and forecasted ratios (or "multiples") typically used to value stocks P/CF, Enterprise Value/EBITDA, etc. We first want to compare the historical trends in these ratios to the trends in their forecasted values. If our forecasted multiples are systematically increasing or decreasing our forecasts may be too optimistic or pessimistic, and our forecast assumptions may have to be adjusted. Second, we want to compare our discounted cash flow valuation estimates with those derived from the various multiples. Once again, if there is a large discrepancy between our DCF valuation estimate of the company's stock and the range of values obtained from the various multiples, we may want to adjust our forecast assumptions. 1. You will need to look up the company's year end stock prices and enter them in the first 5 (historical) years of the "per share value" category. 7 2. Use the estimated DCF price per share in the forecasted period (link to your forecasted prices in cells BG47 BP47. 3. Market capitalization will be calculated as basic weighted shares x historical year end prices and then forecasted basic weighted shares x DCF forecasted prices. 8 4. As with previous calculations, historical multiples use actual historical values and forecasted multiples use forecasted values. 9 11 12 Historical Ratios and Valuation Forecasted Ratios and Valuation 13 Inputs 2005 2006 2007 2008 2009 20E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 14 Per share value (hist. & DCF est.) $53.14 $61.89 $81.64 $57.17 $48.87 $65.68 $67.90 $70. $72.63 $75.15 $77.63 $80.11 $82.54 $85.13 $87.66 15 Market capitalization $35,551 $41,466 $54,699 $37,618 $32,205 $43,119 $44,411 $45,679 $47,147 $48,598 $50,017 $51,420 $52,783 $54,233 $55,636 16 EBITDA $3,201 $4,285 $5,702 $5,688 $6,253 $6,167 $6,414 $6,671 $6,871 $7,077 $7,289 $7,508 $7,733 $7,926 $8,125 17 Enterprise Value $48,549 $53,545 $67,056 $49,237 $41,822 $53,228 $54,559 $55,882 $57,189 $58,505 $60,041 $61,390 $62,744 $64,095 $65,461 18 19 Multiples Price/Sales 2.31 2.65 2.89 1.99 1.86 2.39 2.37 2.34 2.35 2.35 2.35 2.35 2.34 2.34 2.34 20 Price/EBITDA 11.11 9.68 9.59 6.61 5.15 6.99 6.92 6.85 6.86 6.87 6.86 6.85 6.83 6.84 6.85 21 Price/Free Cash Flow N/A 22.02 23.01 13.73 16.58.96 17.09 16.91 16.76 16.77 18.04 16.76 16.70 16.64 16.66 22 Enterprise Value/EBITDA 15.17 12.50 11.76 8.66 6.69 8.63 8.51 8.38 8.32 8.27 8.24 8.18 8.11 8.09 8.06 23 Price/Earnings 37.77 26.31 20.25 13.93 11.96 18.41 18.11 17.79 17.69 17.58 17.50 17.37 17.23 17.17 17.11 24 Free Cash Flow Yield 4.5% 4.3% 7.4% 6.0% 9.1% 5.8% 5.9% 6.0% 6.0% 5.6% 6.0% 6.0% 6.1% 6.1% 25 Dividend Yield 2.98% 3.28% 2.21% 2.66% 4.29% 3.40% 3.49% 3.59% 3.67% 3.77% 3.87% 3.98% 4.% 4.22% 4.34% 26 Historical Override Forecasted Stock Prices Based on Historical Multiples -- Years 27 Valuation Estimates Based On: Average w/manual 20E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 28 Price/Sales 2.34 $64.05 $66.96 $70.01 $72.48 $75.05 $77.71 $80.46 $83.31 $85.84 $88.44 29 Price/EBITDA 8.43 $79.17 $82.65 $86.28 $89.20 $92.23 $95.35 $98.58 $1.92 $4.87 $7.89 30 Price/Free Cash Flow 18.84 $112.88 $74.82 $78.11 $81.64 $84.41 $81.05 $90.04 $93.09 $96.34 $99.12 31 Enterprise Value/EBITDA.95 $2.90 $7.42 $112.13 $115.93 $119.86 $123.92 $128.12 $132.46 $136.29 $140.22 32 Price/Earnings 22.04 $78.90 $82.80 $86.85 $90.36 $93.94 $97.35 $1.07 $4.87 $8.32 $111.80 33 Low Price $64.05 $66.96 $70.01 $72.48 $75.05 $77.71 $80.46 $83.31 $85.84 $88.44 34 High Price $112.88 $7.42 $112.13 $115.93 $119.86 $123.92 $128.12 $132.46 $136.29 $140.22 35 36 DCF Price $65.68 $67.90 $70. $72.63 $75.15 $77.63 $80.11 $82.54 $85.13 $87.66 37 38 Price/Sales and Enterprise Value/EBITDA vs. Price Forecasted Per Share Stock Values 39 16 $0 40 $150 $90 41 $135 $80 42 12 $120 $70 43 $5 $60 44 $90 45 8 $50 $75 46 $40 $60 47 $30 4 $45 48 $20 $30 49 50 51 52 53 54 0 $ $0 $15 $0 55 56 Price/Sales Enterprise Value/EBITDA Historical or DCF Price Low Price DCF Price High Price P/S and Ent. Value/EBITDA Historical or DCF Price Forecasted Value Per Share
Exelon Financial Analysis, Page 7 of 8 1 2 3 4 5 6 7 8 9 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 CI CJ CK CL CM CN CO CP CQ CR CS CT CU CV CW CX CY CZ DA DB Price/Earnings Ratio Gross Margin Economic Value Added 40 35 30 25 20 15 5 0 90% 80% 70% 60% 50% 40% 30% 20% % 0% $3,200 $3,000 $2,800 $2,600 $2,400 $2,200 $2,000 Price/Earnings Ratio and Dividend Yield Price/Earnings Ratio Dividend Yield Gross, Operating and Net Profit Margins Gross Margin Operating Margin Net Margin Economic Value Added & Market Value Added (millions) Economic Value Added Market Value Added 5.0% 4.0% 3.0% 2.0% 1.0% $34,000 $33,500 $33,000 $32,500 $32,000 $31,500 $31,000 $30,500 $30,000 $29,500 $29,000 Dividend Yield Market Value Added EPS and DPS ROA, ROE and ROIC NOPAT and Free Cash Flow $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 140% 120% 0% 80% 60% 40% 20% 0% $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 Earnings and Dividends Per Share Earnings Per Share Return on Assets, Equity and Invested Capital Return on Assets Return on Equity Return on Invested Capital NOPAT and Free Cash Flow (millions) NOPAT Dividends Per Share Free Cash Flow
Exelon Financial Analysis, Page 8 of 8 1 2 3 4 5 6 7 8 9 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 DC DD DE DF DG DH DI DJ DK DL DM DN DO DP DQ DR DS DT DU DV Piotroski Score Altman Z Score 11 9 8 7 6 5 4 3 2 1 0 2 1 0 Piotroski Financial Fitness Score (max = 11) Piotroski Score Altman Probability of Bankruptcy Z Score Z >2.9 = Safe, 1.23 < Z < 2.9 = Grey Area, Z < 1.23 = Distress Altman Z Score