Can Exelon Keep Its Glow?

The utility is counting on cost-cutting and smart acquisitions to stoke profits

John W. Rowe loves a big deal. While executives at other utilities spent the last few years leaping into energy trading or unregulated ventures with sky's-the-limit prospects, the Exelon Corp. (EXC ) chairman and CEO preferred old-fashioned acquisitions. He began in 2000 by merging Unicom Corp., a Chicago-based electric company that he had taken over just two years earlier, with Philadelphia's PECO Energy Co. to form Exelon. Since then, Rowe has made at least one sizable purchase a year, transforming the No. 1 U.S. nuclear-power generator into the best-performing utility two years running on BusinessWeek's tally of the 50 best-performing companies in the Standard & Poor's 500-stock index. Last year Exelon landed at No. 33.

So it was somewhat humbling when Rowe's latest big deal turned out to be a big dud. In November, 2003, Exelon agreed to a $2.2 billion transaction to buy Dynegy Inc.'s (DYN ) Illinois Power Co. subsidiary. Rowe predicated the transaction on hurrying a bill through the Illinois legislature to get a rate hike immediately after a statewide rate freeze ended in 2007. Feeling sandbagged, lawmakers rejected the measure, and only three weeks after announcing the takeover, Rowe called it off. "He thought he could bulldoze his way through," says Martin R. Cohen, executive director of the Citizens Utility Board, which fought the proposal. Concedes Rowe, who lost face but no big bucks: "I failed."

The smackdown is just part of what Rowe -- now 58 and running his third public utility -- is up against as he tries to boost profits in what has traditionally been a slow-growth industry. In late 2002, in a rare market misjudgment, Exelon spent $1.7 billion to take full ownership of a half-dozen New England power plants, banking on higher wholesale prices for electricity. Instead, the market has become glutted with capacity. As a result, Exelon took $753 million in write-downs on the assets in 2003, reducing net income 37%, to $905 million, even as revenue rose 6%, to $15.8 billion.

QUITE AN APPETITE. So how will Rowe generate higher numbers in today's market? Most likely he'll stick with what has worked and try again to grow by making a deal. Even after Illinois lawmakers embarrassed him, he's on the lookout for acquisitions. Rowe says he hopes to pick up a utility with $5 billion or so in annual revenue -- as long as it doesn't pile on too much debt and it adds to earnings from the get-go. Possible candidates, suggests Paul B. Fremont, an analyst at Jefferies & Co., include Cinergy Corp. (CIN ) in Cincinnati, or Akron (Ohio)-based FirstEnergy Corp. (FE ), though that company would be quite a mouthful, with sales that exceed $12 billion a year. Detroit's DTE Energy Co. (DTE ) may be another prospect. Rowe isn't tipping his hand. But as he showed with the Illinois Power bid, he won't empty the corporate purse just to cinch a deal. "We value more scale, but buying too high out of ego is a very bad idea," he says.

In the near term, though, Exelon's focus will be on cost-cutting. Last year the company lopped 1,275 positions from its 19,000-person payroll and slashed capital spending and outlays for outsourced services. That boosted cash flow by $300 million, permitting Exelon to raise its dividend by 13.6% in 2003 and again by 10% on Jan. 27. Rowe wants to eliminate 770 more jobs by 2006 and free up another $300 million. Meanwhile, the company avoids the high oil and gas prices that can bedevil other utilities, thanks to its 17 atomic reactors. With low and stable operating costs, those plants generate strong margins even at today's depressed prices for wholesale power.

CONSERVATIVE BOARD. Investors are betting that with no more onetime charges ahead and a reduced cost structure, it won't be difficult for Exelon to prosper in 2004. Some analysts believe that Exelon will regain its title as the top-earning utility, which it lost last year to Southern Co. Jeffries' Fremont predicts earnings will more than double in 2004, hitting $1.86 billion, vs. $1.43 billion for Southern. That should also add some crackle to its share price. Michael J. Chren, co-head of value investment at National City Investment Management Co., is generally underweighting utilities in its Armada Funds. But he is holding on to 275,000 Exelon shares. The stock appreciated 26% last year. It now trades at about $66, and Chren figures it could hit $71 in 2004.

Rowe attributes a good part of the company's fortunes to its strong board. Like many of his peers, Rowe recalls, he considered steering Exelon into highflying nontraditional businesses during the stock market's bubble. But while some other utilities built overseas power plants or swapped broadband capacity, he and Exelon's conservative directors stuck mostly to acquiring domestic generating capacity, including buying out its partner in nuclear-power producer AmerGen Energy Co. for a bargain $276.5 million in 2003.

Exelon did end up making a handful of outside bets, however, and a few even paid off. The company pocketed $116 million last year from the sale of its 49% stake in AT&T Wireless PSC of Philadelphia. More often than not, though, Exelon's directors turned down Rowe's diversification schemes. Rowe says they saw the same growth charts that lured in so many others. They just didn't believe them. "Power plants are real. Wires are real. Customers are real," he says. "But we never believed Enron was real. Having spent enough time studying really big things that have risen and fallen, I know that most things have their limits."

Rowe's feel for the "really big things" is an outgrowth of his love of history. He keeps a 2,600-year-old sarcophagus from Egypt's 26th Dynasty in his 37th-floor office in Chicago's Loop and has personally endowed a professorship in Byzantine history at the University of Wisconsin. Now, figuring he is only five years from retirement, Rowe is already weighing how history will treat him. "The first thing I've always wanted to be known for," he says, "is being a person who can be trusted to keep the lights on and to make money for investors." Given the turmoil in the utility industry over the past few years, Rowe is well on his way to establishing that legacy.

By Michael Arndt in Chicago

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