Exelon Research Report

Applied Investments Program 1 ______________________________________________________________________________ IBM Inc.

Ticker: EXC Chg Insider Positions: +1.54%Current Price: $35.59 P/B: 5.852 Week High: $37.90 Market Cap (mil): $30,58852 Week Low: $26.45 Shares (mil): 857.8MStar Fair Value: $41.00 Sector: Utilities

EPS T12 $2.29 P/E T12: 15.57ROA 2013: 2.17% Beta vs SPX: 0.62ROE 2013: 9.2% Total Return YTD: 34.96%______________________________________________________________________________

Exelon:(EXC)

Sector:Utilities

Subgroup(s):-Integrated Utilities-Electricity Networks

Portfolio weight:Utilities: 1.69%S&P 500 weight:Utilities 3.06%

Recommendation:Buy 1.5% bringing the portfolio closer to the bench mark as well as diversify our utilities holdings.

Business OverviewExelon (EXC) is a utility services holding company. The company’s focus is on the distribution of electricity to customers in Illinois and Pennsylvania. Exelon also distributes gas to customers in the Philadelphia area as well as operates nuclear power plants in states that include Pennsylvania and New Jersey. Exelon is headquartered out of Chicago, Il and has been able to maintain a wide economic moat due to its position as the leading nuclear power producer in the U.S. Exelon is one of only two utilities with a wide economic moat.

Exelon has been able to capitalize on its ability to operate low-cost nuclear power plants year-round and generate large profits even with currently depressed power prices. Similarly, Exelon benefits more than any other Utility from rising coal and natural gas prices, higher electricity demand and environmental regulations on fossil fuel power plants.

Following 2008 power prices decreased significantly causing Exelon to pursue a shift in strategy and further diversification of their portfolio through the acquisition of Constellation.

I recommend we buy Exelon to closer match the benchmark and further diversify our utilities sector holdings. Funding for Exelon could be derived from our current holding of cash as well as one of the funds or preferably from our holding of Manpowergroup within the Industrials sector due to its poor performance.

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Applied Investments Program 2 ______________________________________________________________________________

Vehicles are becoming more reliant on electricity generation as an alternative fuel source.

U.S. Energy Information Administration Annual Energy Outlook 2014

The U.S. Energy Information Administration has determined that consumers are becoming more reliant on electricity generation for transportation. Although, motor gasoline remains the dominant fuel, growing market penetration of diesel, biofuels, hybrid-electric, and plug-in electric systems gradually reduce its share of the light duty vehicle market.

By 2035 natural gas is projected to surpass coal as the nation’s largest source of energy. The U.S. Energy Information Administration concludes that the abundant supply of natural gas spurs greater use for electricity generation and transportation. This will be beneficial for Exelon in the coming years as the country relies more on Nuclear power as well as Natural Gas for their electricity generation needs.

Nuclear power plants are able to maintain a substantially low-cost advantage in comparison to their coal and fossil fuel burning counterparts.

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-Development of a nuclear power plant is dependent upon whether it is pre-licensed or not.

-The Nuclear reactor commission needs to license a reactor design before the design can be used.

-Additionally, a site review must take place and obtain a permit

Economic MoatExelon is one of two utility companies able to maintain a wide economic moat, the other being ITC Holdings Corp. This is due to its position as the leading nuclear power producer in the U.S. as well as having two primary competitive advantages.

All nuclear power plants have two primary competitive advantages the first being a cost advantage and the second being efficiencies of scale.

Exelon has been able to capitalize on both cost advantage and efficient scale, most of their economic moat is derived from a cost advantage. Exelon has a diversified portfolio of regulated and unregulated power plants. Morningstar maintains that in wholesale power markets, nuclear power generation is the only energy source that can sustain a long-term low-cost competitive advantage and wide economic moat.

Exelon’s cost advantage is due to the fact that nuclear power plants take more than seven years to site and build. Plant construction requires significant efforts to clear a site, prepare the area for infrastructure, develop heavy hauling roads, create housing, connect to water and electricity, pour large quantities of concrete for the plant itself, go through a preliminary 6 month testing stage.

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In addition, building a plant costs several billion dollars and typically faces significant community opposition. These significant barriers to entry allow existing nuclear operators to develop a low-cost monopoly within a given region.

Secondly, no other reliable power generation source can match the cost or scale of a nuclear power plant. The application of nuclear power offers low variable costs and low greenhouse gas emissions when compared to competing fossil fuel power generation sources such as coal and natural gas. This in turn reduces substitution threats

Legal and Regulatory NewsA recent supreme court ruling regarding the EPA’s power plant mercury rule was recently reviewed that will likely increase Exelon’s ability to expand operations into the future. The U.S. Supreme Court agreed to decide whether the Obama administration went too far with new power pollution caps. The government estimates that the caps would cost almost $10 billion a year and that the Environmental Protection Agency did not

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Applied Investments Program 5 ______________________________________________________________________________ adequately consider those costs when it limited mercury and other hazardous pollutants.

http://www.bloomberg.com/news/2014-11-25/epa-s-power-plant-mercury-rule-gets-review-by-u-s-supreme-court.html

If the U.S. Supreme Court agrees to allow for higher caps on the mercury dispersion and other pollutants Morningstar suggests that it will provide a tailwind for Exelon into the future.

Business Diversification

Exelon is the largest U.S. competitive power generator with roughly 35 gigawatts of power generation, including the nation's largest nuclear fleet with 19 GW of capacity, as a result of its all-stock merger with

Constellation Energy, which closed in 2012. Exelon is also the nation's second-largest regulated distributor of electricity and gas (6.6 million customers) and one of the largest retail energy suppliers in the United States.

Exelon’s Power generation is broken down into 4 main segments:

55.00%28.00%

4.00% 13.00%

Exelon Power Generation

Nuclear Natural Gas Coal Other Sources

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Financial Statements and

ValuationExelon 2013 Financial Statement Key Ratios (as % of Revenue): EBITDA 23.65%

Free Cash Flow 948 million Net income 7.97%

Oper. Cash Flow 6,343 millionOperating Income 12.45%

Price to Book 1.3

Earnings Yield 6.8% Debt-to Equity 0.8Basic EPS 2.44 Diluted EPS 2.43 Revenues have grown from $17.3 billion in 2009 to $24.8 billion in

2013. Market cap has also grown from 27.6 Billion in 2010 to 31 billion in

2014. Long-term debt to equity has been trending down currently at 79.65 (EXC) EV/EBITDA = 6.8 (PCG) EV/EBITDA = 9.5DCF Analysis (Valuation)

Relative Valuation

Investment RisksInvestment in Exelon poses some risks with a majority of risk coming from political pressures and potential changes in regulation that would have an effect on Exelon’s ability to operate a certain way. Currently, I have not come across any news or forecasts of legal proceedings that would negatively affect the outlook of Exelon. Other risks the fund should consider is the low beta and a higher level of Institutional Ownership as cited by Argus.

Conclusion and RecommendationIn conclusion, I recommend we buy Exelon with a 1.5% portfolio weight. I maintain that Exelon appears to offer some decent upside based on a comparison of the peer group as well as a DCF analysis. Additionally, adding Exelon to the portfolio would provide us with a more neutral bet on utilities as well as allow us to own more than one stock in the utilities sector. This will likely reduce our risk within the sector as well as improve our returns due to Pacific Gas and Electric’s recent run up. My recommendation is to Buy Exelon immediately pulling money from cash and funds with an estimated sell target of $48/share.

Tables and Exhibits

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Depiction of Exelon’s Power Plant’s, Storage/Terminals, Wind Farms, and Natural Gas Distribution network

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Documents

Exelon Research Report