We reiterate our recommendation on Exelon Corporation (EXC) to Neutral. In second-quarter 2012, the company’s earnings and revenue missed the Zacks Consensus Estimates. The year-over-year decline in earnings were primarily due to lower margins in its Generation segment, higher operation and maintenance costs, and increased average diluted shares outstanding for the merger with Constellation. In addition, Exelon’s quarterly performance was affected by inconsistent weather patterns in its service territories.
We know that Exelon’s financial performance is guided by price fluctuations in the wholesale power markets. Wholesale power prices are dependent on supply and demand, which in turn, are determined by several factors like fuel prices, especially prices of coal and natural gas. In addition, impact of economic conditions, and implementation of energy efficiency and energy demand response programs could influence Exelon’s forthcoming operational as well as financial performance.
We also know that Exelon’s generation and energy delivery businesses are highly regulated. Fundamental changes in regulation could disrupt the company’s business plans, which in turn, may adversely affect its future results. Apart from regulatory risks, Exelon also faces weather related risks. Weather patterns and related impacts on electricity and gas usage may affect Exelon’s operational results.
On the positive side, completion of merger with Constellation has benefited Exelon’s results, and we expect Exelon to realize further synergies moving forward. The company expects to achieve $100 million – $170 million of merger-related operations and maintenance synergies in 2012. This merger is expected to boost the company’s position in terms of load and customer base.
In addition, Exelon continues with its investments to upgrade its plants, which will subsequently enable the company to produce additional 420 million watts of carbon-free power in the next five years. The additional production will benefit the company when Environmental Protection Agency regulations come into effect in late 2014, providing Exelon with dual benefits. The implementation of control technology will increase the company’s operational cost and ultimately lead to a hike in per unit price of power. The smaller units, which fail to meet these economic requirements, would be forced to shut down and thus make way for Exelon to increase its market share.
However, Exelon’s pending rate cases and volatile commodity prices continue to be an overhang on the company’s future performance.
Chicago, Illinois-based Exelon Corporation, a utility services holding company, engages in the generation, transmission, distribution and sale of electricity to residential, commercial, industrial and wholesale customers. Exelon Corporation currently retains a short term Zacks #3 Rank (Hold Rating) and competes with Ameren Corporation (AEE).
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