The immediate market reaction to Utility Forecaster Growth Portfolio Aggressive Holding Exelon Corp’s (NYSE: EXC) third-quarter earnings was decidedly tepid early Wednesday morning.
The stock opened higher, dipped below Tuesday’s closing price and then found some footing above $28.10. That’s a nickel higher than the $28.05 registered at the previous closing bell on the New York Stock Exchange, as Exelon slightly lagged the Dow Jones Utilities Average.
Exelon’s share price spiked during the company’s conference call to discuss the third quarter, notching its biggest intraday gain since Aug. 22, 2013, as management noted that it expects the wholesale power market to recover by the end of 2014 or early in 2015.
There’s no question that Exelon’s financial and operating results for the three months ended Sept. 30, 2013, were better than what management reported for the second quarter.
Adjusted earnings per share (EPS) were $0.78, better than a consensus analyst forecast of $0.67, and revenue of $6.5 billion topped an estimate of $5.77 billion. Second-quarter earnings missed the consensus. Sales for the third quarter topped estimates by 12.6 percent versus a 6.6 percent beat for the second quarter.
Management noted strong operating performance at Exelon’s power plants, as the nuclear fleet’s capacity factor reached 94.8 percent for the third quarter versus 90.7 percent a year ago. Better performance drove a solid increase in nuclear output.
Management also narrowed its guidance range for 2013 adjusted EPS to $2.40 to $2.60 from $2.35 to $2.65, the midpoint of $2.50 topping analysts’ expectation of $2.45.
The company’s operating segments include independent power production through Exelon Generation and energy delivery through regulated utilities Commonwealth Edison (ComEd) in northern Illinois, PECO Energy (PECO) in southeastern Pennsylvania and Baltimore Gas and Electric (BGE) in central Maryland.
Exelon Generation is one of the largest competitive power generators in the US, with owned generating assets totaling approximately 34,700 megawatts. It has one of the nation’s cleanest portfolios, with 55 percent nuclear, 28 percent natural gas and 10 percent hydro, wind, solar and other clean generation.
Exelon is the largest owner/operator of nuclear power plants in the US with combined capacity of more than 17,000 megawatts.
Generation posted net income of $411 million, or 61.6 percent of Exelon’s overall adjusted earnings for the third quarter, down from $458 million a year ago due to lower realized energy prices across all regions, higher nuclear fuel costs and increased depreciation and amortization expense due to ongoing capital expenditures.
The energy delivery businesses, which serve 6.6 million electric and gas customers, reported combined earnings of $271 million, up from $211 million a year ago.
ComEd’s adjusted net was up $37 million on increased distribution revenue due to higher allowed return on equity and recovery of capital investment pursuant to the formula rate under Illinois’ Energy Infrastructure Modernization Act. Residential electricity use was down.
PECO earnings were down by $31 million due to favorable income tax impacts in the prior corresponding period and unfavorable weather. Electric use was down by 3.4 percent, though gas sales ticked up by 1.4 percent.
BGE’s bottom line improved by $54 million compared to the third quarter of 2012 due to higher
electric and gas distribution rates and decreased storm costs, partially offset by higher depreciation and amortization expense. Due to revenue decoupling in Maryland, BGE isn’t affected by actual weather, with the exception of major storms.
Nuclear is Exelon’s calling card, yet low natural gas prices continue to exert a substantial impact on sales and earnings because of their impact on wholesale power prices.
This is the biggest factor in a series of updates issued by analysts in recent weeks that included outright downgrades to or reiterations of “sell” advice accompanied by reductions in 12-month target prices for the stock.
Exelon’s particular circumstance is complicated by the fact that its nuclear fleet requires a higher level of ongoing operating and maintenance capital expenditure (CAPEX) because of tight Nuclear Regulatory Commission (NRC) rules.
And this burden will only get weightier in future as plants age and demand greater upkeep.
The market surely appreciates management’s optimism about a merchant power turnaround in late 2014 or early 2015, though the intraday/intra-conference call bounce on Oct.30 came off decade lows for the stock price.
In fact, since hitting an Obama-era high of $57.81 on Feb. 6, 2009, Exelon, once described/derided as “The President’s Utility,” has been in a steep downtrend.
It bounced in mid-2013 on optimism its 41 percent dividend cut in February would provide it the headroom to generate meaningful earnings growth and at the same time reduce debt.
After slipping to just above $30 in the immediate aftermath of the cut announcement, the shares rallied to a 2013 closing high of $37.78 on April 29. Since then, however, it’s been all downhill again, to the point where the market has entirely discounted the value of the Constellation Energy Group merger completed in March 2012.
Part of the deterioration can be attributed to the flight away from stocks perceived to be sensitive to rising interest rates following US Federal Reserve hints at the end of its bond-buying program.
Exelon’s financial profile, despite the sequential improvement from the second quarter to the third, continues to worsen.
And there are certainly management decisions that beg scrutiny, particularly the timing of the Constellation deal.
That’s on top of the weakening of the US merchant power business as well as difficult conditions in its regulated service territory.
Management actually plans heavy investment in its regulated operations over the next several years to support the dividend, a telling indication of decision-makers’ outlook for the merchant side of the business.
The crux of the matter is that the financial picture, highlighted by a steady drop in income, looks increasingly negative. And the market, although there are myriad factors that inform buy and sell decisions at any given time, may be pricing in yet another dividend cut.
Exelon does own a solid set of generation assets, a portfolio that should benefit from finality on Environmental Protection Agency rules on greenhouse gas emissions from power plants. But this is a long-term trend, and there are better opportunities for new money right now.
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