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
).
AMEREN CORP (AEE): Free Stock Analysis Report
EXELON CORP (EXC): Free Stock Analysis Report
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