Exelon Corporation (EXC) announced second-quarter 2012 operating earnings of 61 cents per share, lower than the year-ago figure of $1.05 per share and the Zacks Consensus Estimate of 63 cents.
The year-over-year decline in earnings per share in the reported quarter is attributable to lower energy margins at Generation, higher operation and maintenance cost and increase in the average diluted shares outstanding as a result of the merger with Constellation. The downside was partially offset by fewer nuclear outage days and the addition of Baltimore Gas and Electric’s and Constellation’s results.
Reported quarter earnings included one-time items like a 15-cent gain from mark-to-market impact of economic hedging activities, a charge of 33 cents from commodity contracts intangibles, 8 cents for the Constellation merger and integration costs and 2 cents for unrealized losses related to NDT fund investments.
Adjusting for these extraordinary items, Exelon reported net earnings of 33 cents per share, comparing unfavorably with 93 cents per share in the prior-year quarter.
Total Revenue
Exelon’s total operating revenue for second-quarter 2012 was $6.4 billion, reflecting year-over-year growth of 42%. Reported quarter revenue missed the Zacks Consensus Estimate of $6.9 billion.
Quarterly Highlights
During the quarter, total operating expenses increased sharply 61% year over year to $5.3 billion largely due to higher purchase power and fuel, and operating & maintenance costs.
The rise in cost impacted the margins of the company despite the growth in total revenue. The operating income of the company in the reported quarter declined 13% year over year to $1.03 billion.
Segment Update
Generation: Operating revenue increased 52.9% year over year to $3.7 billion from $2.5 billion. Net income plummeted 63% to $165 million.
Exelon Generation achieved a nuclear capacity factor of 93.4% in the second quarter of 2012 versus 89.6% in the year-ago quarter. Generation’s average realized margin on all electric sales, including sales to affiliates and excluding trading activity, was $26.15 per megawatt/hour (MWh) in the quarter, compared with $41.59 per MWh in the prior-year quarter.
Commonwealth Edison Company (ComEd): Operating revenue decreased 11.3% year over year to $1.3 billion. Net income dropped substantially by 63% year over year to $42 million.
In the second quarter of 2012, heating degree-days in the ComEd service territory were down 33.9% versus the same period in 2011 and were 28.9% below normal. The Cooling degree-days in the ComEd service territory were up 78.5% relative to the same period in 2011 and were 94.0% above normal.
Weather-normalized retail electric deliveries decreased 1.3% year over year in the second quarter of 2012, reflecting declines in deliveries to both residential and small commercial and industrial (C&I) customers.
PECO Energy Company (PECO): Operating revenue declined 15.1% year over year to $715 million. Net income decreased 3% to $79 million.
Heating degree-days in the PECO service territory were up 1.8% year over year and were 27.2% below normal. Total retail electric deliveries were down 2.7% from last year, reflecting declines in deliveries to all customer classes. On the retail gas side, deliveries in the quarter were down 6.0% from the year-ago level.
BaltimoreGas and Electric (BGE): Operating revenue totaled $616 million in the quarter and registered a net income of $16 million.
Financial Update
The company exited the quarter with cash and cash equivalents of $1,349 million versus $1,056 million at the end of 2011.
Long-term debt as of June 30, 2012 totaled $18.1 billion versus $12.2 billion at year-end 2011.
Cash provided by operating activities in the first half of 2012 was $2,729 million versus $1,013 million in the comparable period last year.
Capital expenditure in the first six months of 2012 increased to $2,816 million from $1,985 million in the comparable year-ago period.
Guidance
Exelon Corporation reaffirmed its full-year earnings guidance range of $2.55 to $2.85 per share and expects operating earnings in the range of 65 cents to 75 cents for the third quarter.
Exelon expects to generate 219,600 GWh of power assuming that its nuclear plants will achieve an average capacity factor of 93.1% in 2012.
The company expects cash from operations in 2012 to be $5.37 billion and also forecasts the issue of new debts of $1.75 billion during 2012. It hopes to retire $1.07 billion of debt during the year.
Hedges
Exelon’s hedging program involves the hedging of commodity risks for expected generation, typically on a ratable basis over a three-year period. The proportion of expected generation hedged as of June 30, 2012, is 99% – 102% for 2012, 79% – 82% for 2012 and 46% – 49% for 2014.
Peer Comparison
Ameren Corporation (AEE), which competes with Exelon Corporation, is scheduled to report its second quarter results before the market opens on August 2, 2012. Ameren expects its full-year 2012 earnings per share to be in the range of $2.20 to $2.50.
The Zacks Consensus Estimates for EPS and total revenue for second quarter 2012 are presently pegged at 60 cents and $1,748 million, respectively.
Our View
Like all electric utilities, Exelon was impacted by the inconsistent weather patterns in its service territories. However, the warmer summer weather trends are expected to gradually reinvigorate demand.
The completion of merger with Constellation benefited results and we expect Exelon to realize further synergies as we move forward. However, its highly regulated operations and pending rate cases continue to be an overhang on the stock.
Exelon Corporation currently retains a Zacks #3 Rank (short-term Hold rating). We maintain a longer-term Neutral recommendation on Exelon.
Based in Chicago, Illinois, Exelon Corporation, a utility services holding company, engages in the generation, transmission, distribution and sale of electricity to residential, commercial, industrial and wholesale customers.
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