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Exelon Beats EPS, Lags Sales

Zacks Equity Research

Exelon Corporation (NYSE:EXC - News) announced second-quarter 2011 operating earnings of $1.05 per share, up from 99 cents per share in the year-ago quarter and ahead of the Zacks Consensus Estimate of 97 cents.

The year-over-year growth in earnings was attributable to new electric and gas distribution rates at PECO effective January 2011, higher realized energy prices in the Mid-Atlantic region due to the expiration of the power purchase agreement and due to special tax deduction related to nuclear decommissioning trust funds.

GAAP earnings during the quarter were 93 cents, compared with 67 cents in the year-ago period. The difference between operating and GAAP earnings during the quarter was owing to the following one-time items: an impact of 12 cents for mark-to-market losses, 2 cents for the cost associated with the retirement of assets, a 2 cent cost related to the proposed merger, while the company stood to gain 3 cents related to a arte case order and 1 cent from nuclear decommissioning trust (:NDT) fund investments.

Total Revenue

Exelon's total operating revenue for second-quarter 2011 was $4.58 billion, up 4.3% from $4.4 billion in the year-ago period.

Reported quarter revenue however failed to meet the Zacks Consensus Estimate of $4.64 billion.

Segment Update

Generation: The revenue generation from this segment during the quarter increased 8.2% to $2.54 billion from $2.35 billion in the prior-year quarter. Exelon Generation achieved a nuclear capacity factor of 89.6% in the second quarter of 2011 versus 94.8% in the year-ago quarter. Generation’s average realized margin on all electric sales, including sales to affiliates and excluding trading activity, was $41.59 per megawatt/hour (MWh) in the quarter, compared with $36.87 per MWh in the prior-year quarter.

Commonwealth Edison Company (ComEd): Revenues from this segment during the quarter were $1.44 billion versus $1.49 billion in the year-earlier period, reflecting a decline of 3.7%. ComEd's total retail electric deliveries decreased 2.3% quarter over quarter and the weather adjusted retail electric deliveries dipped 0.8% year over year due to a reduction in deliveries to all major customer classes.

PECO Energy Company (PECO): The segment recorded revenues of $0.84 billion, down 33.6% from $1.27 billion in the prior-year quarter. Cooling degree-days in the PECO service territory dropped 15.7% year over year. Total retail electric deliveries went down 2.5% from last year, primarily reflecting a decrease in deliveries to large commercial and industrial customers.

Operational Update

Total operating expenses shot up 4.8% year over year. Steeper expenses were however ameliorated by the top-line growth. Consequently, operating income during the quarter increased by 1.4% to $1.18 billion from $1.17 billion reported in the year-ago quarter.

Interest expenses increased by $10 million to $182 million from the prior-year quarter.

Financial Update

Cash and cash equivalents, at $562 million, were substantially lower than $1,168.0 million at the end of the year-ago quarter.

Capital expenditures for the quarter were $835 million versus $706.0 million in the second quarter of 2010.

In the current fiscal the company expects to return $1.4 billion cash to its shareholders through payment of dividends.

2011 Insights

Exelon expects to generate 166,100 GWh of power assuming that its nuclear plants will achieve an average capacity factor of 93.0% in 2011. Exelon expects Midwest to contribute 99,000 GWh, Mid-Atlantic to generate 56,300 GWh and South & West to contribute 10,800 GWh to total generation in 2011.

The company reiterated its cash from operations guidance of $4.3 billion for 2011. Exelon also forecasts the issue of new debts of $1 billion during 2011 and hopes to retire $600 million of debt during the year.

Taking into account its strong performance in the first half of 2011, Exelon raised its operating earnings for 2011 to a range of $4.05 to $4.25 per share from $3.90 to $4.20 per share earlier, while the third quarter 2011 earnings per share are pegged in a band of $1.00 to $1.10. The guidance assumes normal weather for the balance of the year.


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, 2011, is 95% – 98% for 2011, 82% – 85% for 2012 and 49% – 52% for 2013.

Our View

We believe the impending merger of Exelon Corporation and Constellation Energy Group Inc. (NYSE:CEG - News) will create the nation’s cleanest power generation fleet besides allowing for concentration of nuclear power generation that in its turn would bring economies of scale. Incidentally, the majority of power generated by Exelon originated from its nuclear power fleet.

Exelon Corporation currently retains a Zacks #3 Rank (short-term Hold rating). We maintain a longer-term Neutral recommendation on Exelon. The company competes with Ameren Corporation (NYSE:AEE - News) and PPL Corporation (NYSE:PPL - News).

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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