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New Challenges Mounting as Exelon Seeks to Expand Regulated Arm

Vincent Kruger

2016 May Turn Rough for Exelon Corporation as Challenges Mount

(Continued from Prior Part)

Exelon Corporation: Net income

Wall Street analysts are estimating Exelon (EXC) to post revenues of $6.7 billion in 1Q16. Exelon’s management has provided an adjusted operating earnings guidance range of $0.60–$0.70 per share for 1Q16. In the same quarter last year, Exelon earned $0.71 per share.

For fiscal 2016, Exelon Corporation expects its earnings to range from $2.40–$2.70 per share. This would be nearly 3% earnings growth compared with its earnings of $2.49 per share in 2015.

Exelon Corporation (EXC) is the largest merchant power generator by market capitalization and is now expanding into the regulated business. With its Pepco Holdings merger, its regulated operations are expected to improve.

Exelon’s management seeks half of its consolidated earnings to be obtained from regulated investments in order to bring earnings stability and margin improvement. Interestingly, Exelon is building 2,200 megawatts of merchant power generation plant in Texas.

Performance drivers

Exelon Corporation’s (EXC) return on equity improved in the last two years and stayed around 9% in 2015. However, it was more than double in 2010. This decline was mainly caused due to a fall in power prices, which narrowed its margins. Return on equity (or ROE) fell due to goodwill acquired in recent takeovers. The improving ROE will reflect in better earnings in the near future.

The new natural gas pipeline in New Jersey through Pinelands is significantly increasing supply and effectively taking business away from Exelon Corporation. Interestingly, New Jersey regulators are in the process of developing another such pipeline in the state.

Also, prior to the upcoming PJM Interconnection May auctions, the data reflects a fall in the energy demand of 2% in 2016 compared to 2015. The fall in the demand may pose a threat to power pricing and ultimately affect merchant power players like EXC, Public Service Enterprise (PEG), and FirstEnergy (FE) negatively.

Merchant generation: A competitive advantage for Exelon?

With American Electric Power (AEP) considering a way out of merchant generation business, Exelon Corporation would be left as the largest hybrid utility (FUTY) with the greatest exposure to merchant power and capacity prices. Duke Energy (DUK) and PPL Corporation (PPL) exited their merchant generation businesses in 2014 and 2015, respectively.

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