Exelon Corp. (EXC) is among one of the largest U.S. energy service companies with a generational capacity of more than 35,000MW. The company has been going through tough times recently, mainly due to lower natural gas prices and cash flow concerns that have led to an approximate 40% dividend cut. Also, the weak PJM capacity prices declared earlier this year took a toll on the stock price. Moreover, EXC has been struggling to deliver decent financial performance in recent times, lagging behind its competitors. The company has a lower ROA, ROE, profit margin and dividend yield in comparison to its competitors. Due to these aforementioned factors, I reaffirm my bearish stance on EXC.
EXC has been going through a difficult market environment, as natural gas prices and capacity prices remain low. In the given situation, EXC has been focusing on Constellation merger synergies to support its earnings. EXC completed its merger transaction with Constellation Energy in March 2012. Earlier this week, EXC presented at the Wolfe Research Power and Gas Leader Conference, in which the company reaffirmed that it remains on track to enjoy merger synergies. In the ongoing year (2013), the merger is expected to result in almost $300 million in synergies; the number will be $550 million in 2014. The expected synergies will be derived through operations and cost management.
Also, during the presentation made earlier this week, EXC highlighted that it will be significantly investing roughly $13.5 billion in its utilities (regulated operations) over the next five years. EXC also plans to spend approximately $2 billion in its merchant business operations, most of which would be targeted to renewable energy sources. As the company continues to invest in its utility operations, it expects that utility operations will support total dividends by 2016 and 2017. As the company continues to invest in the business and focus on synergies, these efforts will strengthen future earnings. However, current low power prices and capacity revenues do not portend well for the company.
In the recent second quarter, lower PJM capacity prices were announced, which does not portend well for EXC. EXC has approximately 65% of its deregulated operations in the PJM region, which is why weak PJM capacity prices remain a concern for the company.
The company also is staying focused on maintaining its investment grade credit rating, which is why it slashed its quarterly dividends by approximately 40%. EXC is currently assigned BBB and BBB+ investment grade credit ratings by S&P and Fitch, respectively. On September 16, EXC's subsidiary PECO Energy completed an offering of $550 million mortgage bonds. The offering comprises of $300 million and $250 million worth of bonds due in 2016 and 2043, respectively. The company intends to use proceeds of the bonds to pay $300 million worth of debt due on October 15 and for other general business purposes. Credit rating agencies, Moody's and S&P, assigned A1 and A- credit ratings to the issue.
The company has been going through tough times and is lagging behind its competitors in terms of financial performance. EXC has a lower ROA, ROE, profit margin and dividend yield in comparison to its peers.
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Source: Yahoo Finance
Also, the company currently suffers from lower power prices and capacity revenues, which are adversely affecting its merchant business. Despite the fact that the company-regulated operations remain fairly stable and it has been planning to incur significant investment in its regulated operations, it does not make up for the problems to which the company is exposed at merchant business operations. Therefore, I believe the tough times will continue as we move forward, until and unless the capacity prices show any signs of improvement.