Exelon Corp. (EXC), one of the leading power companies in the U.S., has a total generating capacity of approximately 35,000MW; including 17,000MW of nuclear power generation. The company has been struggling to post a satisfactory financial performance in the recent past due to lower natural gas prices, weak PJM capacity prices, and cash flow problems. It seems the company's problems are not going to go away so easily, as natural gas prices remain low and the forward power prices curve continues to deteriorate; the stock is down more than 25% in the last six months. Due to the aforementioned factors, I reiterate my bearish stance on EXC.
A continuous weakness in the forward power prices, primarily driven by a weakness in natural gas prices, is taking its toll on the stock price. Since May earlier this year, the stock is down more than 25% versus the S&P Utilities, which is down approximately 5%. Forward natural gas prices have fallen by $0.16/mmbtu and $0.13/mmbtu for 2014 and 2015, respectively, between the end of 2Q2013 and 3Q2013. The fall in natural gas prices is likely to have an adverse impact of approximately $0.03 and $0.04 on the EPS in 2014 and 2015, respectively. The reduction in EXC's merchant generation segment's earnings, due to the weak power prices, will also offset any improvement in the regulated utility operations, leading to an overall reduction in EXC's earnings.
Also, the company does not carry many options to offset the weakness in natural gas prices and the forward power curve. As the company is the leading nuclear power generator in the U.S., with nuclear power generation of approximately 17,000MW, it has narrow flexibility to reduce CapEx and operating and maintenance (O&M) expenses due to strict NRC oversight of EXC's nuclear plants. Also, the O&M spending for EXC is likely to increase in the future to keep nuclear plants safe as they age.
Moreover, the company has filed a case requesting a rate increase of $336 million or 15.6%, which remains an overhang on the stock price. EXC has requested a ROE of 8.72% and a common equity to total capitalization of 45% in the case filed. The rate case was filed by Commonwealth Edison, EXC's subsidiary, on April 2013, and a decision on the case is expected by December 25, 2013. An unconstructive outcome of the pending rate case will adversely affect the company's future earnings and will not portent well for the stock price.
Earnings Preview 3Q2013
EXC is scheduled to report its 3Q2013 earnings on October 30, next week. Analysts are expecting an EPS of $0.67 for 3Q2013, within the management's guidance range of $0.60-$0.70 for the quarter. Important takeaways from the upcoming earnings release will be the management's guidance for 2016 forward looking hedges, the outlook for load growth across its regulated operations, and the CapEx outlook for the upcoming years.
In the last four quarters, EXC has reported two earnings beats, one earnings in line with consensus estimates, and one earnings miss. The following table shows the comparison between the actual EPS and EPS estimates for EXC.
(click to enlarge)
Source: Yahoo Finance
EXC is being affected by lower capacity revenues and power prices, mainly due to lower natural gas prices, which are negatively affecting EXC's merchant business segment. The continuous weakness in EXC's merchant business is also offsetting the growth in EXC's regulated operations, and will eventually negatively impact the company's EPS in the future. Analysts have projected a negative growth rate of 5.27% for the next five years for EXC. Due to the aforementioned reasons, I believe the tough times for EXC will continue in the future, and therefore I reiterate my bearish stance on the stock.