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I reiterate my bearish stance on Exelon Corp. (NYSE:EXC), as its fundamentals regarding the exposure to its unregulated nuclear assets remains challenging. The company's earnings are highly sensitive to forward natural gas prices and capacity power prices. Weak forward commodity prices have negatively affected the cash flows of the company's merchant business segment, and raised concerns over the nuclear plant's operational feasibility in the medium to long term. Also, the depressed retail margins for EXC do not paint a vibrant picture for the company. Therefore, I foresee limited upside to the stock price and have a bearish stance on the stock.

Financial Performance
The company reported weak financial performance for 4Q2013. The company registered adjusted operating earnings of $0.50 per share for 4Q2013, missing consensus estimates by 5.7%, down 22% year-on-year. Revenues for the recent fourth quarter came out to be $6.2 billion, down 1.3% as compared to the corresponding period last year. Earnings for the quarter were adversely affected by lower energy prices and higher depreciation and amortization expenses. However, earnings for the recent quarter were positively affected by cost control measures and lower pension expenses; operating expenses for the company dropped to $5.3 billion in 4Q2013, representing a reduction of 4.3% year-on-year.

The company's largest segment, in terms of earnings contribution, experienced a drop of 35% in earnings per share, mainly due to lower energy prices. The following table shows the change in earnings in 4Q2013 for different reporting segments of EXC, and the segment's earnings contribution towards EXC consolidated earnings.

Exelon Generation

Commonwealth Edison

PECO Energy

Baltimore Gas and Electric Co.

Change in 4Q2013 Earnings (year-on-year)

(35%)

(32%)

24%

10%

Earnings Contribution

42%

24%

24%

10%

Source: Company Report and Calculations

The company introduced its 2014 earnings per share guidance, which is better than the consensus estimates, however it is lower than the 2013 EPS, mainly due to the company's merchant (ExGen) business drag. The company expects earnings to be in a range of $2.25-$2.55 per share, in contrast to consensus estimates of $2.30. Earnings in 2014 are expected to be lower year-on-year due to weak energy prices, higher depreciation expenses and higher other expenses.

Stock Price Catalysts
The company's merchant business segment is struggling due to weak commodity prices and is adversely affecting the company's free cash flows. The ongoing depressed commodity prices remain a concern for the industry and have even forced FirstEnergy (NYSE:FE) to cut its dividends; last year, EXC also slashed its dividend due to weak power prices; currently it offers a dividend yield of 4.15%. Also, depressed power prices have raised questions regarding operational viability of some of the nuclear plants within the industry. Uncertainty is likely to remain in the near term over the shutdown of the nuclear plants for the company. EXC is expected to make a decision on high cost, unprofitable nuclear plants in the 2H2014. The company indicated that at current market prices, it is losing money on some of its nuclear plants, and if the depressed market conditions prevail as we move forward, it will consider shutting down some of its unprofitable nuclear plants to support its bottom line results and preserve cash. In 2013, the industry saw the shutting down of 5 nuclear plants in response to depressed market conditions. Duke Energy (NYSE:DUK), Dominion (NYSE:D) and Entergy (NYSE:ETR) are among the leading utility companies which opted for plant shutdowns in 2013.

Also, the current weak power prices have resulted in higher competition for EXC's retail business, which has pressurized margins to the low-end of its long term target of $2-$4/MWh. Challenging retail business operations remain another overhang on the stock price.

I believe PJM's RPM (future capacity prices) auction in May 2014 will be an important catalyst for EXC and the competitive power markets. I believe a slight improvement in PJM's next capacity prices is possible as a result of potential limits to imports; any improvement will portend well for EXC's merchant business and its stock price.

As business conditions for EXC's merchant and retail businesses remain tough, the company is eyeing to lower its costs to support its earnings. The company targets to implement tight cost controls, as it expects a 0.6% decline in O&M expenses in the next three years, with flat O&M expenditures for its merchant business operations. Cost control efforts will positively affect the company's earnings and cash flows to some extent, but I believe a recovery in commodity prices and improvement in PJM's auction prices remain important stock price catalysts.

Conclusion
EXC is expected to experience negative earnings growth in the future, mainly due to a fall in ExGen earnings. Analysts are expecting a negative next five years growth of (4.8%). EXC's future earnings are highly sensitive to the forward power prices and natural gas prices, both of which remain weak. Lower natural gas prices and excessive power supply in the PJM region does not favor EXC's future performance. Also, there is uncertainty related to the nuclear plant's shutdowns. Due to the abovementioned factors, I believe there is a limited upside to the stock price, and I have a bearish stance on the stock.

Source: Exelon: Limited Upside Potential Fuels Bearish Stance