Exelon Hurt By Higher Expenses

Third quarter earnings for Exelon Corporation (NYSE:EXC) came in just under analysts expectations this morning.  The Chicago-based electric utility reported that net income decreased to $700 million or $1.06 a share, from $780 million, or $1.15 a share a year ago.  Adjusted Revenue came in at $5.27 billion while analysts were expecting earnings of $1.13 a share on revenue of $5.46 billion.

One-time Items

During the last quarter, Exelon also encountered a few special items including an $80 million charge for a 2007 electric rate settlement, and income of $17 and $18 million from decreases in decommissioning obligations and positive investments in synthetic fuel-producing activities.  Excluding these special items, operating income for the quarter was $706 million, $1.07 per diluted share, versus $823, $1.21 per diluted share, from a year ago.

Expenses on the Rise

Unfavorable weather and an increase in uncollectible accounts expense hurt earnings during the 3^rd quarter from a year ago.  Naturally, home energy needs are primarily contingent on what mother nature hands us.  Commonwealth Edison, ComEd, provides electricity to over 70% of Illinois and with 16 fewer cooling-degree days, retail kWh deliveries decreased 4.2%.  As for PECO Energy, the Pennsylvania provider to about 2 million customers, a decrease in cooling-degree days from a year ago caused a 1.7% decrease in deliveries.  Other costs that hurt Exelon’s bottom line this quarter were inflationary pressures, increased labor costs, and higher refueling outage costs.

The Good News

Helping to offset the higher expenses, increased output from EXC’s Nuclear Operations and higher availability of their fossil fleet and hydro facilities were very strong over the quarter.  Higher capacity factors and fewer refueling days helped nuclear plants increase output from the 3^rd quarter 2007 even with the lower demand.  Higher energy margins also helped EXC with average market prices on the rise.

More importantly during these stressful times, EXC is in a very comfortable liquidity position for the rest of 2008 and going forward.  They have no debt maturities remaining in 2008 and only $29 million of non-securitized debt for 2009.  Also, they have $6.8 billion available in aggregate credit facility commitments with 24 banks through 2012, each maintaining less then 10% of the exposure.

NRG Bid

With a bid on the table for NRG Energy, Inc. (NYSE:NRG) from earlier in the week, Exelon has definitely turned the heat up on the rest of the electric utility providers in the U.S.  With an increase in market cap to over $40 billion and new power production of approximately 47,000 MW, if the deal goes through, Exelon would hands down be the largest electric utility in the country.  But with the market conditions as they are now, many new roadblocks will surface, especially with a recent downgrade of Exelon’s credit rating to the lowest of investment grade, BBB.  The take-over includes $8 billion in debt from NRG that needs to be refinanced.  This is obviously not a favorable time for a large take-over, but if the deal does go through, Exelon’s stock will probably face some downward pressure due to the increased risk of incorporating NRG’s business during this credit crisis.  However, the deal has the possibility of adding to EXC’s EPS as early as next year and a synergy of the two companies will help diversify Exelon’s energy portfolio away from being nuclear-dominant and expand their gas/oil and coal divisions.

Turbulent Times

With all the unknowns surrounding the potential acquisition of NRG this is clearly a time to remain cautious.  CEO John W. Rowe reiterated this morning, “We expect to be well within our original 2008 earnings guidance range, but due to the effects of these unfavorable items, such as weather and macro economic factors, we expect our full-year 2008 results to be near the bottom of the $4.15 to 4.30 per share range that we announced on September 4^th.”  Even with the potential takeover looming, Exelon performed well over the last quarter and has provided guidance that they are in a good position to continue growing operations and minimize their exposure to credit risk.

When I look at this company I see great value and a possible buying opportunity once the NRG deal is completed. Another positive note is that Exelon declared their dividend for the 3^rd quarter of 52.5 cents, a 5% increase, and continuing their annual compounding dividend growth rate of 12% since 2001.  I would sit on the sidelines here for a little while longer but keep a sharp eye on this stock and be ready to get in.

Disclosure:  The mutual fund the author is associated with is long EXC.

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