Exelon Corporation (EXC) announced third quarter 2010 operating earnings of $1.11 per share versus 96 cents in the year-ago quarter, reflecting growth of 15.6%. The third quarter’s result was in line with the Zacks Consensus Estimate of $1.11.
GAAP earnings of Exelon were $1.27 per share, compared with $1.14 in the year-ago period. The difference between operating and GAAP earnings during the quarter was owing to the following one-time items: an impact of 14 cents for mark-to-market losses, primarily from the Generation segment’s hedging activities, nine cents for unrealized gains related to nuclear decommissioning trust (NDT) fund investments, two cents for the cost associated with the retirement of assets and 5 cents for the impairment of certain emissions allowances.
Exelon’s total operating revenue for the quarter was $5.3 billion versus $4.3 billion reported in the year-ago period. Results exceeded the Zacks Consensus Estimate of $4.8 billion.
Operational Update
Total operating expenses during the quarter were $4 billion versus $3.1 billion in the year-ago quarter. As a percentage of revenue, total operating expenses increased 430 basis points compared to the previous year. The increase was mainly due to higher purchased power, which increased 79.4% year over year.
Interest expenses during the quarter decreased by $10 million to $175 million versus $185 million in the year-ago quarter. However, the interest expense is expected to rise substantially going forward as the company issued a considerable amount of debt during the quarter.
Segmental Update
Generation: Exelon Generation achieved a nuclear capacity factor of nearly 95.4% in the third quarter of 2010 versus 94.7% in the year-ago quarter. Generation’s average realized margin on all electric sales, including sales to affiliates and excluding trading activity, was $35.11 per megawatt/hour (MWh) in the quarter, compared with $36.32 per MWh in the prior-year quarter.
Commonwealth Edison Company (ComEd): In the third quarter of 2010, cooling degree-days in the ComEd service territory were up 107% relative to the same period in 2009 and were 37% above normal. ComEd’s total retail electric deliveries increased 16.0% quarter over quarter, with gains in deliveries across all customer classes, primarily driven by favorable weather conditions.
PECO Energy Company (PECO): Cooling degree-days in the PECO service territory were up 37% year over year, but were 29% above normal. Total retail electric deliveries were up 9% from last year, reflecting an increase in deliveries across all customer classes, driven by favorable weather conditions. On the retail gas side, deliveries in the third quarter of 2010 were 0.5% higher than the year-ago level, mainly due to increased residential deliveries.
Exelon reported operating net income of $739 million for the third quarter of 2010, up $106 million from the year-ago period. The year-over-year improvement was due to the favorable weather conditions in the service territories of ComEd and PECO. Favorable pricing from the Exelon Generation also boosted net income. The net income of the company was partially bogged down by the increased depreciation and amortization expenses and higher fuel costs at Generation.
Financial Update
During the quarter, Exelon issued bonds worth $1.4 billion in three series. The company intends to use the proceeds to refinance maturing bonds, contribute to its pension funds, pay a portion of the purchase price for its pending acquisition of John Deere Renewables and also utilize the funds in other general corporate purposes.
Hedging Status
Exelon’s hedging program involves the hedging of commodity risks for expected generation, typically on a ratable basis over a three-year period. The proportion of expected generation hedged as of September 30, 2010, is 97% – 100% for 2010, 87% – 90% for 2011 and 62% – 65% for 2012.
Others
During the quarter, the company chalked out plans to invest $4.6 billion in different projects in IIIinois, with the potential to create 4,200 new jobs over the next five years.
Guidance
Exelon raised the operating earnings guidance for 2010 to a range of $3.95 – $4.10 per share from the prior range of $3.80 – $4.10 per share, taking into consideration the strong results in the first nine months of 2010. The guidance assumes normal weather for the balance of the year.
Our View
We like that the company is making fresh investments and are encouraged for its 2010 earnings outlook, which is backed up the strong performance of its operating segments in the first nine months of the year.
Exelon Corporation currently retains a Zacks #3 Rank (short-term Hold rating). We maintain a longer-term Neutral recommendation on Exelon, given the erratic weather patterns in its service territories and pending rate cases.
Based in Chicago, Illinois, Exelon Corporation, a utility services holding company, engages in the generation, transmission, distribution and sale of electricity to residential, commercial, industrial and wholesale customers.
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