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Exelon Corporation (EXC - Analyst Report) announced third-quarter 2012 operating earnings of 77 cents per share, lower than the year-ago figure of $1.12 per share but ahead of the Zacks Consensus Estimate by 5 cents.

Earnings were above the guidance range of 65 cents to 75 cents for the quarter. However, the year-over-year is attributable to lower energy margins at Generation, higher operation and maintenance cost and increase in the average diluted shares outstanding as a result of its merger with Constellation. The downside was partially offset by contributions from Constellation and a decline in storm related costs.

Reported quarter earnings included one-time items like a 2 cent gain from mark-to-market impact of economic hedging activities and a 4 cent gain from Nuclear Decommissioning Trust Fund Investments.

The reported quarter also included a charge of 21 cents from commodity contracts intangibles, 4 cents for the Constellation merger and integration costs, 22 cents for plant retirements and divestitures and 1 cent for asset retirement obligation.

Adjusting for these extraordinary items, Exelon reported net earnings of 35 cents per share, comparing unfavorably with 90 cents per share in the prior-year quarter.

Total Revenue

Exelon’s total operating revenue for third-quarter 2012 was $7.02 billion, reflecting year-over-year growth of 34.6%. Reported quarter revenue missed the Zacks Consensus Estimate of $8.3 billion.

Quarterly Highlights

During the quarter, total operating expenses increased sharply 50.4% year over year to $5.85 billion largely due to higher purchase power and fuel, and operating & maintenance costs.

The hike in operating expenses during the reported quarter impacted the operating income of the company. Operating income in the reported quarter declined 6.6% year over year to $1.23 billion.

Segment Update

Generation: Operating revenue increased 61.3% year over year to $4.49 billion from $2.79 billion a year ago. Net income dropped 12.3% to $458 million.

Exelon Generation achieved a nuclear capacity factor of 90.7% in the third quarter of 2012 versus 95.8% in the year-ago quarter. Generation’s average realized margin on all electric sales, including sales to affiliates and excluding trading activity, was $25.96 per megawatt/hour (MWh) in the quarter, compared with $39.19 per MWh in the prior-year quarter.

Commonwealth Edison Company (ComEd): Operating revenue decreased 16.8% year over year to $1.48 billion. Net income dropped 20.3% year over year to $90 million.

In the third quarter of 2012, cooling degree-days in the ComEd service territory were up 9.4% versus the same period in 2011 and were 40.1% above normal. In the third quarter of 2012, heating degree-days in the ComEd service territory were down 27.2% versus the same period in 2011 and were 10.1% below normal. Total retail electric deliveries increased 2.1% sequentially.

Weather-normalized retail electric deliveries increased 0.2% year over year in the third quarter of 2012, reflecting increases in deliveries to residential and public authorities & railroads.

PECO Energy Company (PECO): Operating revenue declined 14.8% year over year to $806 million. Net income increased to $124 million from $103 million reported in the year-ago period.

During the reported quarter, cooling degree-days in the PECO service territory were up 2.6% versus the same period in 2011 and were 21.8% above normal. In the third quarter of 2012, heating degree-days in the PECO service territory were down 22.2% from 2011 and were 60.0% below normal.

Total retail electric deliveries were down 2.3% sequentially. On the retail gas side, deliveries in the third quarter of 2012 were down 4.4% from the year-ago period.

BaltimoreGas and Electric (BGE): Operating revenue totaled $720 million in the third quarter and incurred a net loss of $3 million.

Financial Update

The company exited the quarter with cash and cash equivalents of $1,773 million versus $1,056 million at the end of 2011.

Long-term debt as of September 30, 2012 totaled $18.24 billion versus $12.2 billion at year-end 2011.

Cash provided by operating activities in the first nine months of 2012 was $4,557 million versus $2,917 million in the comparable period last year.

Capital expenditure in the first nine months of 2012 increased to $4,145 million from $2,972 million in the comparable year-ago period.

Guidance

Exelon Corporation revised its earnings expectation for 2012 upwards. The current earnings expectation for 2012 is in the range of $2.75 to $2.95 per share, up from the prior range of $2.55 to $2.85 per share.

Exelon expects to generate 219,500 GWh of power assuming that its nuclear plants will achieve an average capacity factor of 92.8% in 2012.

The company expects cash from operations in 2012 to be $5.82 billion and also forecasts the issue of new debts of $1.72 billion during 2012. It hopes to retire $1.12 billion of debt during the year.

Hedges

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, 2012, is 99% – 102% for 2012, 88% – 91% for 2013, 56% – 59% for 2014 and 21% – 24% for 2015.

Peer Comparison

Ameren Corporation (AEE - Analyst Report), which competes with Exelon Corporation, is scheduled to report its third quarter results before the market opens on November 9, 2012.  

The Zacks Consensus Estimates for EPS and total revenue for third quarter 2012 are presently pegged at $1.42 and $2,126 million, respectively.

Our View

Exelon’s completion of merger with Constellation benefited results in the quarter under review. We expect Exelon to realize further synergies going forward.

The company revised its earnings guidance for 2012 upwards taking into consideration the strong performance of the quarter under review. We nevertheless expect the estimates for the year to come down after the full impact of Hurricane Sandy is assessed.

Exelon Corporation currently retains a short-term Zacks #3 Rank (Hold rating).

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. With a market capitalization of $30.54 billion, the company has 19,267 full time employees.

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