(By Mani) Exelon Corp. (NYSE:EXC
) is expected to benefit from opportunities and upside available to its well positioned generating fleet and its large customer facing business as retail power and gas markets continue to grow. However, the medium term outlook poses a challenge.
Exelon is a diversified utility with ownership of the largest nuclear fleet in the nation and two transmission and distribution utilities serving Chicago and Philadelphia. In total, the company owns about 26,000MW of merchant generation capacity.
In April 2011, the company announced plans to merge with Constellation Energy (CEG) for $7.9 billion, which would create the largest competitive energy provider and merchant generator and the second largest electric and gas distribution company in the US.
At its recent analyst meeting, the company's commitment to its dividend (5.4 percent yield) was strong, merger synergies are now higher, and the tone was confident and optimistic. That said, the company's improved disclosures imply a challenging outlook.
While the gross margin of the company's Exelon Generation Company, (Exgen) is expected to rise by $150 million from 2012 to 2014, this uplift embeds a full year contribution from the CEG businesses versus only 9-10 months in 2012.
"We expect costs to rise materially in 2013 due to the incorporation of a full year impact from the CEG businesses. Furthermore, we note that O&M growth expectations of 1%/yr already fully embed the $500M of merger synergies. We believe some may have missed both these points," Deutsche Bank analyst Jonathan Arnold wrote in a note to clients.
Arnold sees 2014 earnings at $2.55 a share, lower than the company's outlook of $2.55 to $2.85 a share and well below the consensus view of $2.89 a share.
However, the company emphasized its intention to maintain its dividend, likely reassuring investors and aided its value proposition by adding certainty to the robust yield while investors wait for better times.
That said, the company's debt is slated to rise through 2014 to support higher capex (incl. growth) and the dividend, with little support from the utilities which also face elevated capex levels.