How Long Will Exelon Earnings Keep Falling?

Exelon (NYSE: EXC  ) will release its quarterly report on Wednesday, and investors are bracing themselves for what could be another disappointing report for the utility. Despite its promise as a major producer of nuclear power, Exelon earnings are likely to decline from their year-ago levels, continuing a troubling trend that has led to past dividend cuts and uncertainty about the company's future.

Historically, Exelon has benefited greatly from its diversified portfolio of electrical generation capacity, with its nuclear power plants helping to give it a major competitive advantage when fossil-fuel prices were high. Lately, though, low natural gas prices have taken away that advantage, creating problems for the utility's business model and depressing the price of the power it generates, hitting profits. Let's take an early look at what's been happening with Exelon over the past quarter and what we're likely to see in its quarterly report.

Stats on Exelon

Analyst EPS Estimate

$0.54

Change From Year-Ago EPS

(11.5%)

Revenue Estimate

$6.15 billion

Change From Year-Ago Revenue

(3.3%)

Earnings Beats in Past Four Quarters

2

Source: Yahoo! Finance.

When will Exelon earnings bottom out?
Analysts have largely kept their views on Exelon earnings stable in recent months, leaving June-quarter estimates unchanged though reining in their full-year 2013 views by $0.02 per share. The stock, though, has continued to pose problems for investors, having fallen 14% since late April.

A large part of that drop came in late May, following very poor results from power-grid operator PJM's auction of electrical capacity governing the 2016-2017 delivery year. With the grid operator managing to secure nearly 170 gigawatts of capacity at a price more than 55% below the previous year's auction, analysts downgraded Exelon and rival FirstEnergy (NYSE: FE  ) because of the adverse long-term implications on electricity demand. New natural-gas-fueled power plants were a major part of the capacity jump, and as gas prices continue to remain relatively low, producers like FirstEnergy and Exelon are facing profit squeezes well into the future.

But Exelon isn't giving up on the future prospects of nuclear energy. It filed renewal applications for two of its nuclear plants in May, seeking to get the multi-year process under way well before the 2024 to 2027 expiration dates of its current approval from the Nuclear Regulatory Commission. Industry rivals aren't committed to nuclear power given the current price environment, as Duke Energy (NYSE: DUK  ) decided to suspend its plans to build new nuclear plants in North Carolina, citing slowing growth in power demand as making the plants unnecessary as Duke turns its attention to modernizing its fossil-fuel plants.

Moreover, Exelon is looking at sources other than nuclear power for electricity generation. In its corporate sustainability report, the company not only touted safety and reliability but also more than 400 megawatts of wind power and 31 megawatts of solar generation it added in the past year.

In the Exelon earnings report, watch for signs of how the utility is handling the prospect of higher interest rates. The full brunt of higher financing costs won't hit the company immediately, but over time, rising interest expense could produce a further headwind to Exelon's profitability going forward.

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