Reuters 2001-09-28 (a Friday)
By Jim Brumm
NEW YORK (Reuters) - Exelon Corp., one of the largest U.S. utility operations, on Thursday cut its 2001 earnings target, raising investor concerns about the outlook for other utilities.
The resulting stock price decline had a noticeable impact PPL Corp. and Duke Energy Co. shares, triggering affirmations of previously announced outlooks.
In conversations with utility analysts, Exelon management attributed the reduced targets to lower than expected power marketing earnings due largely to weather-driven power price declines.
The company's announcement cited the cost of job cuts, the drop in telecommunications stock and economic weakness in addition to lower than expected prices for electricity during the key summer cooling season.
PPL, ALLEGHENY CITE SUMMER STRENGTH
But PPL, which also sells electricity in Pennsylvania, said it expects third-quarter earnings per share to exceed Wall Street's consensus of 88 cents a share. It went on to reaffirm its guidance of at least $4.00 per share for the year.
Allegheny Energy Inc., which markets power in Maryland, Pennsylvania, West Virginia and Ohio, experienced warmer weather in July and August that it did a year ago, spokesman Gregg Fries said, adding August was warmer than normal. For the year, he added, its guidance remains $3.80 to $4.10 per share.
Officials at Public Service Enterprise Group Inc., American Electric Power Co. Inc. and Cinergy Corp., which also produce and sell power in these markets, said their guidance is unchanged.
Southeast power house Duke reaffirmed its belief earnings per share would grow 10 to 15 percent from 2000's $2.10.
WEAKENING DEMAND IN CHICAGO
"While we instituted cost-containment efforts to address the economic weaknesses in the third quarter, the revenue impact of recent events cannot yet be quantified," Exelon Co-Chief Executive Corbin McNeill said.
Merrill Lynch analyst Steven Fleishman said Exelon "management is concerned about signs of weakening retail demand post the Sept. 11 tragedy, particularly in Chicago."
One of the first analysts to comment on Exelon's reduced expectations; he downgraded the stock and cut his earnings estimates for this year and next.
Exelon, formed last October when Philadelphia Electric Co.'s parent company acquired Chicago's Commonwealth Edison, said it now expects third-quarter earnings of $1.10 to $1.20 per share. It previously said the quarter would represent 30 percent to 40 percent of the company's $4.50 per share target, or $1.35 to $1.80.
Based on that outlook, Thomson Financial/First Call said, analysts expected third-quarter earnings per share ranging from $1.51 to $1.62, resulting in a consensus earnings estimate of $1.57, which the analysts compared to $1.41 one year ago.
Exelon said pro forma 2000 earnings, assuming the company was formed on January 1, 2000, were $1.27 per share.
Given reduced expectations for the third quarter and the recent economic uncertainty, Exelon said its full-year earnings guidance is being reduced to a range of $4.30 to $4.45 per share.
Analysts had used its previous guidance as a base, saying they expected earnings per share of $4.50 to $4.75, resulting in a mean of $4.58 compared to last year's $3.86.
THE DRAG OF LITIGATION, JOB CUTS
Exelon said its core operations continue to perform well, with its nuclear power plants, owned jointly with British Energy Plc (BGY.L) operating above target. Energy delivery operations, which distribute natural gas and electricity to some 5 million customers, have held spending below budget and merger-related savings are on target for $148 million in 2001.
But trading was hurt when wholesale power prices in the mid-Atlantic and upper Midwest states did not average the $34 a megawatt Exelon expected due to cooler weather and weak economies, First Union Securities analyst Thomas Hamlin said.
In addition to the negative market impacts, Exelon said, its generation unit recorded an increase in its litigation reserves of $14 million.
Earnings will be reduced further by severance costs of $30 million in the third quarter and $18 million in the fourth to eliminate another 450 positions on top of the 2,900 positions previously announced in conjunction with the merger.
The company said it anticipates a $36 million third quarter write-down of its Corvis Corp. holdings. The telecommunications equipment makers� shares were received through venture capital fund investments.
ESTIMATES SLASHED
Exelon shares were also downgraded, to hold from buy, by ABN-AMRO's Paul Patterson. He reduced his estimates of 2001, 2002 and 2003 earnings per share to $4.40, $5.15 and $5.60, respectively, from $4.62, $5.45 and $5.95.
First Union's Hamlin trimmed his estimates to $4.30 this year and $5.15 next, from $4.60 and $5.45, respectively. And Merrill's Fleishman cut his to $4.35 and $5.00, respectively.
Exelon's stock dropped nearly 23 percent to a Thursday morning low of $38.99, its lowest price since early April 2000 when it was trading as PECO.
Closing down $5.95 at $44.50, it was still down 11.79 percent -- the loss among the 40 components of the S&P Utilities Index, which has dropped nearly 19 percent in the past month.
About half the Index did end the day with small gains, reflecting advances that followed the statement from PPL, which still ended the day with a $2.11 loss at $31.19, its lowest close since late August 2000.
Duke trimmed its loss to 28 cents from $2.17. And Entergy was among the gainers, adding 53 cents after slipping 92 cents Wednesday when the New Orleans-based utility said it would meet or beat analysts' estimates for the quarter, "excluding the impact of weather" -- which is a component of those estimates.