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Exelon Quarterly Profit Misses Estimates on Costs, Weather

Exelon Corp., the largest U.S. utility holding company, reported fourth-quarter profit that missed analysts’ estimates because of increasing power plant operating costs and warmer-than-normal weather.

Net income rose to $606 million, or 91 cents a share, from $524 million, or 79 cents, a year earlier, Chicago-based Exelon said in a statement today. Excluding costs from its pending purchase of Constellation Energy Group Inc. and gains from financial contracts and investments, per-share profit was 6 cents less than the average of 14 analysts’ estimates compiled by Bloomberg.

“It’s a modest disappointment,” Michael Worms, a New York-based analyst for BMO Capital Markets who rates the stock “market perform” and owns none, said today in an interview. Lower revenue from fees for keeping its plants running, known as capacity payments, cut per-share profit by 13 cents, he said.

Power prices will rebound in the near term from an “overdone” negative reaction to natural-gas supplies and a federal court’s decision on new emission rules, John Rowe, Exelon’s chairman and chief executive officer, said during a conference call today. Wholesale electricity prices are “currently undervalued by at least $5 a megawatt,” Kenneth Cornew, president of Exelon’s power unit, said on the call.

Exelon rose 2 percent to $40.01 at the close in New York. The shares, which gained 4.2 percent last year, have 10 buy and 11 hold recommendations from analysts.

Profit Margin Narrows

Exelon is seeing profit margin shrink on electricity generated by its 17 nuclear reactors as contracts signed when power prices were high begin to expire, said Andrew Levi, a New York-based power analyst with Caris & Co. A glut of U.S. gas has cut prices for the power-plant fuel, in turn causing average annual wholesale electricity prices in the mid-Atlantic to decline 38 percent since 2008.

Exelon’s fourth-quarter sales dropped 5.4 percent to $4.25 billion. The profit margin for power it generated narrowed 5.2 percent from a year earlier to $39.31 a megawatt-hour during the quarter. Costs rose on higher plant operating expenses and more days when reactors were idled for fueling, the company said. Exelon got 93 percent of its power from nuclear plants in 2010, according to its website.

“Power prices in general have fallen off a cliff,” said Levi, who spoke in an interview before the earnings were released and doesn’t own or rate Exelon. “Whether it’s Exelon or some of the integrated names, they definitely have some big headwinds to fight.”

The company said as much as 91 percent of its generation has been hedged against price fluctuations for 2012, declining to 64 percent next year and 35 percent in 2014.

Mild Winter

Weather-driven demand for heating in the fourth quarter was 20 percent lower than a year earlier for customers of Exelon’s Commonwealth Edison utility in Chicago and 23 percent lower for its Philadelphia-based utility PECO, the company said.

Chicago had its warmest fourth quarter in 40 years with an average temperature of 45 degrees Fahrenheit (7.2 degrees Celsius), according to the National Climatic Data Center. Average temperatures in Illinois and Pennsylvania, where Exelon’s two utility subsidiaries serve customers, were 10 percent and 13 percent warmer, respectively, than the same period a year earlier.

Electricity demand this year for Commonwealth Edison is forecast to drop 0.2 percent, based on normal weather, the company said. For PECO, demand may decline 5.4 percent after two oil refineries in the region closed and a third is expected to shut by July, Exelon Chief Financial Officer Matthew Hilzinger said during the call.

The company won’t provide earnings guidance for 2012 until after its merger with Constellation closes, Hilzinger said.

Exelon reported $21 million in fourth-quarter costs associated with its $7.36 billion plan to buy Constellation. The takeover, announced April 28, is awaiting regulatory approvals and the company expects it to be complete by April.

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