Exelon shares fall after downgrade to "Hold"
Shares of Exelon fall after Deutsche bank cuts to "Hold" pointing to recent auction results
NEW YORK (AP) -- Exelon Corp. shares tumbled Tuesday after a Deutsche Bank analyst downgraded the stock saying that the utility's profits will take a hit when certain kinds of revenue fall in a few years.
THE SPARK: Jonathan Arnold lowered his rating for the stock to "Hold" from "Buy," saying that based on the results of the PJM capacity auction last week, Exelon faces a significant drop in Reliability Pricing Model revenue starting in 2016.
In addition, new power sources could offset any price gains stemming from the retirement of coal plants, he said.
THE BIG PICTURE: The Reliability Pricing Model was established by PJM, which operates the electric grid that serves 13 eastern states. The model is designed to make sure that there are sufficient electricity capacity resources to adequately serve homes and businesses at peak power consumption times at the lowest possible cost.
Each May since 2007, PJM holds an auction to obtain sufficient electricity capacity where it is needed to reliably meet expected electricity demand three years into the future. Before each auction, PJM estimates peak electric usage for the entire region and provides it to bidders. Their bids are based on the costs to have that resource available for that delivery year.
THE ANALYSIS: Arnold said that based on the results from this year's auction, lower capacity prices could significantly reduce Exelon's profits starting in 2016 and continuing into 2017 if prices don't pick up significantly next year.
Meanwhile, a big jump in new power supply will make it hard for power prices to rise very much, noting that the last two auctions have seen 15.3 gigawatts of power commit to entering the market, mostly offsetting the about 20 gigawatts leaving the market as a result of expected coal retirements.
"While some committed new plants may not ultimately be constructed, we think new supply is now a materially larger risk to the Exelon thesis that power prices will rise on the back of coal plant retirements," Arnold wrote in a note to investors.
THE SHARES: Down $2.62, or 7.6 percent, to $32.03 in afternoon trading, after falling as low as $31.93 earlier in the day. Over the past 52 weeks, the company's shares have traded between $28.40 and $39.82.
