Constellation Tempers Retail Expectations on Aggressive Competition, Pricing

Exelon has cut its outlook for retail supply volumes and margins from an earlier forecast in response to, "aggressive competition and pricing," Exelon CEO Chris Crane said during an earnings call yesterday.

"[B]oth the retail and the wholesale markets have been impacted by aggressive competition and pricing," Crane said, noting that Constellation has maintained a "disciplined" approach to pricing, and appropriately reflects various risks in pricing.

"This approach has resulted in us not winning as many of the recent Muni-Ag RFPs in Illinois and certain other competitive procurements in other markets," Crane said.

"Our recent experience in the competitive environment has tempered our near- to mid-term outlook for our retail business," Crane said.

At an analyst day in June, Exelon had projected 20% growth in commercial volumes from 2011 to 2014. "Reflecting the current market dynamics, we are now projecting a 9% growth in volumes from 2011 to 2015," Crane said.

"We still expect retail to support growth in our commercial business and serve as a key channel to market," Crane added.

"We also view the current pricing dynamic as unfortunate, but a necessary aspect of what we expect to be consolidation of retail providers," Crane said.

As a result of these retail headwinds, Exelon has revised downward its earlier forecast Power New Business / To Go gross margin by $50 million in 2013 and $100 million in 2014 as a result of lower expected volumes and margins.

Crane reported seeing margin pressure across all segments, including in commercial and industrial sales and in the municipal aggregation arena.

Specifically, with the increased competition, Constellation is seeing retail C&I margins at the low end of its average $2 to $4 per megawatt-hour range.

"[W]e'll continue to monitor the competitive environment, strive to attract and serve new customers and improve our market share, but we will remain disciplined in our pricing," Crane said.

Due to the broader weak power market, Exelon raised the possibility that it may cut its dividend in six months if market conditions do not recover, in order to maintain an investment grade credit rating.

Asked by an analyst of potential asset sales as a means of raising capital, Crane said that Exelon is currently looking at divesting a few small assets in California, and also cited a Las Vegas asset and Alberta asset as non-core. Such assets are not meaningful to cash flow.

Exelon is not considering sales of any core assets.

On Oct. 31, 2012, Exelon Generation notified PJM Interconnection of its intention to permanently retire Schuylkill Generating Station Unit 1 by Feb. 1, 2013, and Riverside Generating Station Unit 6 by Jun. 1, 2014. Schuylkill Unit 1 is a 166 MW peaking oil unit located in Philadelphia, PA, which was placed in service in 1958. Riverside 6 is a 115 MW peaking gas/kerosene unit located in Baltimore, MD, which was placed in service in 1970. The units are being retired because they are no longer economic to operate due to their age, relatively high capital and operating costs and current market conditions.