-----Original Message-----
From: 	"ML Power & Gas Group"<Maria_Melone@ML.com>@ENRON  
Sent:	Thursday, September 27, 2001 11:24 AM
To:	Gualy, Jaime
Subject:	Fleishman-EXC- Ratings Reduced on Lower Earnings

EXC; $50.45; C-2-2-7
Reported EPS (Dec): 2000A $3.74; 2001E $4.35; 2002E $5.00
* We are lowering our investment rating on EXC to 2-2 from 1-1 on a reduced earnings outlook.
* EXC announced this morning that lower power prices and a weakening economy would cause earnings to fall below its $4.50/share target for 2001.  The new range is $4.30-$4.45.  Importantly, this number includes absorbing costs for increased severance and a telecom write-off.  For 2002, the company is not providing any outlook, but notes concern over economic weakness.
* While EXC?s earnings are somewhat protected from lower power prices with roughly 60-70% of its generation sold to its own retail customers, the other 30-40% is sold into the wholesale markets.  EXC?s low-cost nuclear plants insure that these sales are profitable, but the rapid decline in gas prices and associated drop in power prices will reduce these profits below expectations.
* In addition, EXC management is concerned about signs of weakening retail demand post the September 11 tragedy, particularly in Chicago.
* We are lowering our 2001E to $4.35/share to reflect these issues.  For 2002, EXC will still see a $0.43/share benefit from the elimination of goodwill amortization.  Moreover, we expect less one-time items and losses at Enterprises and cost cuts at distribution to help earnings.  However, we now assume mid-to-high $20 prices for wholesale and only modest retail growth (1%).  Our new 2002E number is now $5.00/share.
* Our lower rating reflects less conviction on earnings and concern over how EXC can implement its strategic consolidation plan with a lower stock currency.  However, the stock trades at only 10x our reduced earnings outlook and the company remains a low-cost producer with a significant retail hedge.  Once the dust settles, we expect the stock to return to an average group multiple of around 9x, implying a mid $40s stock price.

 - EXC092701_F..pdf