Exelon (NYSE:EXC) announced today 4th quarter results, full year 2012 results and a new dividend policy. While results were expected to be bad, and they were, and a potential dividend cut was announced, and it was cut, share prices have rallied from yesterday's close. At the time of this writing (about noon), share prices are trading $31.55, up $0.57 or +1.34%, on volume of 7.9 million shares. Volume for the first half of the trading day currently equals the daily average volume for the past 90 days.
Management announced 4th quarter ongoing earnings per share of $0.64, in line with expectations. For the year 2012, EXC earned $2.85, 31% lower than 2011. Management forecast 2013 earnings to be in the range of $2.35 to $2.65, with a mid-point of $2.50.
Management also announced a dividend cut from $0.535 per quarter to $0.31 per quarter, or a reduction from $2.10 annualized to $1.24 annualized, effective with the March dividend payment.
Operationally, electric demand remained weak for the 4th quarter with weather normalized sales down at ComEd and up at PECO. Heating degree-days were up from last year at both ComEd and PECO. Management also announced the pending retirement of several small and midsized generating facilities this year and next.
Going forward, EXC is anticipated to generate 2013 operating cash flow of around $3.9 billion, down from $4.5 billion (estimated), $4.8 billion and $5.2 billion respectfully for 2012, 2011 and 2010. The dividend cut will reduce annual dividend liability from $1.806 billion to $1.066 billion, based on 860 million shares outstanding including 2012 issued merger shares. Return on invested capital is expected to sink this year from 13.2% (estimated) in 2012 to 6.0%, and would move ROIC from the higher end of electric utilities to middle of the pack.
According to the slide presentations at the end of the SEC filed 8-k dated 2/7/13, it seems the dividend is covered by a 65% to 88% payout ratio of the regulated portions of the business ($0.85 to $1.15, mid-point $1.00), or $0.75 a share, combined with a 30% payout ratio of the merchant power business ($1.40 to $1.60, mid-point $1.50), or about $0.50 a share. The further risk to the dividend is a further reduction of merchant power earnings below the $1.40 mark.
2014 is expected to be another down year for EXC with earnings estimates in the $2.25 to $2.35 range, with the reduction mainly coming from the merchant power business. As of the Feb 1 auction, there has been little improvement in either the PJM-W or the NiHub auction pricing. Going forward, the auction market needs to respond to further reductions in generation capacity due to coal-fired plant closings or to an improving natural gas pricing market.
At the proposed dividend and current market pricing, EXC offers a 3.95% yield, in line with the average utility of 3.95%, based on the yield of XLU, and regulated electric peers of 4.01% along with a 4.20% yield for integrated electric utilities.
EXC seems to be fully valued at current levels with a price target range from $28 to $42 - large enough to drive a truck through. The median price target is $32, or right at today's price. While the overhang of a dividend cut is now removed, buying on further weakness would seem to be prudent, as the trough in performance may not be realized until next year. For longer-term investors, a turnaround in the natural gas markets will positively influence EXC, and EXC could be considered as a strong natural gas rebound play - albeit not an immediate forecast.
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