Edited by Adam Isaac
Exelon Corporation (EXC) is one of the largest utility providers in the United States. It primarily generates electricity from fossil, nuclear, hydro, and renewable energy sources. The company is also involved in blanket energy marketing business, as well as the retail and purchase of natural gas and electricity, along with the provision of distribution and transmission services. Exelon supplies its services to commercial, residential, wholesale and industrial customers. As of December 31, 2011, it possessed generation resources with a collective net capacity of 25,544 megawatts. The company provides electricity to approximately 3.8 million customers in northern Illinois and around 1.6 million customers in southeastern Pennsylvania, and offers natural gas to approximately 494,000 customers in Philadelphia.
Exelon Corporation has a long history of dividends and has one of the most attractive dividend yields in the market at 5.90 percent. The dividends have been fairly stable over the past four years, with only one dividend split that occurred during the second quarter of 2012. However, in the third quarter, dividends came back to normal levels. In this article, I am assessing the dividend stability of the Exelon Corporation as well as a possible increase in the current dividend levels. In order to gauge the strength of the company, I will look at current earnings and future earnings prospects, as well as analyzing the company's balance sheet and cash flows.
In its most recent earnings announcement, Exelon declared an adjusted net income of $0.61 per share. Moreover, the company's net income for the quarter was reported as $286 million. This number represents a decline of 53.9 percent from last year's figures. This marks the second quarter in a row that Exelon's net income has dropped, since profits fell 70.1 percent in the first quarter. However, the Exelon Corporation completed its planned merger with Constellation Energy (CEG) in a stock-for-stock transaction in March. The merger will certainly enhance Exelon's position in the market.
The new entity is well positioned to become a leading energy products and services provider, in terms of its customer base and the scale of its power generator. This merger will enable the two companies to work jointly on fuel improvement, and to augment their efficiency levels. The companies will also be able to offer a greater range of choices and rates to customers, as well as producing power at a lower cost to themselves. The combined unit is expected to provide about 164 terawatt-hours per year to almost 100,000 businesses and public sector companies, and almost one million residential customers. Increased revenues and an enhanced cost structure will enable the company to post better earning in the future.
Exelon's operating cash flows have been decreasing over the last three years, while capital expenditures have been increasing. The company had the largest capital expenditures in 2011, which amounted to $4.02 billion. More recently, the Exelon has been expanding through capital expenditures and acquisitions. At present, the firm seems to be improving its operating cash flows and, at the end of the second quarter, it had operating cash flows of more than $2.7 billion. Furthermore, the firm has experienced a declining trend in its free cash flows over the past three years, which I believe will start to show a positive trend in the near future. At the end of the second quarter, the firm had cash balances of over $1.3 billion. I expect Exelon to post higher operating cash flows, as well as free cash flows, in the coming quarters due to improved revenues from the merged entity and an enhanced cost structure.
Exelon Corporation has a long-term debt of more than $17 billion at the moment. The company has seen an increase of over $5 billion in long-term debt during the previous six months. However, most of the corporate bonds are long-term, with only two bonds maturing prior to 2015, and the rest mature between 2020 and 2037. Furthermore, Exelon has a debt-to-equity ratio of 0.88, which is less than the industry average of 0.91. However, an increase of 40 percent in company debt is due to the recent acquisition of Constellation Energy. Massive amounts of debt remain the only red flag for Exelon Corporation at the moment. The firm will need to generate significant cash flows to get out of its currently massive debts, but I believe it will be able to generate sufficient cash flows to accomplish this task.
I am a big fan of utility companies. These stocks are slow, but steady upside movers. In fact, shareholders of diversified utilities experienced double digit returns in the past 10 years. With a market cap of almost $30 billion, Exelon is one of the largest utility providers in the U.S. Among the utility space, only Duke (DUK) energy, Southern Company (SO), and Dominion (D) has market caps above that of Exelon's. Compared to these companies, Exelon is trading at lower valuation multiples.
Exelon Corporation has a solid revenue history and attractive growth prospects. The recent merger will enable the company to significantly improve its revenues and cash flows. However, analysts have some concerns regarding the company's credit quality, due to its massive debt levels. Nevertheless, I do not see Exelon reducing its dividends in the near future. Exelon has been consolidating and, in the coming quarters, the company will start seeing the benefits of the merger. Exelon has enough financial strength to continue paying dividends and cover its debt at the same time.