By Ishtiaq Ahmed
Exelon's (EXC) stock fell to its 52 week low in the last month. This year most utilities underperformed the market. However, for some electric utilities, like Exelon, it's been particularly rough. However, the stock has started to pick up more recently and currently trades at $35.95.
At present, the company has a dividend yield of 5.84%, and an annual dividend of $2.10. In my previous article, I talked about the ability of the company to maintain its current high level of dividends. I looked at the earnings potential, cash flows and the debt of the company. However, in this article, I go deeper in my analysis of the cash flows and debt coverage of the company, and through some metrics, try to ascertain the position of the company.
Free Cash Flows:
Free Cash Flows
Depreciation and other noncash charges
Funds from Operations (FFO)
change in noncash current assets
change in noncash current liabilities
Operating Cash flows
Free Operating Cash Flow
Source: SEC filings
In the previous three years, net income of the company has been declining. At the end of 2009, net income stood at $2.7 billion, which came down to $2.49 billion by the end of 2011. Accordingly, the funds from operations also declined during the previous three years. From $4.5 billion in 2009, the FFO came down to $3.8 billion at the end of 2011. The cash flows from operations also demonstrated the same pattern as funds from operations. At the end of 2011, cash flows from operations stood at $4.8 billion as compared to $6.09 billion at the end of 2009.
Exelon has made significant capital expenditures in the previous three years. The company spent over $3 billion in 2009 and 2010. In 2011, the capital expenditures further increased, and the company spent $4 billion in capital expenditures. As a result, the company generated less than $1 billion in free cash flows during 2011. A decline in net income coupled with an increase in capital expenditures resulted in a sharp decline in free cash flows during 2011.
Funds from Operations(FFO)/Total Debt
FFO/Capital spending requirements
Free Operating Cash Flow + interest expense/ Interest expense
Debt Service coverage
The first ratio in the table indicates that the debt of the company is adequately covered with the FFO. At the moment, the FFO is about 32% of the total long term debt. Recently, declining natural gas prices have hurt the FFO of the company. However, the FFO still remains adequate for Exelon to cover its debt obligations and the natural gas prices will have to come down drastically to bring Exelon FFO into the danger zone. In 2011, the company had the highest capital expenditures figures of the past three years. A decline in FFO along with an increase in capital expenditures has resulted in a low FFO to capital spending requirements ratio.
As I mentioned, capital expenditures are an essential cash outflow for Exelon, and the firm will keep on spending a substantial amount in capital Expenditures. Due to a decline in FFO, the firm may need to borrow for capital expenditures. However, it is normal for utilities to carry heavy amounts of debt and Exelon debt to equity ratio stands at .8 compared to the industry average of 1.1.
The last two metrics in the table indicate that the firm is able to meet its interest and debt payments sufficiently. The interest coverage ratio indicates that the firm should not have any trouble meeting its interest obligations. In addition, the debt service coverage ratio shows that the firm is generating ample cash flows to cover its debt servicing requirements. These last two metrics strengthen the belief that the firm will have no trouble even if it decides to take on more debt. At the moment, the cash flows are sufficient to cover for the interest expense, as well as the repayment of the debt.
Nuclear power has had a tough time competing against the low costs of natural gas; still, nuclear power remains a clean form of energy. Exelon presents a lot of rewards to risk averse and income-seeking. The company offers a necessity product in electricity, which will have high demand independent of economic conditions of the country. As a result, the firm will have near certain cash flows for the foreseeable future. In addition, its acquisition of Constellation Energy will help decrease its reliance on nuclear power and give it more space to take advantage of all fuel sources, including low natural gas prices.
Exelon is one of the largest utility providers in the U.S. Among the utility space only Duke (DUK) energy and Southern Company (SO) have market caps above that of Exelon's. Dominion (D) is another player in the industry that has large-scale operations in the U.S. Compared to its peers 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 improve its revenues. In addition, the recovering natural gas prices will further improve the operating results.
The analysis indicates the firm has experienced a decline in some of its metrics, but it has been able to keep its dividends stable. I believe the firm will be able to carry on its current dividend levels in the near future. As I mentioned, the acquisition of Constellation Energy should help the company reduce dependence on nuclear energy and take advantage of fuel sources. I believe the company will soon be able to gain from its merger and the revenues will start to pick up. However, investors may have to be a little patient for a dividend increase.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.