Feb. 7 (Bloomberg) -- Exelon Corp., owner of the largest group of U.S. nuclear plants, will cut its quarterly dividend for the first time as falling electricity prices and expiring long-term contracts reduce profit.
Cutting the payment to shareholders will “position us to maintain our investment-grade rating, return a stable dividend and provide capacity to invest in growth,” Christopher Crane, chief executive officer of Chicago-based Exelon, said in a statement today. Exelon is rated BBB by Standard & Poor’s, two levels above junk status.
Exelon will reduce its dividend 41 percent to 31 cents a share in the second quarter, the first cut in the 12 years since the company was formed by the merger of Unicom Corp. and Peco Energy Inc. The shares rose 1.3 percent to $31.37 at the close in New York.
Investors were expecting the dividend cut, which Crane first mentioned as a possibility in November, and the 31-cent payout “is higher than many on the street had anticipated,” Julien Dumoulin-Smith, a New York-based analyst for UBS AG, said in a note to clients today. He rates the shares neutral, the equivalent of a hold.
The reduced shareholder payment will free about $700 million annually that Exelon will use to pay off debt over the next few years and invest in “a few years” in solar farms, natural gas plants and utility infrastructure, Crane said in a phone interview today.
The change in dividend was announced as Exelon reported a 38 percent decline in fourth-quarter profit on lower power prices and higher nuclear fuel costs. Net income fell to $378 million, or 44 cents a share, from $606 million, or 91 cents, a year earlier. Excluding one-time costs, per-share profit was 1 cent less than the 65-cent average of 16 analysts’ estimates compiled by Bloomberg.
The 6.78 percent dividend yield offered by Exelon was the highest among its U.S. peer group as of today, according to data compiled by Bloomberg. Exelon will make a first-quarter dividend payment of 52.5 cents on March 8 to shareholders of record on Feb. 19.
The announced cut would lower Exelon’s dividend yield to around 4 percent, slightly below the 4.4 percent average yield offered by its peers, Michael Worms, a New York-based utilities analyst for BMO Capital Markets Corp., wrote in a note to clients today.
Exelon faces greater exposure to falling wholesale power prices as long-term contracts that locked in higher rates expire, Paul Patterson, a New York-based utilities analyst with Glenrock Associates LLC who doesn’t rate the shares, said in a phone interview before earnings were released.
Net income at the power company’s generation unit fell 69 percent to $137 million during the fourth quarter from a year earlier, Exelon said. The average realized margin on power sold during the quarter decreased by a third to $26.52 a megawatt-hour.
Average electricity prices have dropped 45 percent since 2008, the most recent peak, in the wholesale market where most of Exelon’s power plants are, according to data compiled by Bloomberg.
Exelon is the largest U.S. nuclear operator, with 35,000 megawatts of capacity. That’s enough electricity to light 28 million homes, according to U.S. Energy Department estimates. Exelon’s utilities deliver electricity and natural gas to about 6.6 million customers.
“With the overhang of a dividend now behind us, investors would increase focus on load growth and gas price fundamentals, which continue to remain weak, in our view,” wrote Worms, who rates Exelon market perform, the equivalent of a hold. “Unfortunately, the dividend cut does not change the near-term market outlook for the company.”
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