After reporting pretty much awful results this morning, Exelon Corp. (NYSE: EXC) let investors know that it would also cut its quarterly dividend by a whopping 41%, from $0.525 to $0.31. The merchant power generator and owner of Illinois power company Commonwealth Edison said it needs to lower its dividend in order “maintain our investment grade rating, return a stable dividend and provide capacity to invest in growth.”
If the only — or at least the main — reason to own stock in utilities is to earn a steady flow of dividend income, Exelon’s cut is a bad sign for dividend investors. The problems, of course, are warmer or more severe weather (over which the company has no control), lower demand for electricity (over which the company has no control), tighter regulation of emissions (over which the company has very little control), higher operating expenses (mainly due to storm damage) and higher depreciation and amortization expenses due to added capital spending. That last item is the one that could cause other utilities to take the same path as Exelon.
Duke Energy Corp. (NYSE: DUK) said yesterday that it would close a nuclear power plant in Florida rather than pay to upgrade and recommission the plant. Last year Dominion Resources Inc. (NYSE: D) shut down a nuclear plant in Wisconsin, and another four nukes could follow this year. It is more cost effective to build a new natural gas-fired plant than it is to keep a nuke running or certainly to build a new one. Exelon, with its acquisition last year of Constellation Energy, produces 55% of its electricity from nuclear-powered plants.
Coal is not faring too well either. A survey by Bloomberg shows that the all-in cost of coal-fired generation is about $50 per megawatt-hour higher than the cost of natural gas-fired generation. That is all down to fuel costs and right now there is nothing cheaper than natural gas. How long that will last is debatable, but Duke is banking on it. The company plans to replace the Florida nuke and two coal-fired plants with natural gas generation over the next few years.
American Electric Power Co. Inc. (NYSE: AEP) and Southern Co. (NYSE: SO) still depend heavily on coal-fired generation although AEP is building natural gas plants and Southern is working on a coal-gasification plant, and even planning on a new nuclear plant in Georgia. Neither company chooses to rely on continuing low natural gas prices and face a 2015 deadline for either bringing coal plants into compliance with new regulations or closing them.
The impact on dividends follows both from energy consumption and the changes in fuel. Before today, Exelon’s dividend yield was 6.8%. That will fall to about 4.1% next quarter, which is lower than Duke’s 4.4%, AEP’s 4.2% and Southern’s 4.5%, and equal to Dominion’s 4.1%. These are still pretty lofty yields, but the combination of forces that led Exelon to drop its dividend exerts a similar power over the other power generation companies.
Exelon’s share price is up 2% this morning, at $31.60 in a 52-week range of $28.40 to $40.31.