Project Description

Exelon Potential Spin-off Notes

January 11, 2022 Update

  • Exelon has filed form 10
  • Constellation is the name of the spin and held an analyst call on January 11, 2022
  • Constellation plans on paying $180m ($0.55 per share) in dividends the first year after the spin, subject to approval by the board
  • They are currently 90% carbon-free and plan to move to 100% by 2040
  • Constellation generates 162.6 MWh of carbon-free energy compared to its biggest competitor NextEra that generates 98.7 MWh of carbon-free energy
  • Also, it only takes Constellation 98 lbs of carbon per MWh compared to NextEra’s 482 lbs/MWh
  • Constellation will provide 10% of all carbon-free power in the US
  • RemainCo will operate 7 utilities mainly based in Chicago and the Northeast
  • It will pay 60% percent of its earnings as a dividend and expects to grow it 6-8% per year
  • The spin-off should happen in early February

Constellation is not a company with a bolt-on ESG strategy. At Constellation, ESG is the strategy.

February 25, 2021 Update

  • In the fall, reports in the press indicated that Exelon was considering breaking up its company and spinning off its non-utility assets.
  • On February 24, 2021, the company announced that it indeed would follow that path.
  • Here is the slide deck on Q4 earnings and the separation (separation slides start on page 13).
  • Key details:
    • Will be a tax free transaction.
    • Expected to take place by Q1 2022.
    • RemainCo will target a 60% payout ratio.
    • Spin-off’s first priority will be debt paydown to support investment grade credit rating.
  • Great article on Exelon and its strategy.
  • Good Seeking Alpha article on the spin-off.
  • My thoughts:
    • I don’t think there is anything actionable to do right now.
    • The spin-off could face indiscriminate selling pressure given it won’t pay a dividend.
    • I need to do more work to evaluation the SOTP valuation.

October 15, 2020 Update

  • Bloomberg reported on October 12, 2020 that Exelon (EXC) is working with financial advisors to evaluate a break up that would separate the company’s utility assets from its non-utility assets.
  • Good article by Barron’s on the situation.
  • No final decision has been made.
  • Non-utility power generation business.
    • Represents ~40% of earnings .
    • Includes 21 nuclear reactors as well as several solar, wind, and natural-gas generating assets.
    • There is uncertainty regarding this business and profitability is down.
    • Finding a buyer for this business would be tough. A spin-off is more feasible.
    • Exelon’s gas plants would probably be attractive to potential buyers, but its nuclear reactors would complicate the deal.
    • The company has lobbied for aid in New York and Illinois, arguing that its plants are uneconomic and would close without bailouts.  Thus, some of the plants probably have very little value.
  • Utility power generation business.
    • Portfolio includes a half-dozen utilities in Pennsylvania, Maryland, Delaware, and elsewhere.
    • Investors prefer pure-play regulated businesses due to their predictability.
  • Backdrop:
    • Power companies are increasingly unloading their unregulated assets to focus on their utilities in part because investors prefer pure-play businesses.
    • DTE Energy Inc is selling or spinning off its non-utilities business.
    • Dominion Energy agreed to sell its natural gas infrastructure to Berkshire Hathaway earlier this year.
  • Activist involvement:
    • Keith Meister of Corvex Management recently pitched Exelon at a 13D Monitor conference noting the company is cheap in an already cheap sector.
    • He said that utilities are not impacted by uncertainty related to the Presidential election and offer defensive attributes.
    • He said the company could benefit as investors focus more on environmental issues and gravitate towards electric vehicles and away from coal generation.
    • He believes the regulated business is worth $40 per share and the unregulated business is worth $20.
  • Carbon Tax
    • One important factor is whether a carbon tax is on the way, particularly if Democrats sweep the White House and Congress. Meister (of Corvex Management) argues that a carbon tax could add $3.3BN in value to the nuclear business since nuclear power doesn’t create greenhouse gases.