Project Description

Exelon Potential Spin-off Notes

  • 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.