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Talk of Exelon split nothing new, analysts say


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Talk of Exelon split nothing new, analysts say

A report that Exelon Corp. is working with advisers on a possible split of its nonutility assets does not come as a surprise to analysts.

Bloomberg News on Oct. 12 reported that while the Chicago-headquartered company is exploring its options, no decision has been made.

In about double average trading volume on Oct. 13, Exelon shares gained 2.50%, closing at $40.98.

Unregulated arm Exelon Generation Co. LLC owns a generating capacity of more than 31,600 MW, most of which comes from nuclear power plants. The nonutility operations also include wind, solar, hydroelectric, natural gas and oil facilities in 17 U.S. states and Canada, according to a company presentation prepared for fall investor meetings.

On the regulated side, Exelon owns utilities in five states and the District of Columbia: Atlantic City Electric Co. in New Jersey; Commonwealth Edison Co. in Illinois, including Chicago; Baltimore Gas and Electric Co., Delmarva Power & Light Co. and Potomac Electric Power Co. in Maryland; and PECO Energy Co. in Pennsylvania, including Philadelphia. Delmarva also operates in Delaware, while Pepco also serves the District of Columbia. The utilities in total serve about 10 million customers.

"As we most recently communicated on our second-quarter earnings call, we regularly review our corporate structure and overall mix of businesses to determine how to best create value and position our businesses for success," an Exelon spokesperson said in a statement responding to the Bloomberg report.

Nothing new seen here

CreditSights analyst Andrew DeVries said the question of what Exelon might do with its nonutility assets is nothing new as utility investors have been asking management questions on the topic for years and getting an answer that the matter is under evaluation. But chances of finding a buyer for the assets are slim, he said in an Oct. 13 interview.

"I don't see who the logical buyers are," DeVries said. "No one wants to do the long power price risk and you're still years away from a potential CO2 tax that would really send this thing higher."

He also questioned the valuation upside from spinning off the assets.

"If I was an Exelon shareholder, they have great utilities growing slightly above average and you essentially have a free call option a CO2 tax down the road," DeVries said. "So I would rather they keep it together and see if there's potential for a CO2 tax down the road. From a bondholder viewpoint, I don't want anything to do with taking the risk that this is spun or sold into the high yield market."

DeVries does not think Exelon is in any rush to make a decision and expects that any announcement would come in the middle of next year. By then, the outcome of the presidential and congressional elections would be known, as would their respective legislative priorities.

Guggenheim Securities LLC analyst Shahriar Pourreza agreed that Exelon weighing its options with regard to the nonutility assets is nothing new, as the company continually goes through such an evaluation.

Pourreza, however, thinks the most viable option is a spinoff of some kind to existing shareholders, given challenges posed by a sale involving a large nuclear fleet.

"And so [with] the collateral requirements that you would need and the balance sheet support you would need, a sale would just not be a viable option," he told S&P Global Market Intelligence Oct. 13.

Pourreza also does not expect to hear word on any particular decision from Exelon anytime soon, given the multiple factors at play, which include the federal election and upcoming veto session of the Illinois General Assembly.

The Bloomberg report comes on the heels of another report from the news organization that DTE Energy Co. is looking into unloading or spinning off its natural gas pipelines and nonutility businesses. Over the summer, Dominion Energy Inc. agreed to sell its natural gas transmission and storage business to Berkshire Hathaway Energy, while Public Service Enterprise Group Inc. said it was exploring strategic alternatives for PSEG Power LLC's non-nuclear generating fleet. In late September, the Wall Street Journal reported that NextEra Energy Inc. had approached Duke Energy Corp. about a possible tie-up.

Nuclear plants have faced headwinds

Exelon Generation's nuclear fleet, totaling full or partial interests in 13 plants, operate primarily in the PJM Interconnection market.

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Exelon officials have repeatedly touted the clean energy attributes of the nuclear fleet and pushed for market reforms and policies to compensate the plants for these qualities and keep them operating. In the fall investor presentation, Exelon said it is "ideally situated to help meet climate goals," asserting that Exelon Generation is the largest zero-carbon generator in the U.S., producing one out of every nine zero-carbon MWhs.

The company has had some success in getting assistance at the state level to keep plants online, with plants such as Clinton and Quad Cities in Illinois and Salem in New Jersey, of which Exelon owns nearly 43%, receiving some kind of zero-emissions credit subsidy. In New York, the James A. FitzPatrick, Nine Mile Point and R.E. Ginna/Ontario Sta. 13 also got so-called ZEC credits.

Still, the company has not shied away from closing unprofitable nuclear plants, including the September 2019 shutdown of Three Mile Island in Pennsylvania, which struggled with an influx of cheap gas-fired generation that depressed PJM capacity market prices.

Exelon Generation continues to plan for early retirement of more nuclear plants that are facing what it says are tough economic conditions. The company's Byron and Dresden plants in Illinois are slated for closure in September 2021 and November 2021, respectively. In announcing the move in August, Exelon Generation pointed to economic challenges due to depressed wholesale power prices, market rules and lack of government support.

Exelon Generation further said the Braidwood and LaSalle County plants, also in Illinois, are "also at high risk for premature closure," though it has not yet projected any closure dates for those plants.