Exelon Corp.'s transformation into a pure-play, transmission and distribution utility could significantly boost its equity valuation, with opportunities to invest in electric vehicle infrastructure and grid resiliency, according to management, and freeing the company from generation planning.
"We don't have fossil [fuel generation] units. We don't have the distraction of any of that," Exelon President and CEO Chris Crane said during a Jan. 10 investor day conference about spinning off more than 31,000-MW generating capacity from nuclear, wind, solar, natural gas and hydro assets currently within Exelon Generation Co. LLC.
Constellation Energy Resources LLC is expected to be officially formed Feb. 1 as a new, publicly traded entity, giving Exelon "clarity on capital allotment and ... clarity on the value proposition for the investment," Crane added.
Exelon obtained the final regulatory approval necessary to complete its planned separation after the New York Public Service Commission gave the green light in December 2021 to a settlement transferring its upstate nuclear plants to a new company.
Management said Exelon plans to spend $29 billion from 2022 through 2025 and estimates growing its rate base just over 8% from 2021 through 2025 to $65 billion, with 6% to 8% EPS growth projected during same period.
That capital spending will increase in 2024 and 2025, according to Senior Executive Vice President and COO Calvin Butler, to accommodate designated projects involving "electrification, resilience, cyber and physical security, in addition to looking at the opportunities for hardening the system overall."
Guggenheim Securities LLC analysts on Jan. 10 applauded the slimmed-down Exelon as presenting "an attractive alternative to other wires-only eastern names like [Eversource Energy and FirstEnergy Corp.]," emphasizing that the fully-regulated entity "could have the core attributes for potentially drawing in [Eversource Energy]-style [environment, social and governance] investors in the longer term."
The Climate and Equitable Jobs Act that Illinois Gov. J.B. Pritzker signed into law in September 2021 "has the potential to materially move investor perception of [Exelon] toward its large-cap regulated peers, which currently trade at a meaningful premium," BMO Capital Markets told clients Jan. 10.
Scotiabank analysts, on the other hand, cited regulatory uncertainty in Illinois and Exelon utility Commonwealth Edison Co.'s alleged bribery scheme as meriting "a modest (5%) [price to earnings ratio] discount to peers."
Outside of the clean energy measures, the new law authorizes the Illinois Commerce Commission to investigate whether Commonwealth Edison used ratepayer funds in connection with its role in an alleged bribery scheme in Illinois or to pay the $200 million penalty in the deferred prosecution agreement with federal authorities.
Spinning off coal generation assets into Constellation may also put Exelon at a disadvantage, Scotiabank continued, since "the emission reductions that will come from coal plant retirements should be more attractive to ESG funds than a company with a better starting point like [Exelon]."
Analysts acknowledged Exelon has significant leverage when it comes to investing in EV infrastructure, and Exelon's Butler explained that provisions in the stalled Build Back Better Act present opportunities to set aside even more capital for electrification.
"Anytime we have a jurisdiction that gets dollars for EV transportation upgrades, resiliency hardening, those are dollars that we can sit back and redeploy in other areas to support them," Butler said during the call. "How can we ... get twice as far and sooner?"
In February 2021, Maryland released a plan that calls for a 50% reduction in greenhouse gases by 2030 and net-zero greenhouse gas emissions by 2045. Exelon subsidiaries Baltimore Gas and Electric Co., Delmarva Power & Light Co. and Potomac Electric Power Co. all intend to electrify 50% of their passenger vehicles and medium-duty fleet by 2030.