Companies’ motivation for selling or spinning off assets is basically two-fold, asserts Roger Conrad, an industry leading income expert and editor of Conrad's Utility Investor.
First, management must believe in the industrial logic — it can put the proceeds to better uses that will augment the value of the business more than divesting depletes it.
Second is the expectation that investors will value the restructured business more highly, in a best case resulting in a sum of the parts windfall for investors.
I believe the planned spinoff at Exelon Corp. (EXC) of its unregulated retail and power generation operations has the potential to do both, possibly before the expected closing in Q1 of 2022.
The deal does face some hurdles, including the often hard to please New York Public Service Commission, which may require concessions. But priced at just 12.9 times expected next 12 month earnings, the stock is arguably getting negative value for its nuclear generation fleet.
Exelon’s nuclear plants in the Northeast and Midwest US currently produce 12 percent of America’s CO2 emissions-free power. And other than variable output hydro, it’s substantially the only source of baseload electricity that doesn’t produce carbon.
That hasn’t prevented some of the company’s facilities from becoming uneconomic, including two in Illinois it has targeted for shutdown this year.
Closing Exelon’s nukes, however, means burning more natural gas. And that’s raised interest of states like Illinois as well as the Biden Administration for extending and expanding subsidy to keep them running.
Exelon’s plants ran at a 95.3 percent capacity factor in Q1, continuing their strong performance. And though Texas power market dysfunction this year cost the company an estimated $880 million in income, the unit combined with unregulated retail operations has been quite profitable historically, generating nearly $400 million in earnings in Q4.
All that suggests the unit will be worth a lot more than zero if Exelon can complete the spinoff. And the pure play transmission and distribution utility that’s left will be arguably far more attractive on its own as well. The stock remains a buy up to $48.
