It took an 11th hour legislative showdown and threats by the company to shut a pair of nuclear plants — but Illinois has now passed the omnibus energy legislation that Exelon Corp. (EXC) sought for years, asserts Roger Conrad, editor of Conrad's Utility Investor.
And the company has never been better positioned to take advantage. The headline number is $694 million over five years: The subsidy the company’s six Illinois nuclear power plants will receive so they can run profitably. And the governor and legislature can already claim some credit for Exelon’s announcement that it will hire 650 workers and spend $300 million on plant upgrades.
Reliably profitable nuclear plants are a huge value booster for Constellation Energy, Exelon’s soon-to-spin off competitive power generation and retail energy business.
Management has also affirmed division is on track for Q1 2022, after which current shareholders will own both the generation company and the regulated utility serving roughly 10 million customers in five states plus the District of Columbia.
Exelon shares currently trade at a deeply discounted valuation of less than 14 times expected next 12 months earnings. That’s arguably because investors have consistently priced in negative value for the nuclear power and retail unit.
But with other key states like New York possibly following Illinois’ lead, I expect Exelon’s sum of the parts post-split will ultimately be worth at least 25 to 30 percent more than the current whole.
In addition to nuclear subsidy, the state’s Climate and Equitable Jobs Act also includes $340 million in incentives to construct new renewable energy generation and energy storage, for which the new Constellation Energy will be eligible.
And Exelon’s regulated Illinois utility unit will benefit from grid spending on the transition from fossil fuels as well as new electric vehicle infrastructure. One bit of unfinished business for the split is setting dividends for the company halves.
But with Constellation’s Illinois cash flows now far more predictable, higher natural gas prices making nuclear power more price competitive and utility unit profit already covering the payout albeit at a tight ratio, the odds of a stable overall dividend have at the very least greatly improved. Buy Exelon at price of $52 or lower.