In summer 2013, Exelon Corp. (EXC) cut its quarterly payout from 52.5 cents to 31 cents per share. The 41 percent reduction was a tacit admission that no US carbon tax would save the nation’s largest nuclear power fleet from falling wholesale electricity prices, explains Roger Conrad, editor of Conrad's Utility Investor.
Instead, management focused on growing investment at regulated utility operations, funded by maximizing free cash flow at the nuclear plants.
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The strategy shift picked up steam with the early 2016 close of the former Pepco Holdings. And it hit a new gear as “Zero Emission Credits” were adopted in Illinois, New York and New Jersey, paying the company to keep its nuclear plants running.
Pennsylvania has yet to enact ZECs, inducing the company to close the Three Mile Island plant this year. Even with ZECs in three states, wholesale nuclear earnings were lower by 39 percent from the year earlier quarter, as cheap natural gas continued to pressure market prices.
Exelon today, however, is now a regulated utility with wholesale nuclear assets rather than the other way round, which was the case six years ago. Second quarter operating earnings at the four utility units came in at $442 million, or more than twice the $202 million earned by the generation segment.
The gap will only widen as nuclear plants wind down and utility spending grows rate base 7.8 percent a year through 2022, producing 6 to 8 percent unit earnings growth.
Those are the numbers underpinning management’s affirmation during the earnings call of 5 percent annual dividend growth, and 2019 earnings guidance of $3 to $3.30 per share despite generation unit headwinds.
We believed Exelon shares were ahead of themselves when they pushed into the low 50s in June. Now they’re a buy again below our target of 45.
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