Exelon Earnings Call Insights: Synergy Potentials and Hedge Percentages

Exelon Corp (NYSE:EXC) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Synergy Potentials

Stephen Byrd – Morgan Stanley: I wondered if you could talk in a little more depth about synergy potential with the additional nuclear units which you’ll be operating, can you just talk in little more specifics about what kind of operational advantages you see from this transaction?

Christopher M. Crane – President and CEO: The first advantage is a reduction of $50 million to $70 million of expense at the current within the current operating model and that’s significant in itself. Beyond that is the flexibility to move resources around to continue to improve the talent development not only within our own fleet but the CENG fleet. We’re really focused as everybody knows on the long-term viability of the small assets and we think this will give us a much better chance to have the whole fleet operate at a higher safety and reliability while reducing cost.

Stephen Byrd – Morgan Stanley: And then, shifting over to your wind business I’m thinking about some of your contracted assets, can you talk just only about your appetite for either growing in that business or going the other direction and trying to monetize given the value of the contracted assets, how do you think about the strategic path there?

Jonathan W. Thayer – EVP and CFO: So, Stephen, it’s Jack there. As we look at assets and it’s not just our wind assets, we look at what we believe the internal value of those assets are and then we bench that relative to what we see in the market as an implied value for those assets. As you think about those wind assets, one of the opportunities that we’re working through right now is project financing on our wind facility and that we expect to raise, somewhere between $625 million to $700 million of balance sheet debt. The extend that we successfully complete that and we anticipate that in September of this year. We’ll then be in a position to look at those on an off balance sheet basis, and see what’s the optimal way to organize those within the Company. We also expect to use this off-balance-sheet structure to be able to – the extent we’re adding to our Wind portfolio or our Solar portfolio to optimize their capital structure to gain as much earnings accretion from those investments as possible…

Christopher M. Crane – President and CEO: The only thing I would add, we have continued to grow in the renewable space, as Jack said, the Wind and Solar, but a long-term large scale business model on a highly subsidized product is something that we watch closely. We’ve clearly stated that we think that Washington picking winners and losers on subsidies, it is not a long-term plan. So, we’ll continue to monitor the federal policy and the state policy as we look at growth potentials in that area.


Hedge Percentages

Greg Gordon – ISI Group: When you talk about hedging through the gas markets trying to leave your heat rate position open. How should we think about the way you are hedging in the context for instance natural gas basis and PJM having collapsed relative to historical basis versus Henry Hub given the Marcellus situation?

Joseph Nigro – EVP, Exelon, CEO Constellation: In our disclosure we show you our hedge percentages by region and you can see if we use 2015 as a proxy year or approximately 50% hedged which is right on ratable in the Mid-Atlantic region. And in the Midwest we are about 40% approximately hedged which would be 10% behind. As we stated we see the most amount of upside aligning to the Midwest region with all the changes that Ken talked about in the script. The big thing is as it relates to gap hedging is the bulk of the trade that we have done in gas is relative to our Midwest position. And the gas basis there has been much more stable as you know the Mid-Atlantic basis has really seen a roll-down with the Marcellus shale, when you look at gas basis at city gate in Chicago over the last year or so, the degradation has been much, much less than what it’s been in the Mid-Atlantic. So the trade aligns well with our Midwest position.

Greg Gordon – ISI Group: So you tend to trade the more liquid contracts at the Henry Hub. So we should look at basis as being something that you have to manage if the basis starts to become more volatile?

Joseph Nigro – EVP, Exelon, CEO Constellation: Absolutely as you move out on the basis, on the curve in time it gets more difficult to effectively execute the basis in different areas. We do use primarily the NYMEX contract and then if there is an opportunity we’ll layer in the basis as appropriate…

Greg Gordon – ISI Group: A couple of questions for Jack, you had laid out some numbers in terms of what you thought you would generate in terms of reinvestable capital over the next several years after the dividend cut and that, that was sort of your sort of war chest for opportunities should they arise in the business, can you reiterate what those numbers were and have they dissipated significantly because of the sort of downturn in the retail and wholesale power markets and the capacity outcome?

Jonathan W. Thayer – EVP and CFO: So, as you recall, we spoke to roughly $2 billion to $3 billion of balance sheet capacity in the first quarter call, with the degradation in power prices, we have seen that come in. It’s in a roughly $1 billion to $2 billion range now, and a way to think about this from a sensitivity standpoint is for every plus or minus dollar move from megawatt hour roughly to the plus side, $750 million of capacity is created to the down side roughly $650 million is lost depending on what power prices do.

Greg Gordon – ISI Group: And Jack, where were you guys in terms of the evaluation of whether or not your – certain of your nuclear plants are viable in the longer term and when might we get a decision on that?

Christopher M. Crane – President and CEO: This is Chris, I’ll cover that. We have worked hard over the last couple of years to continue to focus on cost to maintain some of the viability of the smaller units. As we mentioned our Clinton facility in MISO, the nuclear team has come up with a fairly good plan to put the plant on annual refueling cycles, which keeps it viable for years to come as the market recovers. As one of the newest boiling water reactors, in our fleet and in the country, it’s a well-run plant, which last year had zero-force loss rate and so we’re not ready to give up on it. We’re continuing to optimize its cost structure, maintaining it safe but also neutral on the balance sheet. As we look at our other smaller ones, being able to bring Gannett into the Exelon cost structure, I think will give us time to continue to look at that, as we understand the policies that are revolving in New York, around capacity and transmission. So, there’s nothing on the chopping block right now. It is constant work to look at cost. It’s constant work to look at regulatory structure and if it does not improve, we’ll be talking more about those facilities…

Greg Gordon – ISI Group: My last question is – I know it sounds maybe like an odd question, but one of the things that you did in the restructuring of the joint venture with the put option with EDF has indemnified them against a serious nuclear accident? I know it’s a tail risk, but it seems like a very large risk to be saddling your shareholders and bond holders with. Can you explain the logic there?

William A. Von Hoene, Jr. – EVP, Finance and Legal: Greg, this is Bill Von Hoene. As you know, the indemnification is for Price-Anderson exposure. Corresponding to their ownership interest in the plants, each unit in the United States has an exposure to this. There are 104 units and I think the exposed rate is about $117.5 million potential retro call for a Price-Anderson event, which is a catastrophic event, and understanding what that means, TMI was not a Price-Anderson event, Price-Anderson has ever been in both. So what you have is on a plant-by-plant basis. You have that exposure it’s limited on a per year basis to $17 million per plant. So essentially what happens here is in the event that there was a Price Anderson event which has never occurred and there was a call and the call is pro-rata in the plants and there was a call for the full amount. The maximum exposure would be about $50 million a year. So looking at that, looking at what the collective insurance arrangement is and looking at what the events are, that would be eligible for this, we do not consider this to be material to the transaction.