As confidentially submitted to the Securities and Exchange Commission on September 14, 2021
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g)
OF THE SECURITIES EXCHANGE ACT OF 1934
CONSTELLATION NEWHOLDCO, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
Incorporation or organization)
|c/o Exelon Corporation
10 South Dearborn Street
P.O. Box 805379
(Address of Principal Executive Office)
(Registrant’s telephone number, including area code)
Securities to be registered pursuant to Section 12(b) of the Act:
|Title of each class to be so registered||Name of each exchange on which each class is to be registered|
|Common Stock, without par value||The Nasdaq Stock Market LLC|
Securities to be registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer||¨||Accelerated filer||¨|
|Non-accelerated filer||x||Smaller reporting company||¨|
|Emerging growth company||¨|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
INFORMATION REQUIRED IN REGISTRATION STATEMENT
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10
The information required by this item is contained under the sections “Summary,” “Unaudited Pro Forma Condensed Consolidated Financial Statements,” “Overview of the U.S. Power Markets,” “Our Business” and “Where You Can Find More Information” of the information statement filed as Exhibit 99.1 to this Form 10 (the “information statement”). Those sections are incorporated by reference herein.
|Item 1A.||Risk Factors.|
The information required by this item is contained under the sections “Summary—Summary of Risk Factors,” “Risk Factors” and “Cautionary Note Regarding Forward Looking Statements” of the information statement. Those sections are incorporated by reference herein.
|Item 2.||Financial Information.|
The information required by this item is contained under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the information statement. Those sections are incorporated by reference herein.
The information required by this item is contained under the section “Our Business—Properties and Facilities” of the information statement. That section is incorporated by reference herein.
|Item 4.||Security Ownership of Certain Beneﬁcial Owners and Management.|
The information required by this item is contained under the section “Security Ownership of Certain Beneficial Owners and Management” of the information statement. That section is incorporated by reference herein.
|Item 5.||Directors and Executive Oﬃcers.|
The information required by this item is contained under the section “Management” of the information statement. That section is incorporated by reference herein.
|Item 6.||Executive Compensation.|
The information required by this item is contained under the sections “Executive and Director Compensation” and “Management – Compensation Committee Interlocks and Insider Participation” of the information statement. Those sections are incorporated by reference herein.
|Item 7.||Certain Relationships and Related Transactions, and Director Independence.|
The information required by this item is contained under the sections “Management” and “Certain Relationships and Related Party Transactions” of the information statement. Those sections are incorporated herein by reference.
|Item 8.||Legal Proceedings.|
The information required by this item is contained under the sections “Our Business—Legal Proceedings” and Note 3 – Regulatory Matters and Note 19 – Commitments and Contingencies of the Notes to Consolidated Financial Statements of the information statement. Those sections are incorporated by reference herein.
|Item 9.||Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters.|
The information required by this item is contained under the sections “The Separation – Results of the Separation,” “Trading Market”, “Dividend Policy”, and “Description of Capital Stock” of the information statement. Those sections are incorporated herein by reference.
|Item 10.||Recent Sales of Unregistered Securities.|
|Item 11.||Description of Registrant’s Securities to be Registered.|
The information required by this item is contained under the section “Description of Capital Stock” of the information statement. That section is incorporated herein by reference.
|Item 12.||Indemniﬁcation of Directors and Oﬃcers.|
The information required by this item is contained under the sections “Certain Relationships and Related Party Transactions—Agreements with Exelon Related to the Separation—Separation Agreement” and “Description of Capital Stock—Limitations on Liability of Directors and Indemnification of Directors and Officers” of the information statement. Those sections are incorporated herein by reference.
|Item 13.||Financial Statements and Supplementary Data.|
The information required by this item is contained under the sections “Financial Statement Presentation,” “Unaudited Pro Forma Condensed Consolidated Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Index to Consolidated Financial Statements” (inclusive of the report of independent registered public accounting firm, financial statements and notes to consolidated financial statements described in that index) of the information statement. Those sections are incorporated by reference herein.
|Item 14.||Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.|
|Item 15.||Financial Statements and Exhibits.|
(a) List separately all ﬁnancial statements ﬁled as part of the registration statement.
The information required by this item is contained under the sections “Unaudited Pro Forma Condensed Consolidated Financial Statements” and “Index to Consolidated Financial Statements” beginning on page F-1 of the information statement and the report of independent registered public accounting firm, financial statements and notes to consolidated referenced therein. Those sections are incorporated herein by reference.
(b) Furnish the exhibits required by Item 601 of Regulation S-K (§229.601 of this chapter).
The following documents are filed as exhibits hereto:
|2.1||Form of Separation Agreement by and between the Company and Exelon**|
|3.1||Articles of Incorporation of the Company**|
|3.2||Bylaws of the Company**|
|4.1||Form of 4.25% Senior Note due 2022 issued by Exelon Generation Company, LLC. (File No. 333-85496, Form 8-K dated June 18, 2012, Exhibit 4.1)*|
|4.2||Form of 5.60% Senior Note due 2042 issued by Exelon Generation Company, LLC. (File No. 333-85496, Form 8-K dated June 18, 2012, Exhibit 4.2)*|
|4.3||Form of 6.000% Senior Notes due 2033 issued by Exelon Generation Company, LLC (File No. 333-85496, Form 8-K dated September 30, 2013, Exhibit No. 4.1)*|
|4.4||Indenture dated as of September 28, 2007 from Exelon Generation Company, LLC to U.S. Bank National Association, as trustee (File No. 333-85496, Form 8-K dated September 28, 2007, Exhibit 4.1)*|
|4.5||Form of 6.25% Exelon Generation Company, LLC Senior Note due 2039 (File No. 333-85496, Form 8-K dated September 23, 2009, Exhibit 4.2)*|
|4.6||Form of 4.00% Exelon Generation Company, LLC Senior Note due 2020 (File No. 333-85496, Form 8-K dated September 30, 2010, Exhibit 4.1)*|
|4.7||Form of 5.75% Exelon Generation Company, LLC Senior Note due 2041 (File No. 333-85496, Form 8-K dated September 30, 2010, Exhibit 4.2)*|
|4.8||Indenture, dated as of September 30, 2013, among Continental Wind, LLC, the guarantors party thereto and Wilmington Trust, National Association, as trustee (File No. 333-85496, Form 8-K dated September 30, 2013, Exhibit 4.1)*|
|4.9||Form of Exelon Generation Company, LLC 2.950% senior notes due 2020 (File No. 333-85496, Form 8-K dated March 10, 2017, Exhibit 4.1)*|
|4.10||Form of Exelon Generation Company, LLC 3.400% notes due 2022 (File No. 333-85496, Form 8-K dated March 10, 2017, Exhibit 4.2)*|
|4.11||Form of Exelon Generation Company LLC 3.250% Senior Notes due 2025 (File No. 333-85496, Form 8-K dated May 15, 2020, Exhibit 4.1)*|
|10.1||Form of Transition Services Agreement by and between the Company and Exelon**|
|10.2||Form of Tax Matters Agreement by and between the Company and Exelon**|
|10.3||Form of Employee Matters Agreement by and between the Company and Exelon**|
|10.4||Credit Agreement, dated as of November 28, 2017, as thereafter amended and conformed among ExGen Renewables IV, LLC, ExGen Renewables IV Holding, LLC, Morgan Stanley Senior Funding, Inc. as administrative agent, Wilmington Trust, National Association, as depository bank and collateral agent, and the lenders and other agents party thereto. (Certain portions of this exhibit have been omitted by redacting a portion of text, as indicated by asterisks in the text. This exhibit has been filed separately with the U.S. Securities and Exchange Commission pursuant to a request for confidential treatment.) (File No. 001-16169, Form 10-K dated February 9, 2018, Exhibit 10.94)*|
|10.5||Receivables Purchase Agreement, dated as of April 8, 2020, among Constellation NewEnergy, Inc. as servicer, and NewEnergy Receivables LLC, as seller, MUFG Bank, LTD., as Agent, the Conduits party thereto, the Financial Institutions party thereto and the Purchaser Agents party thereto (File No. 001-16169, Form 8-K dated April 9, 2020, Exhibit 10.1)*|
|10.6||Credit Agreement, among ExGen Renewables IV, LLC, the lenders party thereto, Jefferies Finance LLC, as administrative agent, and Wilmington Trust, National Association, as depositary bank and collateral agent, dated December 15, 2020 (File No. 333-85496, Form 8-K dated December 15, 2020, Exhibit 1.1)*|
|10.7||Amendment No. 2 to Receivables Purchase Agreement, dated as of March 29, 2021, among Constellation NewEnergy, Inc., as servicer, and NewEnergy Receivables LLC, as seller, MUFG Bank, LTD., as agent, the Conduits party thereto, the Financial Institutions party thereto and the Purchaser Agents party thereto (File No. 001-16169, Form 8-K, dated March 31, 2021, Exhibit 10.1)*|
|21.1||Subsidiaries of the Company**|
|99.1||Amended Preliminary Information Statement, dated September 13, 2021|
* Incorporated by reference.
** To be filed by amendment.
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
|Date: September 14, 2021||Constellation Newholdco, Inc.|
Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been confidentially submitted with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.
SUBJECT TO COMPLETION. DATED SEPTEMBER 14, 2021
Distribution of Common Stock of Constellation
EXELON CORPORATION SHAREHOLDERS
This information statement is being sent to you in connection with the separation of Constellation Newholdco, Inc. (collectively with its consolidated subsidiaries, the “Company”) from Exelon Corporation (“Exelon”). As a result of the separation, Exelon’s competitive power generation and customer-facing energy businesses conducted through Exelon Generation Company, LLC (“Generation”) and its subsidiaries will be owned by the Company, which will be an independent, publicly-traded company. Exelon will complete the separation by distributing all of the outstanding shares of the Company’s common stock (“Company common stock” or “our common stock”), on a pro rata basis to the holders (“Exelon shareholders”) of Exelon’s common stock. We refer to this pro rata distribution as the “distribution,” and we refer to the separation as the “separation”.
Each Exelon shareholder will receive share(s) of our common stock for every share of Exelon common stock held by such shareholder on , 2022, the record date. Exelon will not distribute any fractional shares of Company common stock. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate net cash proceeds from the sales pro rata to each holder who would otherwise have been entitled to receive a fractional share in the separation. The distribution of shares will be made in book-entry form only. The distribution will be effective as of 12:01 a.m., Eastern time, on , 2022. Immediately after the distribution becomes effective, the Company will be an independent, publicly-traded company.
We expect that the distribution will be tax-free to Exelon shareholders for U.S. federal income tax purposes, except to the extent of cash received in lieu of fractional shares. You should consult your own tax advisor as to the particular consequences of the distribution to you, including the applicability and effect of any U.S. federal, state and local and non-U.S. tax laws.
No vote or other action of Exelon shareholders is required in connection with the separation. We are not asking you for a proxy, and Exelon requests that you do not send Exelon a proxy. Exelon shareholders will not be required to pay any consideration for the shares of Company common stock they receive in the distribution, and they will not be required to surrender or exchange their shares of Exelon common stock or to take any other action in connection with the separation.
All outstanding shares of the Company common stock are currently owned by Exelon. Accordingly, there is no current trading market for the Company common stock. We anticipate that a limited market, commonly known as a “when-issued” trading market, will develop shortly before the record date, and that “regular-way” trading in shares of the Company common stock will begin on the first trading day following the distribution date. If trading begins on a “when-issued” basis, you may purchase or sell the Company common stock up to and including the distribution date, in which case your transaction will settle within two trading days after regular-way trading commences following the distribution. We intend to list the Company common stock on the NASDAQ Stock Market, Inc. (“NASDAQ”) under the ticker symbol “ .” As discussed below under “Trading Market,” if you sell your Exelon common stock in the “regular-way” market before the distribution date, you also will be selling your right to receive shares of the Company common stock in connection with the distribution. However, if you sell your Exelon common stock in the “ex-distribution” market before the distribution date, you will still receive shares of the Company common stock in the distribution.
In reviewing this information statement, you should carefully consider the matters described in “Risk Factors” beginning on page 21 of this information statement.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.
This information statement is not an offer to sell, or a solicitation of an offer to buy, any securities.
The date of this information statement is , 2022.
A Notice of Internet Availability of Information Statement Materials containing instructions describing how to access this information statement was first mailed to Exelon shareholders on or about , 2022.
TABLE OF CONTENTS
|TABLE OF CONTENTS||i|
|FINANCIAL STATEMENT PRESENTATION||ii|
|INDUSTRY AND MARKET DATA||ii|
|CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS||iii|
|UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS||47|
|OVERVIEW OF THE U.S. POWER MARKETS||54|
|MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS||95|
|EXECUTIVE AND DIRECTOR COMPENSATION||126|
|CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS||154|
|DESCRIPTION OF CERTAIN INDEBTEDNESS||159|
|SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT||160|
|DESCRIPTION OF CAPITAL STOCK||161|
|WHERE YOU CAN FIND MORE INFORMATION||165|
|CERTAIN DEFINED TERMS||166|
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS||F-1|
Unless otherwise indicated or the context otherwise requires, references in this information statement to the “Company,” “we,” “us,” “our,” and “our company” refer to Constellation Newholdco, Inc. and its consolidated subsidiaries, and references herein to “Exelon” refer to Exelon Corporation and its consolidated subsidiaries prior to the completion of the separation.
Each of the Company’s and Exelon’s affiliated operations is owned and operated by a separate subsidiary that has its own management, employees and assets. References herein to the consolidated “Company,” “Exelon,” “Parent” or “its” or “our” assets and activities are not meant to imply, nor should they be construed as meaning, that the Company or Exelon has any direct operating assets, employees or revenue, or that any of the subsidiaries are operated by the Company or Exelon.
Unless otherwise indicated or the context otherwise requires, all information in this information statement gives effect to the effectiveness of our amended and restated certificate of incorporation and amended and restated bylaws, the forms of which will be filed as exhibits to the registration statement of which this information statement forms a part.
FINANCIAL STATEMENT PRESENTATION
This information statement includes certain historical consolidated financial and other data for Generation and its subsidiaries. Constellation Newholdco, Inc. will become the parent of Generation immediately prior to the separation. Constellation Newholdco, Inc. is the registrant under the registration statement of which this information statement forms a part and will be the financial reporting entity following the consummation of the separation. Generation is presently, and will continue to be, a financial reporting entity following the separation.
This information statement also includes an unaudited pro forma condensed consolidated balance sheet as of December 31, 2020 and unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2020, which present our consolidated financial position and results of operations after giving effect to the separation and distribution, and the other transactions described under “Unaudited Pro Forma Condensed Consolidated Financial Statements.” The unaudited pro forma condensed consolidated financial statements are presented for illustrative purposes only and are not necessarily indicative of the operating results or financial position that would have occurred if the relevant transactions had been consummated on the date indicated, nor is it indicative of future operating results.
You should read the section titled “Unaudited Pro Forma Condensed Consolidated Financial Statements,” which is qualified in its entirety by reference to the audited consolidated financial statements and related notes thereto and the financial and other information, including in the sections titled “Risk Factors,” “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included elsewhere in this information statement.
Constellation Newholdco, Inc. was formed on June 15, 2021 in connection with the separation transaction and has engaged in no activity other than incidental to the separation. As of June 15, 2021, it has no assets or liabilities. In connection with the separation transaction, Constellation Newholdco, Inc. will become the parent of Generation and its subsidiaries, which will constitute all of its assets and business operations.
INDUSTRY AND MARKET DATA
This information statement contains estimates and projections regarding market and industry data that were obtained from internal Company estimates as well as third-party sources, such as market research, consultant surveys, publicly available information and industry publications and surveys. We believe the information provided or made available by these third-party sources is generally reliable. However, market data is subject to change and cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data-gathering process and other limitations and uncertainties inherent in any statistical survey, interpretation or presentation of market data and management’s estimates and projections. In addition, projections are often wrong. As a result, you should be aware that market data set forth herein, and estimates, projections and beliefs based on that data presented herein, may not be reliable. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein, and we cannot guarantee its accuracy or completeness. Unless identified as a third-party source, market data is based on internal company estimates and data. Similarly, internal company estimates, which we believe to be reliable, are based upon management’s knowledge of the industry as of the date of those estimates and have not been verified by any independent sources. Accordingly, we cannot guarantee the accuracy or completeness of any such information and you should not place undue reliance on that information when making your investment decision.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This information statement and other materials Exelon and we have filed or will file with the SEC (and oral communications that Exelon and we may make) contain or incorporate by reference statements that relate to future events and expectations and, as such, constitute forward-looking statements under the securities laws. Forward-looking statements include those statements containing words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goal,” “guidance,” “intends,” “may,” “outlook,” “plans,” “projects,” “seeks,” “sees,” “should,” “targets,” “will,” “would,” or other words with similar meaning. All statements that reflect Exelon’s or our expectations, assumptions or projections about the future, other than statements of historical fact, are forward-looking statements, including, without limitation, statements and guidance regarding future financial results or operating performance; and statements about Exelon’s or our strategies, outlook, business and financial prospects. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and changes in circumstances that are difficult to predict. Although each of Exelon and we believe that the expectations reflected in any forward-looking statements it makes are based on reasonable assumptions, no assurance can be given that these expectations will be attained, and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties. Such risks and uncertainties include the following:
|·||deterioration in global economic and financial market conditions generally;|
|·||unfavorable changes in the markets served by Exelon and us;|
|·||competition from disruptive technologies, industry consolidation or other developments;|
|·||the loss of key customers or significant changes in the business or financial condition of customers;|
|·||political, economic, and regulatory risks relating to Exelon’s and our operations;|
|·||acts of war, terrorism or civil unrest;|
|·||pandemics or other public health crises, and adverse changes in economic and market conditions related to such pandemics or other health crises;|
|·||a material disruption of our operations, particularly at one or more of our nuclear generating facilities;|
|·||the inability to achieve the level of revenue growth, cash generation, cost savings, improvement in profitability and margins, fiscal discipline, or strengthening of competitiveness and operations anticipated or targeted;|
|·||the impact of potential cyber-attacks and information technology or data security breaches;|
|·||the inability to develop innovative new products or implement technology initiatives successfully;|
|·||adverse changes in discount rates or investment returns on pension assets;|
|·||Exelon’s and our inability to realize expected benefits, in each case as planned and by targeted completion dates, from acquisitions, divestitures, facility closures, curtailments, expansions or joint ventures;|
|·||a significant downturn in the business or financial condition of a significant supplier;|
|·||the outcome of contingencies, including legal proceedings, government or regulatory investigations, and environmental compliance and remediation, which can expose Exelon and us to substantial costs and liabilities;|
|·||the expected benefits and timing of the separation, and uncertainties regarding the planned separation, including the risk that conditions to the separation will not be satisfied and that it will not be completed pursuant to the targeted timing, asset perimeters, and other anticipated terms, if at all;|
|·||the impact of the separation on Exelon’s businesses;|
|·||a determination by the IRS that the distribution or certain related transactions should be treated as taxable transactions;|
|·||the possibility that any consents or approvals required in connection with the separation will not be received or obtained within the expected time frame, on the expected terms or at all;|
|·||the risk that dis-synergy costs, costs of restructuring transactions and other costs incurred in connection with the separation will exceed our estimates; and|
|·||the impact of the separation on our businesses and the risk that the businesses will not be separated successfully or such separation may be more difficult, time-consuming or costly than expected, which could result in additional demands on Exelon’s resources, systems, procedures and controls, and disruption of our ongoing business, and impact our relationships with customers, suppliers, employees and other business counterparties.|
There can be no assurance that the distribution and separation will in fact be consummated in the manner described or at all. The above list of factors is not exhaustive or necessarily in order of importance. For additional information on identifying factors that may cause actual results to vary materially from those stated in forward-looking statements, see the discussions under “Risk Factors” in this information statement. Any forward-looking statement speaks only as of the date on which it is made, and each of Exelon and we assume no obligation to update or revise such statement, whether as a result of new information, future events or otherwise, except as required by applicable law.
You should carefully consider each of the following risk factors and all of the other information set forth in this information statement. Based upon information currently known to us, the following information identifies the material risk factors affecting our company. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business, financial condition or results of operations. In addition, past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.
The risks we face can be categorized as risks related to: market and financial factors; regulatory, legislative and legal factors; operational factors; our separation from Exelon; and our common stock:
|·||Risks related to market and financial factors primarily include:|
|·||the price of fuels, in particular the price of natural gas, which affects power prices,|
|·||the generation resources in the markets in which we operate,|
|·||our ability to operate our generating assets, our ability to access capital markets, and the impacts on our results of operations due to the global outbreak (pandemic) of the 2019 novel coronavirus (COVID-19),|
|·||the impacts of on-going competition, and|
|·||emerging technologies and business models, including those related to climate change mitigation and transition to a low carbon economy.|
|·||Risks related to regulatory, legislative and legal factors primarily include changes to, and compliance with, the laws and regulations that govern:|
|·||the design of power markets,|
|·||the renewal of permits and operating licenses,|
|·||environmental and climate policy, including zero emission credit programs, and|
|·||Risks related to operational factors primarily include:|
|·||changes in the global climate could produce extreme weather events, which could put our facilities at risk, and such changes could also affect the levels and patterns of demand for energy and related services,|
|·||the safe, secure and effective operation of our nuclear facilities and the ability to effectively manage the associated decommissioning obligations,|
|·||the ability of energy transmission and distribution companies to maintain the reliability, resiliency and safety of their energy delivery systems, which could affect our ability to deliver energy to our customers and affect our operating costs, and|
|·||physical and cyber security risks for us as an owner-operator of generation facilities and as a participant in commodities trading.|
|·||Risks related to our separation from Exelon primarily include:|
|·||challenges to achieving the benefits of separation, including limited business diversification, loss of economies of scale in sourcing goods and services, and the need to replicate certain services provided by Exelon (such as treasury, finance, human resources, investor relations and legal), which will require additional resources and expense,|
|·||little control over the terms and timing of the separation (including regulatory approvals), which are determined by Exelon (and with respect to regulatory approvals, the applicable regulator), and Exelon may change those terms at any time or elect not to proceed,|
|·||performance by Exelon and us under the transaction agreements, including indemnification responsibilities tied to the allocation of businesses and liabilities, and|
|·||restrictions on future capital-raising or strategic transactions during the two-year period following the distribution arising from the need to protect the tax-free treatment of the distribution.|
|·||Risks related to our common stock primarily include:|
|·||following the separation, there can be no assurance that the combined trading prices of Exelon common stock and our common stock will be equal to or greater than the trading price of Exelon shares prior to the separation,|
|·||the absence of a currently existing trading market for our stock and possible volatility in the market for our stock as holders of Exelon stock seek to reorganize their holdings based on stock index or industry strategies, investment policies or other factors, in addition to the general factors affecting the market price of common stock,|
|·||our status as a holding company is dependent on cash flows from our subsidiaries to meet financial obligations, and|
|·||certain anti-takeover provisions in our charter and bylaws that could have the effect of delaying or discouraging an acquisition of our company or a change in its management.|
Risks Related to Market and Financial Factors
We are exposed to price volatility associated with both the wholesale and retail power markets and the procurement of nuclear and fossil fuel.
We are exposed to commodity price risk for natural gas and the unhedged portion of our electricity generation supply portfolio. Our earnings and cash flows are therefore exposed to variability of spot and forward market prices in the markets in which we operate.
Price of Fuels. The spot market price of electricity for each hour is generally determined by the marginal cost of supplying the next unit of electricity to the market during that hour. Thus, the market price of power is affected by the market price of the marginal fuel used to generate the electricity unit.
Cost of Fuel. We depend on nuclear fuel and fossil fuels to operate most of our generating facilities. The supply markets for nuclear fuel, natural gas and oil are subject to price fluctuations, availability restrictions and counterparty default.
Demand and Supply. The market price for electricity is also affected by changes in the demand for electricity and the available supply of electricity. Unfavorable economic conditions, milder than normal weather, and the growth of energy efficiency and demand response programs can depress demand. In addition, in some markets, the supply of electricity can exceed demand during some hours of the day, resulting in loss of revenue for base-load generating plants such as our nuclear plants. Conversely, new demand sources such as electrification of transportation could increase demand and change demand patterns.
Retail Competition. Our retail operations compete for customers in a competitive environment, which affects the margins we can earn and the volumes we are able to serve. In periods of sustained low natural gas and power prices and low market volatility, retail competitors can aggressively pursue market share because the barriers to entry can be low and wholesale generators (including us) use their retail operations to hedge generation output.
The impact of sustained low market prices or depressed demand and over-supply could be emphasized given our concentration of base-load electric generating capacity within primarily two geographic market regions, namely the Midwest and the Mid-Atlantic. These impacts could adversely affect our ability to reduce debt and provide attractive shareholder returns. In addition, such conditions may no longer support the continued operation of certain generating facilities, which could adversely affect our financial statements primarily through accelerated depreciation and amortization expenses and one-time charges.
Market Designs. The wholesale markets vary from region to region with distinct rules, practices and procedures. Changes in these market rules, problems with rule implementation, or failure of any of these markets could adversely affect our business. In addition, a significant decrease in market participation could affect market liquidity and have a detrimental effect on market stability.
Our results were negatively affected by the impacts of COVID-19.
COVID-19 has disrupted economic activity in our markets and negatively affected our results of operations. The estimated impact of COVID-19 to our Net income was approximately $170 million for the year ended December 31, 2020 and is not expected to be material for the year ending December 31, 2021. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Significant 2020 and 2021 Transactions and Developments — COVID-19” for additional information. We cannot predict the full extent of the impacts of COVID-19, which will depend on, among other things, the rate, and public perceptions of the effectiveness, of vaccinations and rate of resumption of business activity. In addition, any future widespread pandemic or other local or global health issue could adversely affect customer demand and our ability to operate our generation assets.
We are potentially affected by emerging technologies that could over time affect or transform the energy industry.
Advancements in power generation technology, including commercial and residential solar generation installations and commercial micro turbine installations, are improving the cost-effectiveness of customer self-supply of electricity. Improvements in energy storage technology, including batteries and fuel cells, could also better position customers to meet their around-the-clock electricity requirements. Improvements in energy efficiency of lighting, appliances, equipment and building materials will also affect energy consumption by customers. Changes in power generation, storage, and use technologies could have significant effects on customer behaviors and their energy consumption.
These developments could affect the price of energy, levels of customer-owned generation, customer expectations and current business models and make portions of our generation facilities uneconomic prior to the end of their useful lives. These technologies could also result in further declines in commodity prices or demand for delivered energy. Each of these factors could affect our consolidated financial statements through, among other things, reduced operating revenues, increased operating and maintenance expenses, increased capital expenditures, and potential asset impairment charges or accelerated depreciation and decommissioning expenses over shortened remaining asset useful lives.
Market performance and other factors could decrease the value of our nuclear decommissioning trust funds and employee benefit plan assets, which then could require significant additional funding.
Disruptions in the capital markets and their actual or perceived effects on particular businesses and the greater economy could adversely affect the value of the investments held within our nuclear decommissioning trusts and employee benefit plan trusts. We have significant obligations in these areas and hold substantial assets in these trusts to meet those obligations. The asset values are subject to market fluctuations and will yield uncertain returns, which could fall below our projected return rates. A decline in the market value of the nuclear decommissioning trust fund investments could increase our funding requirements to decommission our nuclear plants. A decline in the market value of the pension and OPEB plan assets would increase the funding requirements associated with our pension and OPEB plan obligations. Additionally, our pension and OPEB plan liabilities are sensitive to changes in interest rates. As interest rates decrease, the liabilities increase, potentially increasing benefit costs and funding requirements. Changes in demographics, including increased numbers of retirements or changes in life expectancy assumptions or changes to Social Security or Medicare eligibility requirements could also increase the costs and funding requirements of the obligations related to the pension and OPEB plans.
We could be negatively affected by unstable capital and credit markets and increased volatility in commodity markets.
We rely on the capital markets, particularly for publicly offered debt, as well as the banking and commercial paper markets, to meet our financial commitments and short-term liquidity needs. Disruptions in the capital and credit markets in the United States or abroad could negatively affect our ability to access the capital markets or draw on our bank revolving credit facilities. The banks may not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time. The inability to access capital markets or credit facilities, and longer-term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could result in the deferral of discretionary capital expenditures, affect our ability to hedge effectively our generation portfolio, require changes to our hedging strategy in order to reduce collateral posting requirements, or require a reduction in discretionary uses of cash. In addition, we have exposure to worldwide financial markets, including Europe, Canada and Asia. Disruptions in these markets could reduce or restrict our ability to secure sufficient liquidity or secure liquidity at reasonable terms. As of December 31, 2020, approximately 20%, 17%, and 16% of our available credit facilities were with European, Canadian and Asian banks, respectively.
The strength and depth of competition in energy markets depend heavily on active participation by multiple trading parties, which could be negatively affected by disruptions in the capital and credit markets and legislative and regulatory initiatives that could affect participants in commodities transactions. Reduced capital and liquidity and failures of significant institutions that participate in the energy markets could diminish the liquidity and competitiveness of energy markets that are important to our business. Perceived weaknesses in the competitive strength of the energy markets could lead to pressures for greater regulation of those markets or attempts to replace market structures with other mechanisms for the sale of power, including the requirement of long-term contracts.
If we were to experience a downgrade in our credit ratings to below investment grade or otherwise fail to satisfy the credit standards in our agreements with our counterparties or regulatory financial requirements, we would be required to provide significant amounts of collateral that could affect our liquidity and we could experience higher borrowing costs.
Our business is subject to credit quality standards that could require market participants to post collateral for their obligations upon a decline in ratings. We are also subject to certain financial requirements under NRC regulations as a result of our operation of nuclear power plants that could require us to provide cash collateral or surety bonds if those requirements are not met. One or both events could affect adversely available liquidity and, in the case of a rating downgrade, borrowing and credit support costs.
If we fail to meet project-specific financing agreement requirements, we could experience an impairment or loss of the financed project.
We have project-specific financing arrangements and must meet the requirements of various agreements relating to those financings. Failure to meet those arrangements could give rise to a project-specific financing default which, if not cured or waived, could result in the specific project being required to repay the associated debt or other borrowings earlier than otherwise anticipated, and if such repayment were not made, the lenders or security holders would generally have broad remedies, including rights to foreclose against the project assets and related collateral or to force our subsidiaries in the project-specific financings to enter into bankruptcy proceedings. The impact of bankruptcy could result in the impairment of certain project assets.
Our risk management policies cannot fully eliminate the risk associated with our commodity trading activities.
Our asset-based power position as well as our power marketing, fuel procurement and other commodity trading activities expose us to risks of commodity price movements. We buy and sell energy and other products and enter into financial contracts to manage risk and hedge various positions in our power generation portfolio. We are exposed to volatility in financial results for unhedged positions as well as the risk of ineffective hedges. We attempt to manage this exposure through enforcement of established risk limits and risk management procedures. These risk limits and risk management procedures may not work as planned and cannot eliminate all risks associated with these activities. Even when our policies and procedures are followed, and decisions are made based on projections and estimates of future performance, results of operations could be diminished if the judgments and assumptions underlying those decisions prove to be incorrect. Factors, such as future prices and demand for power, natural gas and other energy-related commodities, become more difficult to predict and the calculations become less reliable the further into the future estimates are made. As a result, we cannot predict the impact that our commodity trading activities and risk management decisions could have on our consolidated financial statements.
Financial performance and load requirements could be negatively affected if we are unable to effectively manage our power portfolio.
A significant portion of our power portfolio is used to provide power under procurement contracts with Exelon’s utility subsidiaries and other customers. To the extent portions of the power portfolio are not needed for that purpose, our output is sold in the wholesale power markets. To the extent our power portfolio is not sufficient to meet the requirements of our customers under the related agreements, we must purchase power in the wholesale power markets. Our financial results could be negatively affected if we are unable to meet cost-effectively the load requirements of our customers, manage our power portfolio or effectively address the changes in the wholesale power markets.
The impacts of significant economic downturns could lead to decreased volumes delivered and increased expense for uncollectible customer balances.
The impacts of significant economic downturns on our retail customers, such as less demand for products and services provided by commercial and industrial customers, could result in an increase in the number of uncollectible customer balances and related expense.
We could be negatively affected by the impacts of weather.
Our operations are affected by weather, which affects demand for electricity and natural gas, the price of energy commodities, as well as operating conditions. To the extent that weather is warmer in the summer or colder in the winter than assumed, we could require greater resources to meet our contractual commitments. Extreme weather conditions or storms have affected the availability of generation and its transmission, limiting our ability to source or send power to where it is sold, and have also affected the transportation of natural gas to our generating assets and our ability to supply natural gas to our customers. In addition, drought-like conditions limiting water usage could impact our ability to run certain generating assets at full capacity. These conditions, which cannot be accurately predicted, could cause us to seek additional capacity at a time when wholesale markets are tight or to seek to sell excess capacity at a time when markets are weak.
Climate change projections suggest increases to summer temperature and humidity trends, as well as more erratic precipitation and storm patterns over the long-term in the areas where we have generation assets. The frequency in which weather conditions emerge outside the current expected climate norms could contribute to weather-related impacts discussed above.
Beginning on February 15, 2021, our Texas-based generating assets within the ERCOT market, specifically Colorado Bend II, Wolf Hollow II, and Handley, experienced periodic outages as a result of historically severe cold weather conditions. We estimate a reduction in Net income of approximately $670 million to $820 million for the full year 2021 arising from these market and weather conditions. See “Management's Discussion and Analysis of Financial Condition and Results of Operations — Significant 2020 and 2021 Transactions and Developments — Impacts of February 21 Extreme Weather Event and Texas-based Generating Assets Outages” for additional information.
Long-lived assets and other assets could become impaired.
Long-lived assets – principally, generation assets –represent the single largest asset class on our statement of financial position.
We evaluate the recoverability of the carrying value of long-lived assets to be held and used whenever events or circumstances indicating a potential impairment exist. Factors such as, but not limited to, the business climate, including current and future energy and market conditions, environmental regulation, and the condition of assets are considered.
An impairment would require us to reduce the carrying value of the long-lived asset to fair value through a non-cash charge to expense by the amount of the impairment.
We could incur substantial costs in the event of non-performance by third-parties under indemnification agreements, or when we have guaranteed their performance. We are exposed to other credit risks in the power markets that are beyond our control.
We have entered into various agreements with counterparties that require those counterparties to reimburse us and hold us harmless against specified obligations and claims. To the extent that any of these counterparties are affected by deterioration in their creditworthiness or the agreements are otherwise determined to be unenforceable, we could be held responsible for the obligations.
We have issued indemnities to third parties regarding environmental or other matters in connection with purchases and sales of assets, including several of the Exelon utilities in connection with our absorption of their former generating assets. We could incur substantial costs to fulfill our obligations under these indemnities.
We have issued guarantees of the performance of third parties, which obligate us to perform in the event that the third parties do not perform. In the event of non-performance by those third parties, we could incur substantial cost to fulfill their obligations under these guarantees.
In the bilateral markets, we are exposed to the risk that counterparties that owe us money or are obligated to purchase energy or fuel from us, will not perform under their obligations for operational or financial reasons. In the event the counterparties to these arrangements fail to perform, we could be forced to purchase or sell energy or fuel in the wholesale markets at less favorable prices and incur additional losses, to the extent amounts, if any, were already paid to the counterparties. In the spot markets, we are exposed to risk as a result of default sharing mechanisms that exist within certain markets, primarily RTOs and ISOs. We are also a party to agreements with entities in the energy sector that have experienced rating downgrades or other financial difficulties. In addition, our retail sales subject us to credit risk through competitive electricity and natural gas supply activities to serve commercial and industrial companies, governmental entities and residential customers. Retail credit risk results when customers default on their contractual obligations. This risk represents the loss that could be incurred due to the nonpayment of a customer’s account balance, as well as the loss from the resale of energy previously committed to serve the customer.
Risks Related to Regulatory, Legislative and Legal Factors
Federal or state legislative or regulatory actions could negatively affect the scope and functioning of the wholesale markets.
Approximately 70% of our generating resources, which include directly owned assets and capacity obtained through long-term contracts, are located in the area encompassed by PJM. Our future results of operations are impacted by (1) FERC’s and PJM's level of support for policies that favor the preservation of competitive wholesale power markets and recognize the value of zero-carbon electricity and resiliency and for states' energy objectives and policies and (2) the absence of material changes to market structures that would limit or otherwise negatively affect us. Market rules in other regions could affect us in a similar fashion. We could also be affected by state laws, regulations or initiatives to subsidize existing or new generation.
FERC’s requirements for market-based rate authority could pose a risk that we may no longer satisfy FERC’s tests for market-based rates. A loss of market-based rate authority would mean that we would sell power at cost-based rates.
Our business is highly regulated and could be negatively affected by regulatory and legislative actions.
Substantial aspects of our business are subject to comprehensive Federal or state regulation and legislation.
Our consolidated financial statements are significantly affected by our sales and purchases of commodities at market-based rates, as opposed to cost-based or other similarly regulated rates and Federal and state regulatory and legislative developments related to emissions, climate change, capacity market mitigation, energy price information, resilience, fuel diversity and RPS. Legislative and regulatory efforts in Illinois, New York and New Jersey to preserve the environmental attributes and reliability benefits of zero-emission nuclear-powered generating facilities through ZEC programs are or could be subject to legal and regulatory challenges and, if overturned, could result in the early retirement of certain of our nuclear plants.
Fundamental changes in regulations or other adverse legislative actions affecting our business would require changes in our business planning models and operations. We cannot predict when or whether legislative and regulatory proposals could become law or what their effect would be.
NRC actions could negatively affect the operations and profitability of our nuclear generating fleet.
Regulatory risk. A change in the Atomic Energy Act or the applicable regulations or licenses could require a substantial increase in capital expenditures or could result in increased operating or decommissioning costs. Events at nuclear plants owned by others, as well as those owned by us, could cause the NRC to initiate such actions.
Spent nuclear fuel storage. The approval of a national repository for the storage of SNF and the timing of that facility opening, will significantly affect the costs associated with storage of SNF and the ultimate amounts received from the DOE to reimburse us for these costs.
Any regulatory action relating to the timing and availability of a repository for SNF could adversely affect our ability to decommission fully our nuclear units. We cannot predict whether a fee may be established or to what extent, in the future for SNF disposal.
We could be subject to higher costs and/or penalties related to mandatory reliability standards.
We, as a user of the bulk power transmission system, are subject to mandatory reliability standards promulgated by NERC and enforced by FERC. The standards are based on the functions that need to be performed to ensure the bulk power system operates reliably and are guided by reliability and market interface principles. Compliance with or changes in the reliability standards could subject us to higher operating costs and/or increased capital expenditures. If we were found in non-compliance with the Federal and state mandatory reliability standards, we could be subject to remediation costs as well as sanctions, which could include substantial monetary penalties.
We could incur substantial costs to fulfill our obligations related to environmental and other matters.
We are subject to extensive environmental regulation and legislation by local, state and Federal authorities. These laws and regulations affect the manner in which we conduct our operations and make capital expenditures, including how we handle air and water emissions, hazardous and solid waste, and activities affecting surface waters, groundwater, and aquatic and other species. Violations of these requirements could subject us to enforcement actions, capital expenditures to bring existing facilities into compliance, additional operating costs for remediation and clean-up costs, civil penalties and exposure to third parties’ claims for alleged health or property damages or operating restrictions to achieve compliance. In addition, we are subject to liability under these laws for the remediation costs for environmental contamination of property now or formerly owned by us and of property contaminated by hazardous substances we generated or released. Also, we are currently involved in a number of proceedings relating to sites where hazardous substances have been deposited and could be subject to additional proceedings in the future.
We could be negatively affected by federal and state RPS and/or energy conservation legislation, along with energy conservation by customers.
Changes to current state legislation or the development of Federal legislation that requires the use of clean, renewable and alternate fuel sources could significantly impact us. The impact could include reduced use of some of our generating facilities with effects on our revenues and costs.
Federal and state legislation mandating the implementation of energy conservation programs and new energy consumption technologies could cause declines in customer energy consumption and lead to a decline in our revenues. See “We are potentially affected by emerging technologies that could over time affect or transform the energy industry” above.
Our financial performance could be negatively affected by risks arising from our ownership and operation of hydroelectric facilities.
FERC has the exclusive authority to license most non-Federal hydropower projects located on navigable waterways, Federal lands or connected to the interstate electric grid. We cannot predict whether we will receive all the regulatory approvals for the renewed licenses of our hydroelectric facilities. If FERC does not issue new operating licenses for our hydroelectric facilities or a station cannot be operated through the end of its operating license, our results of operations could be adversely affected by increased depreciation rates and accelerated future decommissioning costs, since depreciation rates and decommissioning cost estimates currently include assumptions that license renewal will be received. We could also lose revenue and incur increased fuel and purchased power expense to meet our supply commitments. In addition, conditions could be imposed as part of the license renewal process that could adversely affect operations, require a substantial increase in capital expenditures, result in increased operating costs or render the project uneconomic. Similar effects could result from a change in the Federal Power Act or the applicable regulations due to events at hydroelectric facilities owned by others, as well as those owned by us.
We could be negatively affected by challenges to tax positions taken, tax law changes and the inherent difficulty in quantifying potential tax effects of business decisions.
We are required to make judgments in order to estimate our obligations to taxing authorities. These tax obligations include income, real estate, sales and use and employment-related taxes and ongoing appeal issues related to these tax matters. These judgments include reserves established for potential adverse outcomes regarding tax positions that have been taken that could be subject to challenge by the tax authorities.
Legal proceedings could result in a negative outcome, which we cannot predict.
We are involved in legal proceedings, claims and litigation arising out of our business operations. The material ones are summarized in Note 19 — Commitments and Contingencies of the Notes to Consolidated Financial Statements. Adverse outcomes in these proceedings could require significant expenditures, result in lost revenue or restrict existing business activities.
We could be subject to adverse publicity and reputational risks, which make us vulnerable to negative customer perception and could lead to increased regulatory oversight or other consequences.
We could be the subject of public criticism. Adverse publicity of this nature could render public service commissions and other regulatory and legislative authorities less likely to view energy companies in a favorable light, and could cause those companies, including us, to be susceptible to less favorable legislative and regulatory outcomes, as well as increased regulatory oversight and more stringent legislative or regulatory requirements.
Risks Related to Operational Factors
We are subject to risks associated with climate change.
We periodically perform analyses to better understand how climate change could affect our facilities and operations. We primarily operate in the Midwest and East Coast of the United States, areas that historically have been prone to various types of severe weather events, and as such we have well-developed response and recovery programs based on these historical events. However, our physical facilities could be placed at greater risk of damage should changes in the global climate impact temperature and weather patterns and result in more intense, frequent and extreme weather events, unprecedented levels of precipitation, sea level rise, increased surface water temperatures, and/or other effects. In addition, changes to the climate may impact levels and patterns of demand for energy and related services, which could affect our operations. Over time, we may need to make additional investments to protect our facilities from physical climate-related risks and/or adapt to changes in operational requirements as a result of climate change.
We also periodically perform analyses of potential pathways to reduce power sector and economy-wide GHG emissions to mitigate climate change. To the extent additional GHG reduction regulation or legislation becomes effective at the Federal and/or state levels, we could incur costs to further limit the GHG emissions from our operations or otherwise comply with applicable requirements. To the extent such additional regulation or legislation does not become effective, the potential competitive advantage offered by our low-carbon emission profile may be reduced.
Our financial performance could be negatively affected by matters arising from our ownership and operation of nuclear facilities.
Nuclear capacity factors. Capacity factors for nuclear generating units significantly affect our results of operations. Lower capacity factors could decrease our revenues and increase operating costs by requiring us to produce additional energy from primarily our fossil facilities or purchase additional energy in the spot or forward markets in order to satisfy our supply obligations to committed third-party sales. These sources generally have higher costs than we incur to produce energy from our nuclear stations.
Nuclear refueling outages. In general, refueling outages are planned to occur once every 18 to 24 months. The total number of refueling outages, along with their duration, could have a significant impact on our results of operations. When refueling outages last longer than anticipated or we experience unplanned outages, capacity factors decrease, and we face lower margins due to higher energy replacement costs and/or lower energy sales and higher operating and maintenance costs.
Nuclear fuel quality. The quality of nuclear fuel utilized by us could affect the efficiency and costs of our operations. Remediation actions could result in increased costs due to accelerated fuel amortization, increased outage costs and/or increased costs due to decreased generation capabilities.
Operational risk. Operations at any of our nuclear generation plants could degrade to the point where we must shut down the plant or operate at less than full capacity. If this were to happen, identifying and correcting the causes could require significant time and expense. We could choose to close a plant rather than incur the expense of restarting it or returning the plant to full capacity. In either event, we could lose revenue and incur increased fuel and purchased power expense to meet supply commitments.
For plants operated but not wholly owned by us, we could also incur liability to the co-owners. For nuclear plants not operated and not wholly owned by us, from which we receive a portion of the plants’ output, our results of operations are dependent on the operational performance of the operators and could be adversely affected by a significant event at those plants. Additionally, poor operating performance at nuclear plants not owned by us could result in increased regulation and reduced public support for nuclear-fueled energy. In addition, closure of generating plants owned by others, or extended interruptions of generating plants or failure of transmission lines, could affect transmission systems that could adversely affect the sale and delivery of electricity in markets served by us.
Nuclear major incident risk and insurance. The consequences of a major incident could be severe and include loss of life and property damage. Any resulting liability from a nuclear plant major incident within the United States, owned or operated by us or owned by others, could exceed our resources, including insurance coverage. We are a member of an industry mutual insurance company, NEIL, which provides property and business interruption insurance for our nuclear operations. Uninsured losses and other expenses, to the extent not recovered from insurers or the nuclear industry, could be borne by us. Additionally, an accident or other significant event at a nuclear plant within the United States or abroad, whether owned by us or others, could result in increased regulation and reduced public support for nuclear-fueled energy.
As required by the Price-Anderson Act, we carry the maximum available amount of nuclear liability insurance, $450 million for each operating site. Claims exceeding that amount are covered through mandatory participation in a financial protection pool. In addition, the U.S. Congress could impose revenue-raising measures on the nuclear industry to pay claims exceeding the $13.8 billion limit for a single incident.
Decommissioning obligation and funding. NRC regulations require that licensees of nuclear generating facilities demonstrate reasonable assurance that funds will be available in certain minimum amounts at the end of the life of the facility to decommission the facility.
We recognize as a liability the present value of the estimated future costs to decommission our nuclear facilities. The estimated liability is based on assumptions in the approach and timing of decommissioning the nuclear facilities, estimation of decommissioning costs and Federal and state regulatory requirements. The costs of such decommissioning may substantially exceed such liability, as facts, circumstances or our estimates may change, including changes in the approach and timing of decommissioning activities, changes in decommissioning costs, changes in Federal or state regulatory requirements on the decommissioning of such facilities, other changes in our estimates or ability to effectively execute on our planned decommissioning activities.
We make contributions to certain trust funds of the former PECO units based on amounts being collected by PECO from its customers and remitted to us. While we, through PECO, have recourse to collect additional amounts from PECO customers (subject to certain limitations and thresholds), we have no recourse to collect additional amounts from utility customers for any of our other nuclear units if there is a shortfall of funds necessary for decommissioning. If circumstances changed such that there was an inability to continue to make contributions to the trust funds of the former PECO units based on amounts collected from PECO customers, or if we no longer had recourse to collect additional amounts from PECO customers if there was a shortfall of funds for decommissioning, the adequacy of the trust funds related to the former PECO units could be negatively affected.
Should the expected value of the NDT fund for any former ComEd unit fall below the amount of the expected decommissioning obligation for that unit, the accounting to offset decommissioning-related activities in the Consolidated Statement of Operations and Comprehensive Income for that unit would be discontinued, the decommissioning-related activities would be recognized in the Consolidated Statements of Operations and Comprehensive Income and the adverse impact to our financial statements could be material. Any changes to the PECO regulatory agreements could impact our ability to offset decommissioning-related activities within the Consolidated Statement of Operations and Comprehensive Income, and the impact to our financial statements could be material.
Forecasting trust fund investment earnings and costs to decommission nuclear generating stations requires significant judgment, and actual results could differ significantly from current estimates. If the investments held by our NDT funds are not sufficient to fund the decommissioning of our nuclear units, we could be required to take steps, such as providing financial guarantees through letters of credit or parent company guarantees or making additional contributions to the trusts, which could be significant, to ensure that the trusts are adequately funded and that current and future NRC minimum funding requirements are met.
We are subject to physical security and cybersecurity risks.
We face physical security and cybersecurity risks. Threat sources continue to seek to exploit potential vulnerabilities in the electric generation and natural gas industry associated with protection of sensitive and confidential information, grid infrastructure and other energy infrastructures, and these attacks and disruptions, both physical and cyber, are becoming increasingly sophisticated and dynamic. Continued implementation of advanced digital technologies increases the potentially unfavorable impacts of such attacks.
A security breach of our physical assets or information systems or those of our competitors, vendors, business partners and interconnected entities in RTOs and ISOs, or regulators could impact the operation of the generation fleet and/or reliability of the transmission and distribution system or result in the theft or inappropriate release of certain types of information, including critical infrastructure information, sensitive customer, vendor and employee data, trading or other confidential data. The risk of these system-related events and security breaches occurring continues to intensify, and while we have been, and will likely continue to be, subjected to physical and cyber-attacks, to date we have not directly experienced a material breach or disruption to our network or information systems or our operations. However, as such attacks continue to increase in sophistication and frequency, we may be unable to prevent all such attacks in the future.
If a significant breach were to occur, our reputation could be negatively affected, customer confidence in us or others in the industry could be diminished, or we could be subject to legal claims, loss of revenues, increased costs or operations shutdown. Moreover, the amount and scope of insurance maintained against losses resulting from any such events or security breaches may not be sufficient to cover losses or otherwise adequately compensate for any disruptions to business that could result.
In addition, new or updated security regulations or unforeseen threat sources could require changes in current measures taken by us or our business operations and could adversely affect our consolidated financial statements.
Our employees, contractors, customers and the general public could be exposed to a risk of injury due to the nature of the energy industry.
Employees and contractors throughout the organization work in, and the general public could be exposed to, potentially dangerous environments near our operations. As a result, employees, contractors and the general public are at some risk for serious injury, including loss of life. These risks include nuclear accidents, dam failure, gas explosions, pole strikes and electric contact cases.
Natural disasters, war, acts and threats of terrorism, pandemic and other significant events could negatively impact our results of operations, ability to raise capital and future growth.
Our fleet of power plants and the transmission infrastructure to which they are connected could be affected by natural disasters and extreme weather events, which could result in increased costs, including supply chain costs. Natural disasters and other significant events increase our risk that the NRC or other regulatory or legislative bodies could change the laws or regulations governing, among other things, operations, maintenance, licensed lives, decommissioning, SNF storage, insurance, emergency planning, security and environmental and radiological matters. In addition, natural disasters could affect the availability of a secure and economical supply of water in some locations, which is essential for our continued operation, particularly the cooling of generating units.
The impact that potential terrorist attacks could have on the industry and on us is uncertain. We face a risk that our operations would be direct targets or indirect casualties of an act of terror. Any retaliatory military strikes or sustained military campaign could affect our operations in unpredictable ways, such as changes in insurance markets and disruptions of fuel supplies and markets, particularly oil. Furthermore, these catastrophic events could compromise the physical or cybersecurity of our facilities, which could adversely affect our ability to manage our business effectively. Instability in the financial markets as a result of terrorism, war, natural disasters, pandemic, credit crises, recession or other factors also could result in a decline in energy consumption or interruption of fuel or the supply chain. In addition, the implementation of security guidelines and measures has resulted in and is expected to continue to result in increased costs.
We could be significantly affected by the outbreak of a pandemic. We have plans in place to respond to a pandemic. However, depending on the severity of a pandemic and the resulting impacts to workforce and other resource availability, the ability to operate our generating assets could be adversely affected.
In addition, we maintain a level of insurance coverage consistent with industry practices against property, casualty and cybersecurity losses subject to unforeseen occurrences or catastrophic events that could damage or destroy assets or interrupt operations. However, there can be no assurance that the amount of insurance will be adequate to address such property and casualty losses.
Our business is capital intensive, and our assets could require significant expenditures to maintain and are subject to operational failure, which could result in potential liability.
Our business is capital intensive and require significant investments in electric generating facilities. Equipment, even if maintained in accordance with good utility practices, is subject to operational failure, including events that are beyond our control, and could require significant expenditures to operate efficiently. Our consolidated financial statements could be negatively affected if we were unable to effectively manage our capital projects or raise the necessary capital.
Our performance could be negatively affected if we fail to attract and retain an appropriately qualified workforce.
Certain events, such as the separation transaction, an employee strike, loss of employees, loss of contract resources due to a major event, and an aging workforce without appropriate replacements, could lead to operating challenges and increased costs for us. The challenges include lack of resources, loss of knowledge and a lengthy time period associated with skill development. In this case, costs, including costs for contractors to replace employees, productivity costs and safety costs, could arise. We are particularly affected due to the specialized knowledge required of the technical and support employees for generation operations.
We could make acquisitions or investments in new business initiatives and new markets, which may not be successful or achieve the intended financial results.
We could continue to pursue growth in our existing businesses and markets and further diversification across the competitive energy value chain. This could include investment opportunities in technology and innovation, renewables and other types of generation, and potential expansion of the existing wholesale gas businesses. Such initiatives could involve significant risks and uncertainties, including distraction of management from current operations, inadequate return on capital, and unidentified issues not discovered during diligence performed prior to launching an initiative or entering a market. Additionally, it is possible that FERC, state public utility commissions or others could impose certain other restrictions on such transactions. All of these factors could result in higher costs or lower revenues than expected, resulting in lower than planned returns on investment.
We may not realize or achieve the anticipated cost savings through the cost management efforts.
Our future financial performance and level of profitability is dependent, in part, on various cost reduction initiatives and may be affected by the separation transaction. We may encounter challenges in executing these cost reduction initiatives and not achieve the intended cost savings.
Risks Related to Our Separation from Exelon
We have no recent history of operating as an independent company, and our historical and pro forma financial information are not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.
The historical information about Generation in this information statement refers to the business of Generation as integrated with Exelon. Additionally, the pro forma financial information included in this information statement is derived from our historical financial information and (i) gives effect to the separation and (ii) reflects our anticipated post-separation capital structure. Accordingly, the historical and pro forma financial information does not necessarily reflect the financial condition, results of operations or cash flows that we would have achieved as a separate, publicly traded company during the periods presented or those that we may achieve in the future primarily as a result of the factors described below:
|·||Prior to the distribution, our business has been operated by Exelon as part of its broader corporate organization, rather than as an independent company. One of Exelon’s affiliates has performed various corporate functions for us, including legal, treasury, accounting, auditing, human resources, investor relations, and finance. Our historical and pro forma financial results reflect allocations of corporate expenses from Exelon for such functions, which may be less than the expenses we would have incurred had we operated as a separate, publicly traded company.|
|·||Currently, our business is integrated with the other businesses of Exelon. Historically, we have shared economies of scope and scale in costs, employees and vendor relationships. While we have sought to minimize the impact on us when separating these arrangements, there is no guarantee these arrangements will continue to capture these benefits in the future.|
|·||As a current part of Exelon, we take advantage of Exelon’s overall size and scope to obtain more advantageous procurement terms. After the distribution, as a standalone company, we may be unable to obtain similar arrangements to the same extent as Exelon did, or on terms as favorable as those Exelon obtained, prior to completion of the distribution.|
|·||After the completion of the distribution, the cost of capital for our business may be higher than our cost of capital prior to the distribution.|
Other significant changes may occur in our cost structure, management, financing and business operations as a result of operating as a company separate from Exelon. For additional information about the past financial performance of our business and the basis of presentation of the historical consolidated financial statements and the unaudited pro forma condensed consolidated financial statements of our business, see “Unaudited Pro Forma Condensed Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical consolidated financial statements and accompanying notes included elsewhere in this information statement.
Following the separation, our financial profile will change, and we will be a smaller, less diversified company than Exelon prior to the separation.
The separation will result in us and Exelon being smaller, less diversified companies with more limited businesses concentrated in their respective industries. As a result, we may be more vulnerable to changing market conditions, which could have a material adverse effect on our business, financial condition and results of operations. In addition, the diversification of our revenues, costs, and cash flows will diminish as a standalone company, such that our results of operations, cash flows, working capital and financing requirements may be subject to increased volatility and our ability to fund capital expenditures and investments, pay dividends and service debt may be diminished.
We may not achieve some or all of the expected benefits of the separation, and the separation may materially adversely affect our business.
As discussed below under “The Separation—Reasons for the Separation,” we believe that the separation is in the best interest of our shareholders. However, we may not be able to achieve the full strategic and financial benefits expected to result from the separation, or such benefits may be delayed or not occur at all.
If we fail to achieve some or all of the benefits expected to result from the separation, or if such benefits are delayed, it could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
Exelon’s plan to separate into two independent, publicly traded companies is subject to various risks and uncertainties and may not be completed in accordance with the expected plans or anticipated timeline, or at all, and will involve significant time and expense, which could disrupt or adversely affect our business.
In February 2021, Exelon announced its plan to separate into two independent, publicly traded companies. The separation is subject to the satisfaction of certain conditions (or waiver by Exelon in its sole and absolute discretion), including final approval by Exelon’s board of directors of the final terms of the separation and certain other conditions. Furthermore, the separation is complex in nature, and unanticipated developments or changes, including changes in the law, the macroeconomic environment, competitive conditions of Exelon’s markets, regulatory approvals or clearances, the uncertainty of the financial markets and challenges in executing the separation, could delay or prevent the completion of the proposed separation, or cause the separation to occur on terms or conditions that are different or less favorable than expected. Additionally, Exelon’s board of directors, in its sole and absolute discretion, may decide not to proceed with the separation at any time prior to the distribution date.
The process of completing the proposed separation has been and is expected to continue to be time-consuming and involves significant costs and expenses. The separation costs may be significantly higher than what we currently anticipate and may not yield a discernible benefit if the separation is not completed or is not well executed, or if the expected benefits of the separation are not realized. Executing the proposed separation will also require significant amounts of management’s time and effort. Other challenges associated with effectively executing the separation include attracting, retaining and motivating employees during the pendency of the separation and following its completion; addressing disruptions to our supply chain and other operations resulting from separating Exelon into two independent companies; and separating Exelon’s information systems.
Until the separation occurs, Exelon has sole discretion to change the terms of the separation in ways that may be unfavorable to us.
Until the separation occurs, we will be a wholly owned subsidiary of Exelon. Accordingly, Exelon will effectively have the sole and absolute discretion to determine and change the terms of the separation, including the establishment of the record date for the distribution and the distribution date. These changes could be unfavorable to us.
In addition, Exelon may decide at any time not to proceed with the separation and distribution if at any time Exelon’s board of directors determines, in its sole and absolute discretion, that the distribution of our common stock or the terms thereof are not in the best interests of Exelon and its shareholders or that legal, market or regulatory conditions or other circumstances are such that the separation and distribution are no longer advisable at that time. If Exelon’s board of directors determines to cancel the separation and distribution, Exelon’s shareholders will not receive any distribution of our common stock and Exelon will be under no obligation whatsoever to its shareholders to distribute those shares.
The terms we will receive in our agreements with Exelon could be less beneficial than the terms we may have otherwise received from unaffiliated third parties.
The agreements we will enter into with Exelon in connection with the separation, including the separation agreement, a tax matters agreement, an employee matters agreement, and a transition services agreement, were prepared in the context of the separation while we were still a wholly owned subsidiary of Exelon. Accordingly, during the period in which the terms of those agreements were prepared, we did not have an independent board of directors or a management team that was independent of Exelon. As a result, the terms of those agreements may not reflect terms that would have resulted from negotiations between unaffiliated third parties. See “Certain Relationships and Related Party Transactions.”
Exelon may fail to perform under various transaction agreements that will be executed as part of the separation, which could cause us to incur expenses or losses we would not otherwise incur.
In connection with the separation and prior to the distribution, we and Exelon will enter into the separation agreement and will also enter into various other agreements, including a tax matters agreement, an employee matters agreement, and a transition services agreement. The separation agreement, the tax matters agreement and the employee matters agreement will determine the allocation of assets and liabilities between the companies following the separation for those respective areas and will include any necessary indemnifications related to liabilities and obligations. We will rely on Exelon to satisfy its performance and payment obligations under these agreements. If Exelon is unable or unwilling to satisfy its obligations under these agreements, including its indemnification obligations, we could incur operational difficulties and/or losses.
In connection with the separation into two public companies, each of Exelon and we will indemnify each other for certain liabilities. If we are required to pay under these indemnities to Exelon, our financial results could be negatively impacted. The Exelon indemnities may not be sufficient to hold us harmless from the full amount of liabilities for which Exelon will be allocated responsibility, and Exelon may not be able to satisfy its indemnification obligations in the future.
Pursuant to the separation agreement and certain other agreements between Exelon and us, each party will agree to indemnify the other for certain liabilities, in each case for uncapped amounts, as discussed further in the section entitled “Certain Relationships and Related Party Transactions — Agreements with Exelon Related to the Separation — Separation Agreement” of this information statement. Indemnities that we may be required to provide Exelon are not subject to any cap, may be significant and could negatively impact our business. Third parties could also seek to hold us responsible for any of the liabilities that Exelon has agreed to retain. Any amounts we are required to pay pursuant to these indemnification obligations and other liabilities could require us to divert cash that would otherwise have been used in furtherance of our operating business. Further, the indemnities from Exelon for our benefit may not be sufficient to protect us against the full amount of such liabilities, and Exelon may not be able to fully satisfy its indemnification obligations.
Moreover, even if we ultimately succeed in recovering from Exelon any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. Each of these risks could negatively affect our business, results of operations and financial condition.
We may fail to have necessary systems and services in place when certain of the transaction agreements expire.
If we do not have in place our own systems and services, or if we do not have agreements with other providers of these services once certain separation transaction agreements expire, we may not be able to operate our business effectively, and our profitability may decline. We are in the process of creating our own, or engaging third parties to provide, systems and services to replace many of the systems and services that Exelon currently provides to us. We may incur temporary interruptions in business operations if we cannot transition effectively from Exelon’s existing operating systems, databases and programming languages that support these functions to our own systems. Our failure to implement the new systems and transition our data successfully and cost-effectively could disrupt our business operations and have a material adverse effect on our profitability. In addition, our costs for the operation of these systems may be higher than the amounts reflected in our historical combined financial statements.
If the distribution, together with certain related transactions, fails to qualify as a tax-free transaction for U.S. federal income tax purposes, then we, Exelon and Exelon’s shareholders could be subject to significant tax liability or tax indemnity obligations.
It is a condition to the completion of the separation that Exelon receive the IRS Ruling and an opinion from its counsel, Sidley Austin LLP, together substantially to the effect that the distribution, together with certain related transactions, will qualify as a tax-free reorganization under Sections 355 and 368(a)(1)(D) of the IRC.
Although a private letter ruling from the IRS is generally binding on the IRS, the IRS Ruling, if received from the IRS, will rely on certain facts, assumptions, representations and undertakings from Exelon and us regarding the past and future conduct of Exelon’s and our business, among other matters. Moreover, the IRS Ruling will not be a comprehensive ruling regarding all aspects of the U.S. federal income tax consequences of the separation and distribution. The opinion of counsel, if received from Exelon’s counsel, will also rely on certain facts, assumptions and covenants, as described therein, as well as on the validity of the IRS Ruling. In addition, Exelon’s counsel’s ability to provide an opinion will depend on the absence of changes in existing facts or law between the date of this information statement and the closing date of the separation. The opinion of counsel will not be binding on the IRS or the courts, and the IRS or the courts may not agree with such opinion.
Even if Exelon receives the IRS Ruling and opinion of counsel, the IRS could determine on audit that the distribution or any of certain related transactions is taxable if it determines that any of the facts, assumptions, representations or undertakings upon which such ruling and opinion rely are not correct or have been violated or if it disagrees with the conclusions in the opinion that are not covered by the IRS Ruling, or for other reasons, including as a result of certain significant changes in the stock ownership of Exelon or us after the distribution. If the distribution or certain related transactions is ultimately determined to be taxable, the distribution could be treated as a taxable dividend to you for U.S. federal income tax purposes, and you could incur significant U.S. federal income tax liability. In addition, Exelon and/or we could incur significant U.S. federal income tax liabilities or tax indemnification obligations, whether under applicable law or the tax matters agreement that we will enter into with Exelon, if it is ultimately determined that certain related transactions were undertaken in anticipation of the distribution.
We may not be able to engage in desirable capital-raising or strategic transactions following the separation.
Under current U.S. federal income tax law, a spin-off that otherwise qualifies for tax-free treatment can be rendered taxable to the parent corporation and its shareholders as a result of certain post-spin-off transactions, including certain acquisitions of shares or assets of the spun-off corporation. To preserve the tax-free treatment of the distribution, and in addition to potential tax indemnity obligations, we will agree to certain limitations or prohibitions in the tax matters agreement that may prohibit us, for the two-year period following the distribution and except in specific circumstances, from, among other things:
|·||entering into any transaction pursuant to which all or a portion of the shares of our stock, or substantially all of our assets, would be acquired, whether by merger or otherwise;|
|·||issuing equity securities beyond certain thresholds;|
|·||repurchasing shares of our stock other than in certain open-market transactions; and|
|·||ceasing to actively conduct our business.|
The tax matters agreement will also prohibit us from taking or failing to take any other action that would prevent the distribution and certain related transactions from qualifying as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the IRC. These restrictions may limit our ability to pursue certain equity issuances, strategic transactions, repurchases or other transactions that we may believe to be in the best interests of our shareholders or that might increase the value of our business. For more information, see the sections entitled “Certain Relationships and Related Party Transactions — Agreements with Exelon Related to the Separation — Tax Matters Agreement” and “The Separation—Material U.S. Federal Income Tax Consequences of the Separation.”
The transfer to us of certain contracts may require the consents or approvals of, or provide other rights to, third parties. If such consents or approvals are not obtained, we may not be entitled to the benefit of such contracts, which could increase our expenses or otherwise harm our business and financial performance.
In some circumstances, we and Exelon are joint beneficiaries of contracts, and we and Exelon may need the consent of third parties in order to split or separate the existing contracts or the relevant portion of the existing contracts between us and Exelon.
Some parties may use consent requirements or other rights to seek to terminate contracts or obtain more favorable contractual terms from us, which, for example, could take the form of adverse price changes, require us to expend additional resources in order to obtain the services or assets previously provided under the contract, or require us to seek arrangements with new third parties or obtain letters of credit or other forms of credit support. If we are unable to obtain required consents or approvals, we may be unable to obtain the contractual commitments that are intended to be allocated to us as part of our separation from Exelon, and we may be required to seek alternative arrangements to obtain services and assets which may be more costly and/or of lower quality. The termination or modification of these contracts or the failure to timely complete the transfer or separation of these contracts could negatively impact our business, financial condition, results of operations and cash flows.
Risks Related to Our Common Stock
We cannot be certain that an active trading market for our common stock will develop or be sustained after the separation, and following the separation, our stock price may fluctuate significantly.
A public market for our common stock does not currently exist. We anticipate that on or prior to the record date for the distribution, trading of shares of our common stock will begin on a “when-issued” basis and will continue through the distribution date. However, we cannot guarantee that an active trading market will develop or be sustained for our common stock after the separation. If an active trading market does not develop, you may have difficulty selling your shares of common stock at an attractive price, or at all. In addition, we cannot predict the prices at which shares of our common stock may trade after the separation.
Similarly, we cannot predict the effect of the separation on the trading prices of our common stock. After the distribution, Exelon’s common stock will continue to be listed and traded on NASDAQ under the symbol “EXC.” Subject to the consummation of the separation, we expect our common stock to be listed and traded on NASDAQ under the symbol “ .” The combined trading prices of the shares of our common stock and Exelon common stock after the separation, as adjusted for any changes in the combined capitalization of these companies, may not be equal to or greater than the trading prices of Exelon’s common stock prior to the separation. Until the market has fully evaluated the business of Exelon without our business, and fully evaluated us, the price at which Exelon’s or our common stock trades may fluctuate significantly.
Many factors could cause the market price of our common stock to rise and fall, including the following:
|·||our business profile and market capitalization may not fit the investment objectives of Exelon’s current shareholders, causing a shift in our investor base, and our common stock may not be included in some indices in which Exelon’s common stock is included, causing certain holders to sell their common stock;|
|·||our announcements or our competitors’ announcements regarding new products or services, enhancements, significant contracts, acquisitions or strategic investments;|
|·||fluctuations in our quarterly or annual financial results or the quarterly or annual financial results of companies perceived to be similar to us;|
|·||the failure of securities analysts to cover our common stock after the separation;|
|·||changes in earnings estimates or recommendations by securities analysts or our ability to meet those estimates;|
|·||the operating and stock price performance of other comparable companies;|
|·||investors’ general perception of us and our industry;|
|·||changes to the regulatory and legal environment under which we operate;|
|·||changes in general economic and market conditions;|
|·||changes in industry conditions; and|
|·||the other factors described in this “Risk Factors” section and elsewhere in this information statement.|
In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if successfully defended, could be costly to defend and a distraction to management.
A significant number of shares of our common stock may be sold following the distribution, which may cause our stock price to decline.
Any sales of substantial amounts of our common stock in the public market or the perception that such sales might occur, in connection with the distribution or otherwise, may cause the market price of our common stock to decline. Upon completion of the distribution, we expect that we will have an aggregate of approximately shares of our common stock issued and outstanding (based on shares of Exelon common stock outstanding as of , 2022). Shares distributed to Exelon shareholders in the separation will generally be freely tradeable without restriction or further registration under the U.S. Securities Act of 1933, as amended (the “Securities Act”), except for shares owned by one of our “affiliates,” as that term is defined in Rule 405 under the Securities Act.
We are unable to predict whether large amounts of our common stock will be sold in the open market following the distribution. We are also unable to predict whether a sufficient number of buyers of our common stock to meet the demand to sell shares of our common stock at attractive prices would exist at that time.
Your percentage of ownership in us may be diluted in the future.
In the future, your percentage ownership in us may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including any equity awards that we will grant to our directors, officers and employees. Our employees will have stock-based awards that correspond to shares of our common stock after the distribution as a result of conversion of their Exelon stock-based awards. We anticipate that the compensation committee of our board of directors may grant additional stock-based awards to our employees after the distribution. Those awards will have a dilutive effect on the number of our shares outstanding, and therefore on our earnings per share, which could adversely affect the market price of our common stock. From time to time, we will issue additional stock-based awards to our employees under our employee benefits plans.
Anti-takeover provisions could enable us to resist a takeover attempt by a third party.
Our amended and restated articles of incorporation and amended and restated bylaws will contain, and Pennsylvania law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and to encourage prospective acquirers to negotiate with our board of directors rather than to attempt a hostile takeover.
We believe these provisions will protect our shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers; however, these provisions will apply even if the offer may be considered beneficial by some shareholders and could delay or prevent an acquisition that our board of directors determines is not in the best interests of us and our shareholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors. See “Description of Common Stock — Certain Anti-Takeover Provisions.”
In addition, an acquisition or further issuance of our stock could trigger the application of Section 355(e) of the IRC, causing the distribution to be taxable to Exelon. For a discussion of Section 355(e) of the IRC, see “The Separation — Material U.S. Federal Income Tax Consequences of the Separation.” Under the tax matters agreement, we would be required to indemnify Exelon for the resulting tax, and this indemnity obligation might discourage, delay or prevent a change of control that our shareholders may consider favorable.
The combined post-separation value of share of our common stock and one share of Exelon common stock may not equal or exceed the pre-distribution value of one share of Exelon common stock.
As a result of the separation, we expect the trading price of shares of Exelon common stock immediately following the separation to be different from the “regular-way” trading price of Exelon common shares immediately prior to the separation because the trading price will no longer reflect the value of our businesses. There can be no assurance that the aggregate market value of share of our common stock and one share of Exelon common stock following the separation will be higher than, lower than or the same as the market value of a share of Exelon common stock if the separation did not occur.
On February 21, 2021, Exelon’s board of directors unanimously authorized management to pursue a plan to separate the Company from Exelon. The board considered a sale of Exelon’s competitive generation and customer-facing business as a possible alternative, but ultimately decided that a separation was the most efficient way to separate its businesses in a manner intended to enhance long-term value to Exelon’s shareholders.
As a result of that separation, the Company will become a separate, publicly-traded company, and Exelon will have no continuing stock ownership interest in the Company. Prior to the separation, Exelon will effect several internal transactions. See “—Manner of Effecting the Separation—Internal Transactions.”
To complete the separation, Exelon will, following the completion of the internal transactions, distribute to Exelon shareholders all of the outstanding shares of our common stock. The distribution will occur on the distribution date, which is expected to be , 2022. Each holder of Exelon common stock will receive share of our common stock for every share of Exelon common stock held at p.m. Eastern Time, on , 2022, the record date. After completion of the distribution:
|·||We will be a publicly-traded company (NASDAQ: ) and, through Generation, will own Exelon’s competitive generation and customer-facing energy businesses; and|
|·||Exelon will continue to be a publicly-traded company (NASDAQ: EXC) and will continue to own and conduct its regulated electric distribution and transmission and gas distribution businesses.|
Each holder of Exelon common stock will continue to hold his, her or its shares in Exelon. No vote of Exelon shareholders is required or is being sought in connection with the separation, and Exelon shareholders will not have any appraisal rights in connection with the separation.
The distribution is subject to the satisfaction or waiver of certain conditions. In addition, until the distribution has occurred, Exelon’s board of directors has the right not to proceed with the distribution, even if all of the conditions are satisfied. See “—Conditions to the Distribution.”
Reasons for the Separation
Exelon is comprised of six regulated utility operating companies that together serve more than 10 million customers, and Generation, an electricity producer and a competitive energy retailer. The utility operating companies provide electricity transmission and distribution and gas distribution services within relatively defined geographic areas under service terms, conditions and rates that are regulated by public utility commissions based on each utility’s investment in plant, property and equipment, referred to as rate base, and their operating costs. Generation generates electricity primarily from nuclear generating plants and sells electricity and natural gas to wholesale and retail customers within a broad geographic area under service terms, conditions and prices determined by competitive market forces.
The Exelon board of directors believes that the separation of the competitive generation and customer-facing businesses from the regulated utility businesses is in the best interest of Exelon and its shareholders for a number of reasons, including:
|·||Direct investment identity—Exelon’s board of directors believes that Exelon’s regulated utility businesses and our competitive businesses appeal to different types of investors with different industry focuses, investment goals and risk profiles. The utility and competitive businesses have different investment and business characteristics, including different opportunities for growth, capital structures, business models and financial returns. The separation will better position each business within its peer set and will support business strategies tailored to distinct investment profiles and meeting unique customer needs.|
|·||More specialized strategic focus —The separation will allow each company to more effectively pursue its own distinct operating priorities and strategies and will enable the management of both companies to respond to changes in the industry in which operates, pursue separate opportunities for long-term growth and profitability, without taking into account potentially conflicting or competing needs and objectives of two disparate businesses operating in a single company. This ability will unlock strategic flexibility for each company to focus on its core business strategies to better meet evolving customer needs and stakeholder goals. As a standalone company, the Company may be able to pursue investments or acquisitions in the competitive energy infrastructure space that Exelon’s current shareholders would not find attractive as it would increase Exelon’s exposure to non-regulated businesses.|
|·||More efficient allocation of capital — The separation will permit each company to concentrate its financial resources solely on its own operations, providing greater flexibility to invest capital in its business in a time and manner appropriate for its distinct strategy and business needs, all of which will facilitate a more efficient allocation of capital|
|·||Allows each business to maintain risk profiles more appropriate for their shareholders — The competitive generation and customer-facing energy businesses of Exelon are exposed to certain market risks, including, in the near term, the volatility in the price of power, natural gas and other commodities. As operated today, the competitive businesses are substantially hedged in the near-term against certain commodity risks, because commodity price movements could adversely affect Exelon’s near-term earnings, cash flows and credit ratings if Exelon were substantially unhedged. The Company will be committed to disciplined risk-mitigation policies, including a ratable hedging strategy, and Exelon’s board of directors believes that separating the Company from the regulated utilities of Exelon will give our management further flexibility to manage our risk.|
|·||Aligns management incentives — The separation will permit the creation of equity-based incentive compensation programs for each of the companies that is expected to reflect more closely the efforts and performance of each company’s management and will allow each company to better recruit, retain and motivate employees pursuant to compensation policies that are appropriate for their respective lines of business.|
For information about risks related to the separation, see the “Risk Factors – Risks Relating to Our Separation from Exelon” beginning on page 31 of this information statement. Neither Exelon nor we can assure you that, following the separation, any of the benefits described above or otherwise will be realized to the extent anticipated or at all.
Manner of Effecting the Separation
The general terms and conditions relating to the separation will be set forth in a separation agreement between us and Exelon, which we refer to as the separation agreement.
We were incorporated as a Pennsylvania corporation on June 15, 2021 for the purpose of holding Generation and its competitive generation and customer-facing energy businesses.
Immediately prior to the separation:
|·||Generation will repay to Exelon an intercompany note expected to have an outstanding principal amount of $258 million.|
|·||Exelon will contribute its equity ownership in Generation, including its subsidiaries, to us.|
Distribution of Shares of Our Common Stock
Under the separation agreement, the distribution will be effective as of 12:01 a.m. Eastern time, on , 2022, the distribution date. As a result of the separation, on the distribution date, each holder of Exelon common stock will receive share of our common stock for every share of Exelon common stock that he, she or it owns as of p.m. Eastern time, on , 2022, the record date. The actual number of shares to be distributed will be determined based on the number of shares of Exelon common stock outstanding as of the record date. The shares of our common stock to be distributed by Exelon will constitute all of the issued and outstanding shares of our common stock held by Exelon immediately prior to the distribution.
On the distribution date, Exelon will release the shares of our common stock to the Distribution Agent to distribute to Exelon shareholders. The Distribution Agent will credit the shares of our common stock to the book-entry accounts of Exelon shareholders established to hold their shares of our common stock. The Distribution Agent will send these shareholders a statement reflecting their ownership of our common stock. Book-entry refers to a method of recording stock ownership in our records in which no physical certificates are issued. For shareholders who own Exelon common stock through a broker or other nominee, their shares of our common stock will be credited to these shareholders’ accounts by the broker or other nominee. It may take the Distribution Agent up to two weeks to distribute shares of our common stock to Exelon shareholders or to their bank or brokerage firm electronically by way of direct registration in book-entry form. Trading of our stock will not be affected by this delay in distribution by the Distribution Agent.
Exelon shareholders will not be required to make any payment or surrender or exchange their shares of Exelon common stock or take any other action to receive their shares of our common stock.
No vote of Exelon shareholders is required or sought in connection with the separation. Exelon shareholders have no appraisal rights in connection with the separation.
Treatment of Fractional Shares
The Distribution Agent will not distribute any fractional shares of our common stock to Exelon shareholders. Instead, as soon as practicable on or after the distribution date, the Distribution Agent will aggregate fractional shares of our common stock to which Exelon shareholders of record would otherwise be entitled into whole shares, sell them in the open market at the prevailing market prices and then distribute the aggregate net sale proceeds ratably to Exelon shareholders who would otherwise have been entitled to receive fractional shares of our common stock. The amount of this payment will depend on the prices at which the Distribution Agent sells the aggregated fractional shares of our common stock in the open market shortly after the distribution date and will be reduced by any amount required to be withheld for tax purposes and any brokerage fees and other expenses incurred in connection with these sales of fractional shares. Receipt of the proceeds from these sales generally will result in a taxable gain or loss to those Exelon shareholders. Each shareholder entitled to receive cash proceeds from these shares should consult his, her or its own tax advisor as to the shareholder’s particular circumstances. The tax consequences of the distribution are described in more detail under “—Material U.S. Federal Income Tax Consequences of the Separation.”
Transaction and Separation Costs
In connection with the separation, we currently estimate that the one-time separation costs we will incur, primarily employee-related costs such as recruitment expenses, costs to establish certain stand-alone functions and information technology systems, professional services fees and other transaction-related costs during our transition to being a stand-alone public company, will range from approximately $ to $ .
Material U.S. Federal Income Tax Consequences of the Separation
The following is a summary of the material U.S. federal income tax consequences to the U.S. Holders (as defined below) of shares of Exelon common stock in connection with the distribution and certain related transactions. This summary is based on the IRC, the Treasury regulations promulgated thereunder, and judicial and administrative interpretations thereof, all as in effect as of the date of this information statement, and all of which are subject to differing interpretations and may change at any time, possibly with retroactive effect. Any such change could affect the tax consequences described below. This summary assumes that the separation will be consummated in accordance with the separation agreement and as described in this information statement.
This summary is limited to holders of shares of Exelon common stock that are U.S. Holders, as defined immediately below. For purposes of this summary, a U.S. Holder is a beneficial owner of Exelon common stock that is, for U.S. federal income tax purposes:
|·||an individual who is a citizen or a resident of the United States;|
|·||a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized under the laws of the United States or any state thereof or the District of Columbia;|
|·||an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or|
|·||a trust (i) with respect to which a court within the United States is able to exercise primary jurisdiction over its administration and one or more U.S. persons (within the meaning of Section 7701(a)(30) of the IRC) have the authority to control all of its substantial decisions, or (ii) that has a valid election in place under applicable Treasury regulations to be treated as a U.S. person.|
This summary does not discuss all tax considerations that may be relevant to Exelon shareholders in light of their particular circumstances, nor does it address the consequences to Exelon shareholders subject to special treatment under the U.S. federal income tax laws, including:
|·||a financial institution, regulated investment company or insurance company;|
|·||a tax-exempt organization;|
|·||a dealer or broker in securities, commodities or foreign currencies;|
|·||a holder that holds Exelon common stock as part of a hedge, appreciated financial position, straddle, conversion or other risk reduction transaction;|
|·||a holder that holds Exelon common stock in a tax-deferred account, such as an individual retirement account; or|
|·||a holder that acquired Exelon common stock pursuant to the exercise of options or similar derivative securities or otherwise as compensation.|
This summary also does not address the U.S. federal income tax consequences to Exelon shareholders who do not hold shares of Exelon common stock as a capital asset. Moreover, this summary does not address any state, local or non-U.S. tax consequences, or any federal tax other than U.S. federal income tax consequences (such as estate or gift tax consequences or the Medicare tax on certain investment income).
If a partnership (or any other entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds shares of Exelon common stock, the tax treatment of a partner in that partnership generally will depend on the status of the partner and the activities of the partner and the partnership. Such a partner or partnership is urged to consult its tax advisor as to the tax consequences of the separation.
WE URGE YOU TO CONSULT WITH YOUR TAX ADVISOR AS TO THE SPECIFIC U.S. FEDERAL, STATE AND LOCAL, AND NON-U.S. TAX CONSEQUENCES OF THE SEPARATION IN LIGHT OF YOUR PARTICULAR CIRCUMSTANCES.
Treatment of the Separation
Completion of the separation is conditioned upon Exelon’s receipt of the IRS Ruling and an opinion from its counsel, Sidley Austin LLP, together substantially to the effect that the distribution, together with certain related transactions, will qualify as a tax-free reorganization under Sections 355 and 368(a)(1)(D) of the IRC.
Although a private letter ruling from the IRS is generally binding on the IRS, the IRS Ruling, if received from the IRS, will rely on certain facts, assumptions, representations and undertakings from Exelon and us regarding the past and future conduct of Exelon’s and our business, among other matters. Moreover, the IRS Ruling will not be a comprehensive ruling regarding all aspects of the U.S. federal income tax consequences of the separation and distribution. The opinion of counsel, if received from Exelon’s counsel, will also rely on certain facts, assumptions and covenants, as described therein, as well as on the validity of the IRS Ruling. In addition, Exelon’s counsel’s ability to provide an opinion will depend on the absence of changes in existing facts or law between the date of this information statement and the closing date of the separation. The opinion of counsel will not be binding on the IRS or the courts, and the IRS or the courts may not agree with such opinion.
Even if Exelon receives the IRS Ruling and opinion of counsel, the IRS could determine on audit that the distribution or any of certain related transactions is taxable if it determines that any of the facts, assumptions, representations or undertakings upon which such ruling and opinion rely are not correct or have been violated or if it disagrees with the conclusions in the opinion that are not covered by the IRS Ruling, or for other reasons, including as a result of certain significant changes in the stock ownership of Exelon or us after the distribution. If, notwithstanding the IRS Ruling and the opinion of counsel, it is ultimately determined that the distribution, together with certain related transactions, do not qualify as tax-free under Sections 355 and 368(a)(1)(D) of the IRC, then Exelon or we could incur significant U.S. federal income tax liabilities attributable to the separation and distribution. In addition, if the distribution does not qualify as tax-free under Section 355 of the Code, each Exelon shareholder that receives shares of our common stock in the distribution would be treated as receiving a distribution in an amount equal to the fair market value of our common stock that was distributed to the shareholder, which would generally be taxed as a dividend to the extent of the shareholder’s pro rata share of Exelon’s current and accumulated earnings and profits, including Exelon’s taxable gain, if any, on the separation, then treated as a non-taxable return of capital to the extent of the shareholder’s basis in the Exelon stock and thereafter treated as capital gain from the sale or exchange of Exelon common stock. Under current U.S. federal income tax law, certain non-corporation citizens or residents of the United States (including individuals) currently are subject to U.S. federal income tax on dividends (assuming certain holding period requirements are met) and long-term capital gains (i.e., capital gains on assets held for more than one year) at reduced rates.
Assuming that the distribution, together with certain related transactions, will qualify for tax-free treatment, and subject to the qualifications and limitations set forth herein (including the discussion below relating to the receipt of cash in lieu of fractional shares), for U.S. federal income tax purposes:
|·||no gain or loss will be recognized by Exelon on the distribution;|
|·||no gain or loss will be recognized by, or be includible in the income of, a U.S. Holder solely as a result of the receipt of our common stock in the distribution;|
|·||the aggregate tax basis of the shares of Exelon common stock and shares of our common stock, including any fractional share deemed received, in the hands of each U.S. Holder immediately after the distribution will be the same as the aggregate tax basis of the shares of Exelon common stock held by such holder immediately before the distribution, allocated between the shares of Exelon common stock and shares of our common stock, including any fractional share deemed received, in proportion to their relative fair market values immediately following the distribution; and|
|·||the holding period with respect to shares of our common stock received by U.S. Holders will include the holding period of their shares of Exelon common stock, provided that such shares of Exelon common stock are held as capital assets immediately following the distribution.|
U.S. Holders that have acquired different blocks of Exelon common stock at different times or at different prices are urged to consult their tax advisors regarding the allocation of their aggregate adjusted basis among, and their holding period of, our common stock and Exelon common stock.
If a U.S. Holder receives cash in lieu of a fractional share of our common stock as part of the distribution, the U.S. Holder will be treated as though it first received a distribution of the fractional share in the distribution and then sold it for the amount of cash actually received. Such U.S. Holder will generally recognize capital gain or loss measured by the difference between the cash received for such fractional share and the U.S. Holder’s tax basis in that fractional share, as determined above. Such capital gain or loss will be long-term capital gain or loss if the U.S. Holder’s holding period for the Exelon common stock exceeds one year on the date of the distribution. The deductibility of capital losses is subject to significant limitations.
Even if the distribution otherwise qualifies for tax-free treatment under Section 355 of the Code, the separation may result in corporate level taxable gain to Exelon under Section 355(e) of the IRC if 50% or more, by vote or value, of the Exelon stock or our stock is treated as directly or indirectly acquired or issued as part of a plan or series of related transactions that includes the distribution (including as a result of transactions occurring before the separation). The process for determining whether an acquisition or issuance triggering these provisions has occurred is complex, inherently factual and subject to interpretation of the facts and circumstances of a particular case, and any such acquisitions may not be within our or Exelon’s control. For this purpose, any acquisitions or issuances of Exelon stock within two years before the day of the distribution, and any acquisitions or issuances of our stock or Exelon stock within two years after the day of the distribution generally are presumed to be part of such a plan (subject to certain exceptions and safe harbors), although we or Exelon, as applicable, may be able to rebut that presumption. If an acquisition or issuance of our stock or Exelon stock triggers the application Section 355(e) of the IRC, Exelon could incur significant U.S. federal income tax liabilities attributable to the distribution and certain related transactions, but the distribution would generally be tax-free to each of Exelon shareholders, as described above. Under some circumstances, the tax matters agreement would require us to indemnify Exelon for such tax liability associated with the taxable gain.”
U.S. Treasury regulations require certain Exelon shareholders who receive our common stock in the distribution and, immediately prior to the distribution, own (i) at least 5% of the total outstanding stock of Exelon, or (ii) securities of Exelon with an aggregate basis of $1 million or more, to attach to their U.S. federal income tax return for the year in which our stock is received a detailed statement setting forth certain information relating to the tax-free nature of the distribution. U.S. Holders are urged to consult their tax advisors to determine whether they are required to provide the foregoing statement and the contents thereof.
Under the tax matters agreement, we will generally be required to indemnify Exelon for the resulting taxes in the event that the distribution and/or related transactions fail to qualify for their intended tax treatment due to any action by us or any of our subsidiaries. If the distribution were to be taxable to Exelon, the liability for payment of such tax by Exelon or by us under the tax matters agreement could have a material adverse effect on Exelon or us, as the case may be.
WE URGE YOU TO CONSULT WITH YOUR TAX ADVISOR AS TO THE SPECIFIC U.S. FEDERAL, STATE AND LOCAL, AND NON-U.S. TAX CONSEQUENCES OF THE SEPARATION IN LIGHT OF YOUR PARTICULAR CIRCUMSTANCES.
Results of the Separation
After the separation, we will be a publicly-traded company. Immediately following the separation, we expect to have approximately record holders of shares of our common stock and approximately shares of our common stock outstanding, based on the number of shareholders and outstanding shares of Exelon common stock on , 2022, and assuming each holder of Exelon common stock will receive share of our common stock for every share of Exelon common stock. The actual number of shares to be distributed will be determined as of the record date.
We are in the process of determining the treatment of Exelon equity awards in connection with the separation. The treatment of equity awards will be described in greater detail in a subsequent amendment to the registration statement of which this information statement forms a part. For information regarding the treatment of equity awards of the Company’s directors and executive officers after the distribution, see “Certain Relationships and Related Party Transactions—Agreements with Exelon Related to the Separation—Employee Matters Agreement” and “Management.”
We are in the process of determining the treatment of bonuses in connection with the separation, in respect of (i) the current performance year, (ii) any pre-existing awards that have been earned but that remain unpaid, and (iii) any go-forward bonus programs and/or arrangements. The treatment of bonuses will be described in greater detail in a subsequent amendment to the registration statement of which this information statement forms a part.
Before the separation, we will enter into several agreements with Exelon to effect the separation and provide a framework for our relationship with Exelon after the separation. These agreements will govern the relationship between us and Exelon after completion of the separation and provide for the allocation between us and Exelon of the assets, liabilities, rights and obligations of Exelon. See “Certain Relationships and Related Party Transactions—Agreements with Exelon Related to the Separation.”
Trading Prior to the Distribution Date
See “Trading Market – Trading Prior to the Distribution Date” for information regarding trading in our common stock and Exelon’s common stock prior to the distribution date.
Conditions to the Distribution
We expect that the distribution will be effective as of 12:01 a.m. Eastern time, on , 2022, the distribution date. The distribution is subject to the satisfaction, or waiver by Exelon, of the following conditions:
|·||the final approval of the distribution by Exelon’s board of directors, which approval may be given or withheld in its absolute and sole discretion;|
|·||our registration statement on Form 10, of which this information statement forms a part, shall have been declared effective by the SEC, with no stop order in effect with respect thereto;|
|·||the mailing by Exelon of this information statement (or notice of internet availability thereof) to record holders of Exelon common stock as of the record date;|
|·||our common stock shall have been approved for listing on NASDAQ, subject to official notice of distribution;|
|·||Exelon shall have received the IRS Ruling and an opinion of its counsel, Sidley Austin LLP, together substantially to the effect that the distribution, together with certain related transactions, will qualify as a tax-free reorganization under Sections 355 and 368(a)(1)(D) of the IRC;|
|·||the following governmental approvals and any required material governmental approvals and other consents necessary to consummate the distribution or any portion thereof shall have been obtained and be in full force and effect:|
|·||NRC consent and approval to indirectly transfer and to amend the nuclear facility operating licenses,|
|·||FERC approval to indirectly transfer control of facilities subject to its jurisdiction, through the upstream change in ownership resulting from the separation, and|
|·||NYPSC approval of the change in the ultimate upstream ownership of three nuclear plants (FitzPatrick, Nine Mile Point and Ginna) located in New York;|
|·||the absence of any events or developments having occurred prior to the distribution that, in the judgment of Exelon’s board of directors, would result in the distribution having a material adverse effect on Exelon or its shareholders;|
|·||our adoption of amended and restated articles of incorporation and amended and restated bylaws and the filing of those documents with the SEC as exhibits to the registration statement on Form 10, of which this information statement forms a part;|
|·||no order, injunction or decree issued by any governmental entity of competent jurisdiction or other legal restraint or prohibition preventing the consummation of all or any portion of the distribution shall be in effect, and no other event shall have occurred or failed to occur that prevents the consummation of all or any portion of the distribution;|
|·||the internal transactions shall have been completed, except for such steps as Exelon in its sole discretion shall have determined may be completed after the distribution date; and|
|·||each of the separation agreement, the tax matters agreement, the employee matters agreement, the transition services agreement and the other ancillary agreements shall have been executed and delivered by each party thereto and be in full force and effect.|
We are not aware of any material federal, foreign or state regulatory requirements that must be complied with or any material approvals that must be obtained in connection with the distribution and separation, other than the aforementioned approvals of the NRC, FERC and NYPSC; compliance with SEC rules and regulations; approval for listing on NASDAQ; and the declaration of effectiveness of the registration statement on Form 10, of which this information statement forms a part, by the SEC. Some of these conditions may not be met and Exelon may waive any of the conditions to the distribution. In addition, until the distribution has occurred, Exelon’s board of directors has the right to not proceed with the distribution, even if all of the conditions are satisfied. In the event Exelon’s board of directors determines to waive a material condition to the distribution, to modify a material term of the distribution or not to proceed with the distribution, Exelon intends to promptly issue a press release or other public announcement and file a Current Report on Form 8-K to report such event.
Reasons for Furnishing this Information Statement
This information statement is being furnished solely to provide information to Exelon shareholders that are entitled to receive shares of Company common stock in the distribution. This information statement is not, and is not to be construed as, an inducement or encouragement to buy, hold or sell any of our securities or any securities of Exelon. We believe that the information in this information statement is accurate as of the date set forth on the cover. Changes may occur after that date and neither Exelon nor we undertake any obligation to update the information.
We intend to list our common stock on NASDAQ under the ticker symbol “ .”
Trading Prior to the Distribution Date
Beginning shortly before the record date and continuing up to and including the distribution date, we expect that a limited market, commonly known as a “when-issued” trading market, will develop in our common stock. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for shares of our common stock that will be distributed to Exelon shareholders on the distribution date. If you own shares of Exelon common stock at p.m. Eastern time, as of the record date, you will be entitled to shares of our common stock distributed pursuant to the distribution. You may trade this entitlement to shares of our common stock, without trading the shares of Exelon common stock you own, on the “when-issued” market. On the first trading day following the distribution date, “when-issued” trading with respect to our common stock will end and “regular-way” trading will begin. We will announce our when-issued trading symbol when and if it becomes available.
It is also anticipated that, beginning shortly before the record date and continuing up to and including the distribution date, there will be two markets in Exelon common stock: a “regular-way” market and an “ex-distribution” market. Shares of Exelon common stock that trade on the “regular-way” market will trade with an entitlement to shares of Company common stock distributed pursuant to the distribution. Shares that trade on the “ex-distribution” market will trade without an entitlement to shares of our common stock distributed pursuant to the distribution. Therefore, if you own shares of Exelon common stock at the close of business on the record date and sell those shares on the “regular-way” market before the distribution date, you will be selling your right to receive shares of our common stock in connection with the distribution. If you own shares of Exelon common stock at the close of business on the record date and sell those shares on the “ex-distribution” market before the distribution date, you will still receive the shares of our common stock that you would be entitled to receive pursuant to your ownership of the shares of Exelon common stock on the record date. However, if Exelon shareholders own shares of Exelon common stock at p.m. Eastern time, as of the record date and sell those shares on the “ex-distribution” market up to and including the distribution date, the selling shareholders will still receive the shares of our common stock that they would otherwise receive pursuant to the distribution.
Market for Our Common Stock
There is currently no public market for our common stock and an active trading market may not develop or may not be sustained.
We cannot predict the prices at which our common stock may trade before the separation on a “when-issued” basis or after the distribution and separation. Those prices will be determined by the marketplace. Prices at which trading in our common stock occurs may fluctuate significantly. Those prices may be influenced by many factors, including anticipated or actual fluctuations in our operating results or those of other companies in our industry, investor perception of the Company and the retail power and gas and power generation business, market fluctuations and general economic conditions. In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the performance of many stocks and that have often been unrelated or disproportionate to the operating performance of these companies. These are just some factors that may adversely affect the market price of our common stock. See “Risk Factors—Risks Related to Our Common Stock” for further discussion of risks relating to the trading prices of our common stock.
Transferability of Shares of Our Common Stock
On , 2022, Exelon Corporation had approximately million shares of its common stock issued and outstanding. Based on this number, we expect that upon completion of the distribution, we will have approximately million shares of common stock issued and outstanding. The shares of our common stock that you will receive in the distribution will be freely transferable, unless you are considered an “affiliate” of ours under Rule 144 under the Securities Act. Persons who can be considered our affiliates after the distribution generally include individuals or entities that directly, or indirectly through one or more intermediaries, control, are controlled by, or are under common control with, us, and may include certain of our officers and directors. As of the distribution date, we estimate that our directors and officers will beneficially own in the aggregate less than percent of our shares. In addition, individuals who are affiliates of Exelon on the distribution date may be deemed to be affiliates of ours. Our affiliates may sell shares of our common stock received in the distribution only:
|·||under a registration statement that the SEC has declared effective under the Securities Act; or|
|·||under an exemption from registration under the Securities Act, such as the exemption afforded by Rule 144.|
In general, under Rule 144 as currently in effect, an affiliate will be entitled to sell, within any three-month period commencing 90 days after the date that the registration statement of which this information statement is a part is declared effective, a number of shares of our common stock that does not exceed the greater of:
|·||1.0% of our common stock then outstanding; or|
|·||the average weekly trading volume of our common stock on NASDAQ during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.|
Sales under Rule 144 are also subject to restrictions relating to manner of sale and the availability of current public information about us.
In the future, we expect to adopt new equity-based compensation plans and issue stock-based awards. We currently expect to file a registration statement under the Securities Act to register shares to be issued under these equity plans. Shares issued pursuant to awards after the effective date of that registration statement, other than shares issued to affiliates, generally will be freely tradable without further registration under the Securities Act.
Except for our common stock distributed in the distribution and employee-based equity awards, we will have no equity securities outstanding immediately after the separation.
We have not made a decision on whether we will pay dividends on our common stock. Any decision to declare and pay dividends will be made at the sole discretion of our board of directors and will depend on a number of factors, including:
|·||our historic and projected financial condition, liquidity and results of operations;|
|·||our capital levels and needs;|
|·||any acquisitions or potential acquisitions that we may consider;|
|·||statutory and regulatory prohibitions and other limitations;|
|·||the terms of any credit agreements or other borrowing arrangements that restrict our ability to pay cash dividends;|
|·||general economic conditions; and|
|·||other factors deemed relevant by our board of directors.|
As a Pennsylvania corporation, we will be subject to certain restrictions on dividends under Pennsylvania corporate law. Generally, a corporation may only pay dividends under the Pennsylvania Business Corporation Law if the total assets of the corporation would be more than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time as of which the distribution is measured, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.
The following table presents Generation’s unaudited cash and capitalization as of December 31, 2020 on a historical basis, and our unaudited cash and capitalization as of December 31, 2020 on a pro forma basis to give effect to the distribution and separation as if it occurred on December 31, 2020. You can find an explanation of the pro forma adjustments made to the historical combined financial statements under “Unaudited Pro Forma Condensed Consolidated Financial Statements.” The capitalization table below should be read together with “Unaudited Pro Forma Condensed Consolidated Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and accompanying notes included in the “Index to Consolidated Financial Statements” section of this information statement.
We are providing the capitalization table below for informational purposes only. The capitalization table below may not reflect the capitalization or financial condition that would have resulted had we been operated as a stand-alone public company at that date and is not necessarily indicative of our future capitalization or financial condition.
We have not yet finalized our post-separation capitalization. We intend to update and include pro forma financial information reflecting our post-separation capitalization in an amendment to this information statement.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On February 21, 2021, Exelon’s board of directors authorized management to pursue a plan to separate its competitive generation and customer-facing energy businesses into a stand-alone publicly traded company. The separation will occur through a distribution to Exelon’s shareholders of all of the shares of common stock of the Company, which will own Generation, including its competitive generation, customer-facing power and gas supply, and related businesses. Following the distribution, Exelon shareholders will own 100% of the shares of our common stock.
The unaudited pro forma condensed consolidated financial statements have been derived from the historical audited consolidated financial statements of Generation, included elsewhere in this information statement. The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2020 gives effect to the separation and related transactions, including the purchase of the noncontrolling interest in CENG, as if they had occurred on January 1, 2020, the beginning of the most recent fiscal year for which audited financial statements are available. The unaudited pro forma condensed consolidated balance sheet as of December 31, 2020 gives effect to the separation and related transactions, including the purchase of the noncontrolling interest in CENG, as if they had occurred on December 31, 2020.
The unaudited pro forma condensed consolidated financial statements were prepared in accordance with Article 11 of Regulation S-X. The unaudited pro forma condensed consolidated financial statements were prepared for illustrative and informational purposes only and are not intended to represent what our results of operations or financial position would have been had the separation and the purchase of the noncontrolling interest in CENG occurred on the dates indicated. The unaudited pro forma condensed consolidated financial statements also should not be considered indicative of our future results of operations or financial position as an independent, publicly traded company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors. See “Cautionary Note Regarding Forward-Looking Statements” included in this information statement. The unaudited pro forma condensed consolidated financial information does not reflect the realization of any expected cost savings or other synergies as a result of the separation and related transactions, including the purchase of the noncontrolling interest in CENG.
On November 20, 2019, Generation received notice that, pursuant to an April 1, 2014 Put Option Agreement, EDF intended to exercise its put option to sell to Generation its 49.99% equity interest in CENG. Following the required sixty-day notice period, the put option was automatically exercised on January 19, 2020. On August 6, 2021, Generation and EDF entered into a settlement agreement pursuant to which Generation, through a wholly owned subsidiary, purchased EDF’s equity interest in CENG for a net purchase price of $885 million, which includes, among other things, a credit for EDF’s share of the balance of a preferred distribution payable by CENG to Generation. The difference between the net purchase price and EDF’s noncontrolling interest as of the closing date will be recorded to Membership interest on our Consolidated Balance Sheet.
The following unaudited pro forma condensed consolidated statement of operations and unaudited pro forma condensed consolidated balance sheet give pro forma effect to the following:
Separation transaction accounting adjustments
|·||the issuance of shares of the Company’s common stock based on the current assumption of one share of our common stock for each share of Exelon common stock outstanding on the record date for the pro rata distribution (and will be adjusted in accordance with the final distribution ratio).|
|·||the impact of the separation agreement, employee matters agreement, tax matters agreement and the provisions therein.|
CENG put transaction adjustments
|·||the purchase of 49.99% noncontrolling interest in CENG from EDF in accordance with the Put Option Agreement, including the establishment of a deferred tax liability and the issuance of approximately $880 million under a term loan credit agreement to fund the transaction.|
|·||the adjustment of the provision (benefit) for income taxes related to the taxation of income previously attributable to noncontrolling interest holders.|
Autonomous entity adjustments
|·||the incremental costs that the Company expects to incur as an independent, separate public company under the transition services agreement.|
The following unaudited pro forma condensed consolidated financial statements should be read in conjunction with:
|·||Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are included elsewhere within this information statement.|
|·||the historical audited consolidated financial statements and accompanying notes of Generation as of and for the year ended December 31, 2020, which are included elsewhere within this information statement.|
|·||the accompanying notes to the pro forma financial information.|
Constellation Newholdco, Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
|For the Year Ended December 31, 2020|
|Pro Forma Adjustments (Note 2)|
|(In millions, except per share data)||Historical||Separation Transaction Accounting Adjustments||CENG Put Transaction Accounting Adjustments||Autonomous Entity Adjustments||Pro Forma|
|Operating revenues from affiliates||1,211||(1,211||)(e)||—|
|Total operating revenues||17,603||—||—||—||17,603|
|Purchased power and fuel||9,592||(7||)(e)||9,585|
|Purchased power and fuel from affiliates||(7||)||7||(e)||—|
|Operating and maintenance||4,613||555||(e)||[—]||(j)||5,168|
|Operating and maintenance from affiliates||555||(555||)(e)||—|
|Depreciation and amortization||2,123||2,123|
|Taxes other than income taxes||482||482|
|Total operating expenses||17,358||—||—||—||17,358|
|Gain on sales of assets and businesses||11||11|
|Other income and (deductions)|
|Interest expense, net||(328||)||[—]||(h)||(328||)|
|Interest expense to affiliates||(29||)||29||(b)||—|
|Total other income and (deductions)||580||29||—||—||609|
|Income before income taxes||836||29||—||—||865|
|Equity in losses of unconsolidated affiliates||(8||)||(8||)|
|Net (loss) income attributable to noncontrolling interests||(10||)||[—]||(h)||(10||)|
|Net income attributable to membership interest or common shareholders||589||29||—||—||618|
|Average shares of common stock outstanding (Note 3):|
|Earnings per average common share (Note 3):|
Constellation Newholdco, Inc.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
|As of December 31, 2020|
|Pro Forma Adjustments (Note 2)|
|(In millions)||Historical||Separation Transaction Accounting Adjustments||CENG Put Transaction Accounting Adjustments||Pro Forma|
|Cash and cash equivalents||$||226||[—]||(b)||[—]||(h)||$||226|
|Restricted cash and cash equivalents||89||89|
|Customer accounts receivable||1,330||153||(e)||1,483|
|Customer allowance for credit losses||(32||)||(32||)|
|Customer accounts receivable, net||1,298||153||—||1,451|
|Other accounts receivable||352||[—]||(f)||352|
|Other accounts receivable, net||352||—||—||352|
|Mark-to-market derivative assets||644||644|
|Receivables from affiliates||153||(153||)(e)||0|
|Unamortized energy contract assets||38||38|
|Fossil fuel and emission allowances||233||233|
|Materials and supplies||978||978|
|Renewable energy credits||621||621|
|Assets held for sale||958||958|
|Total current assets||6,947||—||—||6,947|
|Property, plant and equipment (net of accumulated depreciation and amortization of $13,370 as of December 31, 2020)||22,214||22,214|
|Deferred debits and other assets|
|Nuclear decommissioning trust funds||14,464||14,464|
|Mark-to-market derivative assets||555||555|
|Prepaid pension asset||1,558||[—]||(c)||1,558|
|Unamortized energy contract assets||293||293|
|Deferred income taxes||6||6|
|Total deferred debits and other assets||18,933||—||—||18,933|
Constellation Newholdco, Inc.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
|As of December 31, 2020|
|Pro Forma Adjustments (Note 2)|
|(In millions)||Historical||Separation Transaction Accounting Adjustments||CENG Put Transaction Accounting Adjustments||Pro Forma|
|LIABILITIES AND EQUITY|
|Long-term debt due within one year||197||197|
|Payables to affiliates||107||(107||)(e)||0|
|Borrowings from Exelon intercompany money pool||285||[—]||(b)||285|
|Mark-to-market derivative liabilities||262||262|
|Unamortized energy contract liabilities||7||7|
|Renewable energy credit obligation||661||661|
|Liabilities held for sale||375||375|
|Total current liabilities||5,219||—||—||5,219|
|Long-term debt to affiliates||324||[—]||(b)||324|
|Deferred credits and other liabilities|
|Deferred income taxes and unamortized investment tax credits||3,656||[—]||(c)||[—]||(h)||3,656|
|Asset retirement obligations||12,054||12,054|
|Non-pension postretirement benefit obligations||858||[—]||(c)||858|
|Spent nuclear fuel obligation||1,208||1,208|
|Contractual obligation for regulatory agreement units||—||3,017||(e)||3,017|
|Payables to affiliates||3,017||(3,017||)(e)||0|
|Mark-to-market derivative liabilities||205||205|
|Unamortized energy contract liabilities||3||3|
|Total deferred credits and other liabilities||22,309||—||—||22,309|
|Commitments and contingencies|
|Accumulated other comprehensive loss, net||(30||)||[—]||(a)||(30||)|
|Additional paid-in capital||—||[—]||(a)||0|
|Accumulated other comprehensive loss, net||—||[—]||(a)||—|
|Total member’s or shareholders' equity||12,399||—||—||12,399|
|Total liabilities and equity||$||48,094||—||—||$||48,094|
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
1. Basis of Presentation
The historical financial information as of and for the year ended December 31, 2020 is derived from and should be read in conjunction with the historical audited consolidated financial statements of Generation appearing elsewhere in this information statement and the assumptions outlined in Note 2 below.
2. Pro Forma Adjustments and Assumptions
Separation transaction accounting adjustments
|(a)||Reflects the issuance of shares of Company common stock based on share of Company common stock for each share of Exelon common stock outstanding on the record date for the pro rata distribution (and will be adjusted in accordance with the final distribution ratio) and reflects the elimination of historical membership interest and undistributed earnings.|
|(b)||Reflects the repayment of $609 million of intercompany debt between Generation and Exelon and the elimination of the related interest expense.|
|(c)||Reflects the estimated impact to prepaid asset, pension obligation and accumulated other comprehensive income resulting from the legal separation of the pension and OPEB plans, historically sponsored by Exelon and accounted for as multi-employer benefit plans, related to current and former Exelon employees transferred to the Company in accordance with the employee matters agreement.|
|(d)||Reflects the estimated impact to Operating and maintenance and Other, net for the presentation reclass of non-service cost components resulting from the legal separation of the pension and OPEB plans, historically sponsored by Exelon and accounted for as multi-employer benefit plans, related to current and former Exelon employees transferred to the Company in accordance with the employee matters agreement.|
|(e)||Reflects the reclassification of sales, purchases and other intercompany transactions between the Company and Exelon's utility subsidiaries, from related party transactions to third-party transactions. Other intercompany transactions include long-term payables to ComEd and PECO related to nuclear decommissioning of Regulatory Agreement Units. See Note 10 — Asset Retirement Obligations of the Notes to Consolidated Financial Statements for additional information.|
|(f)||Reflects the elimination of the deferred taxes related to tax credit carryforwards and recording of a receivable from Exelon for the reimbursement of the tax credits when utilized by Exelon in accordance with the tax matters agreement.|
|(g)||Reflects the expected cash contribution from Exelon to the Company of $ in accordance with the separation agreement.|
CENG put transaction accounting adjustments
|(h)||Reflects the purchase of 49.99% noncontrolling interest in CENG from EDF in accordance with the Put Option Agreement, including the establishment of a deferred tax liability and the issuance of approximately $880 million under a 364-day term loan credit agreement to fund the transaction, which bears interest at a variable rate equal to LIBOR plus a risk premium. The interest rates assumed for purposes of preparing this pro forma financial information comprise of the LIBOR rate of % as of , 2021 plus the risk premium specified in the credit agreement. A 1/8% change to the annual interest rate would change interest expense by approximately $ on an annual basis.|
|(i)||Reflects the adjustment of the provision (benefit) for income taxes related to the taxation of income previously attributable to noncontrolling interest holders and for the adjustments made to income (loss) before income taxes at an estimated statutory rate of approximately 25%.|
Autonomous entity adjustments
|(j)||Reflects the estimated incremental costs of approximately $ for the support services to be provided by Exelon's business services subsidiary, BSC, under the transition services agreement, in addition to the corporate and shared costs allocated to Generation in its historical consolidated financial statements.|
Historically, Exelon has charged its operating subsidiaries for a variety of support services at cost, including legal, human resources, financial, information technology and supply management services, incurred in the operation of the business. Primarily during the first year following the separation date, Exelon will continue to provide certain support services, including legal, financial, and information technology services to the Company until such time as the Company can create all of the necessary stand-alone functions. The unaudited pro forma condensed consolidated statement of operations has been adjusted to depict the Company as an independent, separate public company following the separation.
Other transaction accounting and autonomous entity adjustments
|(k)||Reflects the adjustment of the provision (benefit) for income taxes for the adjustments made to income (loss) before income taxes at an estimated statutory rate of approximately 25%.|
3. Pro Forma Earnings Per Share
The calculation of pro forma basic net income per share is calculated by dividing the pro forma net income by the weighted average number of shares of Exelon common stock outstanding for the period indicated, adjusted for a distribution ratio of share of Company common stock for each share of Exelon common stock outstanding. For more information on the distribution ratio, see Note 2(a) above. The calculation of pro forma diluted net income per share is calculated by dividing the pro forma net income by the weighted average number of shares of Exelon common stock outstanding and dilutive shares of common stock outstanding for the periods indicated, adjusted for the same distribution ratio. This calculation may not be indicative of the dilutive effect that will actually result from share-based awards subsequently transferred to or granted by us.
OVERVIEW OF THE U.S. POWER MARKETS
Prior to the 1990s, most electricity customers in the U.S. were served by regulated, vertically-integrated utilities. During the late 1990s, organized regional competitive wholesale markets began to form and many states in the U.S. also pursued competitive retail structures allowing non-utility generators to sell electricity to utilities and/or retail service providers to sell to end-use customers. Deregulation of the U.S. electric industry has progressed differently across the U.S., with the states in the Northeast, Mid-Atlantic, and Texas generally being the most deregulated and the states in the Southeast and much of the Midwest and West generally being the most regulated. A recent key trend in the U.S. power markets is the growing shift toward clean energy. Nuclear power facilities are particularly well-positioned to respond to and benefit from this trend, as nuclear power provides reliable, carbon-free baseload power to meet the evolving needs of power markets and customers across the U.S.
Competitive Retail Energy Markets
Retail competition in states across the U.S. ranges from full competition of generation supplier for all retail customers (commercial, industrial and residential) to partial retail competition available up to a capped amount for industrial customers only.
The District of Columbia and thirteen states, including Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and Texas, have implemented full retail competition for nearly all customers of investor owned utilities. These competitive jurisdictions represent nearly one-third of all electricity consumption in the continental U.S.
14 Customer Choice Jurisdictions(a)
|a)||Source: Retail Energy Supply Association, June 1, 2020|
In these states allowing full retail competition, regulated utilities continue to provide transmission and distribution service at regulated rates. Generation service, however, is no longer rate regulated. Instead, the rates paid by customers are those offered by competitive retail electricity suppliers or, for customers who do not receive service from competitive suppliers, utility provided POLR service that is reflective of wholesale market prices.
There are also several additional states in the U.S. that offer limited electric customer choice and may be considered “hybrid” models. For example, states including California, Michigan, Arizona, Oregon, Nevada, Virginia, Washington and Montana allow limited portions of total load to be served competitively at retail.
Competitive Wholesale Markets
Distinct from retail markets, which involve the sales of electricity directly to consumers, wholesale markets involve the sales of electricity among electric utilities and electricity marketers before it is eventually sold to end-use consumers. These jurisdictions include many of the most populous states.
Some regions of the country have evolved further in terms of forming ISOs or RTOs, which are FERC-regulated entities that coordinate, control, and monitor the operation of the electrical power system. Examples include PJM, ISO-NE and NYISO. Approximately two-thirds of the nation’s wholesale electricity sales occur in competitive markets managed by the ISOs or RTOs. These regions have independent oversight of the wholesale markets, and are regulated by FERC, which provides oversight of the operators that encompass multiple states (all but ERCOT). ISOs and RTOs generally afford more formalized and structured wholesale electricity markets than non-ISO or non-RTO regions and have implemented mechanisms to facilitate market monitoring, reliability and efficiency. ISO/RTO-guided initiatives, such as locational marginal pricing and capacity markets, are designed to send the appropriate price signal for new investment in capacity when new capacity is needed to maintain system reliability. ERCOT is unique in that its locational marginal pricing is based solely on system energy and congestion, with no accounting for marginal losses occurring on the system. While not yet formalized into an ISO or RTO, many of the previously fragmented dispatch and control areas in the Western part of the US are starting to combine, as they recognize both the operational benefits, as well as the ability to save money for customers through sharing and co-optimization of generation resources and reserves.
PJM. 65% of our generation fleet, measured by net generating capacity, operates within the PJM market. By MW, our generation fleet in PJM consists of approximately 78% nuclear, 9% renewables, 8% gas and 5% oil. PJM is the largest power market in the US and is comprised of all or parts of 13 Mid-Atlantic and Midwestern states and the District of Columbia. PJM is one of the most advanced power markets in the U.S., with nodal day-ahead and real-time energy markets, ancillary service products, and a forward capacity market (the Reliability Pricing Model or RPM) that clears capacity three years in advance of the capacity commitment period.
PJM forecasted 150.2 GW of peak load in the 2022/2023 delivery year with a minimum reserve margin of 14.50%. PJM relies heavily on natural gas-fired and coal-fired generation. PJM’s installed capacity mix in 2020 includes 28% coal, 27% natural gas, 18% nuclear, 15% gas / other secondary capacity, 5% water, 5% oil and 2% other.
Natural gas pricing is one of the primary drivers of energy prices throughout PJM. The discovery and production of vast amounts of shale gas in the U.S., particularly from the Marcellus and Utica shales within the bounds of PJM, combined with development of significant amounts of new efficient gas-fired generation has resulted in a decline in wholesale power prices in PJM.
State policies also impact the investment decisions of resources in the PJM market, including state RPS programs, ZEC programs in Illinois and New Jersey, and the Regional Greenhouse Gas Initiative (RGGI). RGGI is a mandatory greenhouse gas cap and trade program that imposes costs via the purchase of allowances for in-state fossil fuel generators. Eleven states in the Northeast and Mid-Atlantic are members of the RGGI program and Pennsylvania is in the process of joining the program.
Source: PJM Capacity By Fuel Type 2020, PJM 2022/2023 RPM Base Residual Auction Planning Period Parameters.
ERCOT. 12% of our generation fleet, measured by net generating capacity, operates within the ERCOT market. By MW, our generation fleet in ERCOT consists of approximately 97% gas and 3% renewables. ERCOT is the system operator for most of Texas and is not under FERC jurisdiction due to the market being solely located within the state of Texas and not being synchronously interconnected to another part of the U.S. The ERCOT market is projected to have 86.8 GW of capacity available in summer 2021 to meet a peak demand of 75.2 GW, resulting in a reserve margin of 15.5%. ERCOT’s fuel mix for 2021 is projected to consist of 32% gas (combined-cycle), 28% wind, 19% coal, 12% nuclear, 6% gas, and 3% solar, with less than 0.2% from biomass, hydro and other.
As an energy-only market, ERCOT’s market design is different from other competitive electricity markets in the U.S. Other markets, including PJM, maintain a minimum reserve margin through regulated planning, resource adequacy requirements and/or capacity markets. In contrast, ERCOT’s resource adequacy is predominately dependent on free market processes and energy market price signals. All electricity prices are subject to a system-wide offer cap, which is $9,000/MWh, as of July 2021.
Source: ERCOT 2021 Fuel Mix Report, ERCOT December 2020 Capacity Demand and Reserves Report.
NYISO. 6% of our generation fleet, measured by net generating capacity, operates within the NYISO Market. By MW, our generation fleet in NYISO consists of almost 100% nuclear. Established in 1999 as one of the first ISOs, NYISO features liquid day-ahead and real-time energy and ancillary service markets. NYISO also has a spot capacity market, called the ICAP market, which clears capacity up to 6 months in advance of the delivery period. As a result, power generation within NYISO can earn revenues from liquid ancillary, energy and capacity markets. There are four distinct supply and demand zones in the NYISO market: ROS (generally encompassing upstate New York), Zone G-J (known as the “G-J Locality” and located in the Lower Hudson Valley), Zone J (New York City), and Zone K (Long Island). The overall market is known as NYCA.
NYISO is projected to have 41.1 GW of capacity available to meet 32.3 GW of projected peak demand in 2021, resulting in a reserve margin of 27.0%. NYISO is heavily reliant on natural gas and oil-fired generators with hydro and nuclear resources rounding out most of the remainder. NYISO’s generation supply stack is characterized by numerous aging plants. Over 15 GW of generating capacity, representing over 38% of NYISO’s total generation capacity, is over 50 years old.
Source: NYISO 2021 Gold Book, April 2021.
Other power markets. The remaining 17% of our generation fleet operates in other markets including CAISO, ISO-NE, MISO and SPP in the U.S. and AESO in Canada. Our generation in these markets, by MW, consists of approximately 20% nuclear, 46% gas, 13% oil and 20% renewables.
The CAISO market serves customers primarily in California. CAISO features day-ahead and real-time energy markets and ancillary service markets. While CAISO does not operate a formal capacity market, it does have a mandatory resource adequacy requirement supported through bilateral contracts.
The ISO-NE market covers the six states of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont. It offers day-ahead and real time energy markets, ancillary service products, and a forward capacity market
MISO is an RTO that covers all or parts of 15 states: Arkansas, Illinois, Indiana, Iowa, Kentucky, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Montana, North Dakota, South Dakota, Texas, and Wisconsin; as well as the Canadian province of Manitoba. MISO operates day-ahead and real time energy markets and ancillary service markets. Capacity requirements are addressed through bilateral transactions or a voluntary annual auction that MISO administers.
SPP has members in 14 states: Arkansas, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Oklahoma, South Dakota, Texas and Wyoming. It also provides contract reliability coordination services in Arizona, Colorado and Utah. SPP operates day-ahead and real-time energy markets and transmission service markets.
AESO provides the function of Independent System Operator in Alberta, Canada, where we own one generation asset. It is currently an energy-only model and does not operate a capacity market. AESO also operates a separate ancillary services market where resources provide specific services that help maintain grid reliability.
PJM Base Residual Auction. The PJM Base Residual Auction (“BRA”) is PJM’s annual capacity auction to procure power supply resources in advance of a specific delivery year to meet electricity needs for PJM. In each BRA, PJM seeks to procure a target capacity reserve level for the RTO in a least cost manner while recognizing certain reliability-based constraints on the location and type of capacity that can be committed.
Auctions are typically held three years prior to the delivery year. The 2022/2023 Delivery Auction was originally scheduled to be held in May 2019 but was postponed as FERC considered approval of new capacity market rules. In November 2020, PJM announced a revised auction schedule for the next six auctions. In May 2021, PJM conducted its first annual capacity auction since May 2018 and posted the results of the 2022/2023 Delivery Year auction on June 2, 2021. PJM’s next auction, for the 2023/2024 Delivery Year, is scheduled to take place in December 2021.
MOPR Proceedings. PJM and NYISO capacity markets include a MOPR. If a resource is subjected to a MOPR, its offer is adjusted to remove the revenues it receives through a government-provided financial support program, resulting in a higher offer that may not clear the capacity market. Prior to December 19, 2019, the MOPR in PJM applied only to certain new gas-fired resources. Currently, the MOPR in NYISO applies only to certain resources in downstate New York.
On December 19, 2019, FERC required PJM to broadly apply the MOPR to all new and existing resources including nuclear, renewables, demand response, energy efficiency, storage and all resources owned by vertically-integrated utilities. This greatly expands the breadth and scope of PJM’s MOPR, which became effective as of PJM’s May 2021 capacity auction. While FERC included some limited exemptions, no exemptions were available to state-supported nuclear resources.
On October 15, 2020, FERC accepted PJM’s two MOPR compliance filings, subject to a further compliance filing to revise minor aspects of the proposed MOPR methodology. As part of that order, FERC also accepted PJM’s proposal to condense the schedule of activities leading up to the next capacity auction. PJM conducted the auction as scheduled and, because neither Illinois nor New Jersey have implemented an FRR program in their PJM zones, the MOPR applied in the capacity auction to our owned or jointly owned nuclear plants in those states receiving a benefit under the Illinois ZES, or the New Jersey ZEC program. The MOPR prevented Quad Cities from clearing in the capacity auction. At the direction of the PJM Board of Managers, PJM and its stakeholders are considering MOPR reforms to ensure that the capacity market rules respect and accommodate state resource preferences such as the ZEC programs, which PJM filed at FERC on July , 2021.
Because neither Illinois nor New Jersey have implemented an FRR program in their PJM zones, the MOPR currently applies in the capacity auctions to our owned or jointly owned nuclear plants in those states receiving a benefit under the Illinois ZES, or the New Jersey ZEC program, as applicable, increasing the risk that those units may not clear the capacity market. On April 6, 2021, the PJM Board initiated an expedited stakeholder process to develop MOPR reforms for submission to FERC no later than late July. On July 8, 2021, the PJM Board approved PJM’s proposed plan to mitigate the impacts of MOPR in the wholesale power market and maximize transparency and market confidence. PJM plans to make a FERC filing with the aim of incorporating the proposed reforms into the December 2021 auction. If successful, this process could eliminate this risk going forward.
The U.S. energy sector is experiencing unprecedented changes that we believe will increase the demand for reliable, clean power generation and benefit our business. We believe our generation fleet, including our nuclear assets, is well-positioned to deliver reliable, clean power and benefit from the higher prices that higher demand is expected to drive.
Key drivers of increased demand for clean energy include:
|·||governmental and corporate policies designed to accelerate the de-carbonization of the economy, including continued momentum for incentives for and investment in wind and solar, along with emerging carbon-free technologies like storage and hydrogen;|
|·||policy support for nuclear energy sources that also enable energy security, reliability and diversification;|
|·||the rapid electrification of the U.S. economy; and|
|·||evolving customer preferences favoring green energy, choice and digitization, to which we believe our customer-facing business is well-positioned to respond.|
We believe existing nuclear generation, which is currently the largest source of zero emissions electricity in the U.S. accounting for approximately 20% of total 2020 utility-scale electricity generation in the U.S. and complementing other zero-carbon power sources, is essential to achieving existing and future policy objectives for the reduction of GHG emissions. A 2018 study by the Massachusetts Institute of Technology, “The Future of Nuclear Energy in a Carbon-Constrained World,” found that the costs of achieving transformational de-carbonization targets would increase significantly without the contribution of nuclear power.
Policy Support for De-Carbonization and Emerging Carbon-Free Technologies. Driven by societal concerns about climate change, governments, corporations, and investors are increasingly advocating for the reduction of GHG emissions across all sectors of the economy, with reduction of GHG emissions by the energy sector being a key focus. Governments at the international, national and state levels have established or are currently contemplating increasingly stringent policies that require the reduction of GHG emissions over time. Corporations have also adopted targets to reduce the carbon emissions in their business operations, spurred in part by demand from investors and customers for sustainable, environment-friendly business practices. Emerging technologies like storage and hydrogen are also helping to advance de-carbonization.
As decarbonization accelerates, we expect our generation fleet will play a critical role in meeting baseload power needs. Nuclear energy is key to achieving decarbonization objectives, given its existing penetration of the U.S. market today and its greater reliability than renewable energy sources. We believe our business is well-positioned to benefit from growing policy support for de-carbonization, which will drive higher demand and higher prices for the reliable, zero-carbon power our nuclear assets generate.
International Climate Change Agreements. At the international level, the U.S. is a party to the United Nations Framework Convention on Climate Change (UNFCCC). The parties to the UNFCCC adopted the Paris Agreement at the 21st session of the UNFCCC Conference of the Parties (COP 21) on December 12, 2015, and it became effective on November 4, 2016. Under the Paris Agreement, the parties agreed to try to limit the global average temperature increase to 2°C (3.6°F) above pre-industrial levels. In doing so, parties developed their own national reduction commitments. The Biden administration has announced a new target of 50-52 percent reduction in U.S. Greenhouse Gas Pollution from 2005 Levels by 2030. In order to achieve this target and maintain high standards of reliability, the U.S. will need a reliable baseload of zero-carbon generating electricity sources, which our nuclear fleet helps provide.
Federal Climate Change Legislation and Regulation. Combating climate change is one of the top legislative agenda items of the Biden administration. U.S. President Biden’s stated climate change policy targets 100% clean energy economy with net zero GHG emissions no later than 2050. Within the U.S. power sector specifically, the Biden agenda calls for zero GHG emissions from electricity generation by 2035. Since entering office in January 2021, U.S. President Biden has signed a number of executive orders targeting climate change that include removing certain subsidies for the fossil fuel industry. On March 31, 2021, President Biden proposed the American Jobs Plan, a $2 trillion infrastructure plan that includes measures to combat climate change, such as spending on electric vehicle charging and the creation of a Clean Electricity Standard requiring 100 percent of electricity in the United States to be generated by carbon-free sources by 2035. On Earth Day 2021, President Biden emphasized his commitment to mitigating climate change and pledged to cut U.S. greenhouse gas pollution in half by 2030. While it remains uncertain if the American Jobs Plan or other U.S. federal legislation to reduce GHG emissions will be enacted in the near-term, such legislation would increase the need for reliable clean power generation, which would benefit us as the nation’s largest carbon-free power producer.
Given the Administration’s aggressive goals for reducing emissions within the electric power sector, policymakers have recognized the urgent need to prevent the retirement of nuclear power plants prior to the end of their licensed lives. Nuclear energy provides 20 percent of the nation’s electricity and over 50 percent of the nation’s carbon free power. A dozen nuclear reactors have closed in recent years, primarily as a result of economic challenges in merchant power markets. Representative Bill Pascrell (D-NJ) and Senator Ben Cardin (D-MD) have introduced legislation to provide a $15/megawatt hour production tax credit for merchant nuclear power plants. The amount of the PTC is decreased for plants with revenues exceeding $25/megawatt hour. The U.S. Treasury Department proposed an allocated production tax credit for nuclear plants as part of their annual “Green Book” compilation of tax priorities for the Administration. The outlook for this legislation is directly tied to action on legislation extending other clean energy tax credits and remains uncertain.
Regional and State Climate Change Legislation and Regulation. A number of states in which we operate have state and regional programs to reduce GHG emissions, including from the power sector. Eleven northeast and mid-Atlantic states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont and Virginia) currently participate in the RGGI, which is in the process of strengthening its requirements. The program requires most fossil fuel-fired power plants in the region to hold allowances, purchased at auction, for each ton of CO2 emissions. Non-emitting resources do not have to purchase or hold these allowances.
In October 2019, Governor Wolf of Pennsylvania issued an Executive Order that directed the Pennsylvania Department of Environmental Protection to begin a rulemaking process that will allow Pennsylvania to join RGGI, with the goal of reducing carbon emissions from the electricity sector.
Many states in which we operate also have state-specific programs to address GHGs, including from power plants. Most notable of these, besides RGGI, are through renewable and other portfolio standards. Additionally, in response to a court decision clarifying the obligations under the Global Warming Solutions Act, the Massachusetts Department of Environmental Protection in 2017 finalized regulations establishing a statewide cap on CO2 emissions from fossil fuel power plants (Massachusetts remains in RGGI as well). In 2019, New York enacted the Climate Leadership and Community Protection Act, which commits the state to achieving net zero emissions by 2050 with interim emission reduction and renewable energy requirements in 2030 and 2040.
Renewable and Clean Energy Standards. According to the National Conference of State Legislatures (NCSL), thirty states and the District of Columbia have adopted an RPS, while seven more states have set renewable energy goals. These standards impose varying levels of mandates for procurement of renewable or clean electricity (the definition of which varies by state) and/or energy efficiency. These are generally expressed as a percentage of annual electric load, often increasing by year. Twenty-four states and the District of Columbia have 100% clean electricity targets, deep GHG reduction targets, or both, encompassing 53% of U.S. residential electricity customers. Utilities comply with these various requirements through purchasing qualifying renewables, implementing efficiency programs, acquiring sufficient credits (e.g., RECs), paying an alternative compliance payment, and/or a combination of these compliance alternatives. New York, Illinois and New Jersey adopted standards targeted at preserving the zero-carbon attributes of certain nuclear-powered generating facilities. We own multiple facilities participating in these programs within these states. Other states in which our generation facilities operate are considering similar programs. We believe our nuclear assets can play a key role in helping states achieve these goals by providing fuel-secure power that maintains grid reliability and complements variable renewable sources like wind and solar.
100% Clean Electricity Standards, 100% RPS, or High GHG Reduction Targets by State (a)
|a)||Source: Clean Air Task Force, state public disclosures|
Corporate Clean Energy Targets. Corporations are facing increasing pressure from their customers and investors to align their businesses with international and national environmental and sustainability objectives, including supporting goals to reduce GHG emissions in their business operations. Leading institutional investors and money managers are increasingly considering sustainability as a key factor in investment decisions and are increasingly advocating for more transparency in disclosure on climate-related matters and pledging to align proxy voting to climate-rated proposals with its fiduciary duty. An increasing number of corporations are also proactively making commitments to reducing their GHG emissions footprint over time, either through procuring increasing amounts of clean energy or RECs to offset their carbon footprint over time. As the nation’s largest producer of clean energy, we support taking bold action to address the climate change crisis and reestablish leadership in both emerging technologies and existing clean infrastructure that together will power the future.
Emerging Carbon-Free Technologies. Emerging carbon-free technologies like storage and hydrogen are also expected to help accelerate the economy’s de-carbonization. The U.S. added 1.1 GW / 2.6 GWh of energy storage in 2020, a significant scale-up of the market. In total, we anticipate that 13.6 GW / 35.4 GWh of storage projects will be deployed from 2021 to 2023. Lower costs, state-directed mandates, a backlog of storage projects in the interconnection queue, and utilities seeking large-scale storage capacity to support higher renewables penetration have created conditions for rapid growth of this technology in the U.S. Clean hydrogen also has the potential to drive de-carbonization, particularly as it relates to more challenging sectors like long-haul transportation, steel, chemicals, heating and long-term power storage. Nuclear power can be used to produce clean hydrogen, and our nuclear fleet positions us well to explore this emerging space. Entering the hydrogen space could provide de-carbonization alternatives and supplements to natural gas product offerings. Both energy storage and clean hydrogen continue to gain political and business support and are expected to help support net-zero carbon goals.
Policy Support for Nuclear Energy
In the current market environment, many merchant nuclear facilities are economically challenged as a result of the low near-term outlook for power prices, which has been negatively impacted by low gas prices, the influx of subsidized renewable energy generation with zero marginal production costs, over-development of new gas-fired generation and weak demand for electricity as a result of increased energy efficiency and weak economic activity. Policy support for nuclear energy recognizes that due to its strong reliability, efficiency and carbon-free nature, nuclear power will continue to play a critical role in the clean energy transition.
Our nuclear plants are meaningful contributors to the clean energy mix in the states in which they operate. States may not be able to meet their zero-carbon goals without our nuclear plants, as our plants provide a significant portion of the current carbon-free power. According to the Nuclear Energy Institute and the U.S. Department of Energy, a typical, 1,000 MW nuclear facility in the United States needs just over 1 square mile to operate, whereas wind farms and solar plants respectively require 360 and 75 times more land area to produce the same electricity. Producing the same amount of power as a typical commercial nuclear reactor would require over 3 million solar panels or over 430 utility-scale wind turbines. This disparity highlights that nuclear is currently the only baseload, carbon-free solution of scale.
Current Carbon-Free Power Mix in Key States(a)
Source: 2020 U.S. Energy Information Administration data
Federal Policy Support for Nuclear Generation. Given the Administration’s aggressive goals for reducing emissions within the electric power sector, policymakers have recognized the urgent need to prevent the retirement of nuclear power plants prior to the end of their licensed lives. Nuclear energy provides 20 percent of the nation’s electricity and over 50 percent of the nation’s carbon free power. A dozen nuclear reactors have closed in recent years, primarily as a result of economic challenges in merchant power markets. Representative Bill Pascrell (D-NJ) and Senator Ben Cardin (D-MD) have introduced legislation to provide a $15/megawatt hour production tax credit for merchant nuclear power plants. The amount of the PTC is decreased for plants with revenues exceeding $25/megawatt hour. The U.S. Treasury Department proposed an allocated production tax credit for nuclear plants as part of their annual “Green Book” compilation of tax priorities for the Administration. The outlook for this legislation is directly tied to action on legislation extending other clean energy tax credits and remains uncertain.
State Policy Support for Nuclear Generation. A number of states in which our nuclear facilities operate have established policies to support nuclear generation. The supportive policies are driven by a number of factors, including recognition by governments and policy makers that existing nuclear generation facilities are essential to meeting policy objectives on reduction of GHG emissions, the desire to support jobs and regional economies, and the need to ensure reliability and security of the electrical grid through resource diversity.
Illinois Zero Emission Standard. Pursuant to FEJA, on January 25, 2018, the ICC announced that our Clinton Unit 1, Quad Cities Unit 1 and Quad Cities Unit 2 nuclear plants were selected as the winning bidders through the IPA's ZEC procurement event. We executed the ZEC procurement contracts with Illinois utilities, effective January 26, 2018, and began recognizing revenue with compensation for the sale of ZECs retroactive to the June 1, 2017 effective date of FEJA. The ZEC price was initially established at $16.50 per MWh of production, subject to annual future adjustments determined by the IPA for specified escalation and pricing adjustment mechanisms designed to lower the ZEC price based on increases in underlying energy and capacity prices. Illinois utilities are required to purchase all ZECs delivered by the zero-emissions nuclear powered generating facilities, subject to annual cost caps.
New Jersey Clean Energy Legislation. On May 23, 2018, New Jersey enacted legislation that established a ZEC program that provides compensation for nuclear plants that demonstrate to the NJBPU that they meet certain requirements, including that they make a significant contribution to air quality in the state and that their revenues are insufficient to cover their costs and risks. Under the legislation, the NJBPU will issue ZECs to qualifying nuclear power plants and the electric distribution utilities in New Jersey will be required to purchase those ZECs. On April 18, 2019, the NJBPU approved the award of ZECs to Salem 1 and Salem 2. On October 1, 2020, PSEG and Generation filed applications seeking ZECs for the second eligibility period (June 2022 through May 2025). On April 27, 2021 the NJBPU approved the award of ZECs to Salem 1 and Salem 2 for the second eligibility period, with the subsidy extended at $10 per MWh.
New York Clean Energy Standard. On August 1, 2016, the NYPSC issued an order establishing the New York CES, a component of which is a Tier 3 ZEC program targeted at preserving the environmental attributes of zero-emissions nuclear-powered generating facilities that meet the criteria demonstrating public necessity. The NYPSC has determined that our FitzPatrick, Ginna and Nine Mile Point nuclear facilities meet the criteria. The New York State Energy Research and Development Authority (NYSERDA) centrally procures the ZECs through a 12-year contract extending from April 1, 2017 through March 31, 2029, administered in six two-year tranches. ZEC payments are made based upon the number of MWh produced by each facility, subject to specified caps and minimum performance requirements. The ZEC price for the first tranche was set at $17.48 per MWh of production and is administratively determined using a formula based on the social cost of carbon as determined in 2016 by the federal government, subject to pricing adjustments designed to lower the ZEC price based on increases in underlying energy and capacity prices. Following the first tranche, the price will be updated bi-annually. The ZEC price for the third tranche was set at $21.38 per MWh and took effect on April 1, 2021. The next update is scheduled to occur on April 1, 2023. Each Load Serving Entity (LSE) is required to purchase an amount of ZECs from NYSERDA equivalent to its load ratio share of the total electric energy in the New York Control Area.
The push to reduce or eliminate GHG emissions could lead to acceleration of the electrification of the U.S. economy, including electrification of transportation, industrial operations, heating and cooling, and appliances, which could materially increase demand for electricity. Widespread electrification could increase 2050 U.S. electricity consumption by between 20% and 38%. Higher demand for electricity will likely drive higher prices and benefit our business. We expect reliable, baseload nuclear power will be essential to meeting increased demand, well-positioning our fleet to benefit from the electrification of the U.S. economy.
Although EV sales in North America are well behind Europe and China, increased policy support from the Biden administration, together with a number of electric pickup trucks and SUVs, including hybrid EVs, hitting the market over the next five years will drive the U.S. market in 2021 and beyond. Beginning in 2021, U.S. consumers will have a stronger EV lineup to choose from, including EVs from prominent producers like Tesla, Rivian, Nissan, Ford, Audi, GMC, Hyundai, and Volkswagen, among others. For example, in January 2021, General Motors announced a goal to phase out gas and diesel-powered vehicles by 2035, which account for roughly 98% of their sales today. With over 90% of states offering incentives for setting up EV charging infrastructure, U.S. EV market sales are projected to rise to 6.9 million units by 2025.
U.S. Passenger EV Charging Infrastructure Demand(a)
|a)||Source: Bloomberg NEF Electric Vehicle Outlook 2020. Note: BEV = Battery Electric Vehicle|
U.S. EV Electricity Demand Outlook(a)
|a)||Source: Bloomberg NEF Electric Vehicle Outlook 2020. Note: BEV = Battery Electric Vehicle|
Electrification of industrial processes, commercial equipment and residential appliances that currently run on fossil fuels will also play a role in increasing the net demand for electricity. This trend is likely to be driven by increased corporate, investor, and customer focus on sustainability, as well as by an underlying need to increase efficiencies and manage operational costs. Electric systems tend to be relatively more efficient than existing systems, including having a higher performance lifetime and relatively superior design, yield, process controllability, and flexibility. As the costs of renewables, including energy storage, continue to decline, it is likely reducing energy and overhead costs will also be a driving factor towards the electrification of industrial processes and operations. Conversion of heating systems that currently run on gas and oil represents another potential source of increased demand for electricity. According to the International Energy Agency, heat makes up two-thirds of industrial energy demand, and almost one-fifth of global energy consumption, prompting efforts by energy companies and industrial manufacturers to electrify their thermal processes. For companies like us whose core competency is safely generating and serving electricity and related products to its customers, this increasing trend toward electrification provides natural growth opportunities.
U.S. Electricity Use by End-Use Sector | TWh(a)
|a)||Source: U.S. Energy Information Administration, Annual Energy Outlook 2021 (Feb 2021). Reflects the AEO2021 Reference Case.|
Evolving Customer Preferences
Evolving customer preferences that favor additional clean energy solutions, choice and access through increased digitization, will impact the commercial power and natural gas (or energy) industry. Recent key trends include: (i) consumer preferences for additionality (i.e., meeting sustainability goals by adding incremental renewable resources to the grid instead of utilizing existing spare capacity), (ii) the ability to be connected to, trace and validate the source of their green energy choices, (iii) value-add services and products around their energy usage, and (iv) the ability to buy, manage and measure their energy usage digitally. Today’s power markets provide the ability to offer more customized energy solutions and green products to better address and serve the demands of customers today.
Under de-carbonization, customer preferences for additionality to meet sustainability goals through adding incremental renewable resources to the grid will contribute to greater buildout of renewables. Consumers are also increasingly purpose-driven and knowledgeable of services that drive de-carbonization, leading them to value the ability to be connected to and trace the source of their clean energy choices. A third-party study found that 60% of consumers have become more aware of climate change since the start of the COVID-19 pandemic, with more than half of consumers likely to invest and upgrade to energy efficiency programs today than before.
Growing awareness of climate change and green energy helps drive customer interest in value-add services and products around their energy usage, such as residential rooftop solar, EV charging, smart, energy-efficient home technologies, and the ability to choose 100 percent clean power in competitive retail energy markets. Developments in power technology and automation mean that the relationship between the customer and the understanding of how they manage their energy is now more connected through digital applications. Increasingly, affordable technologies and the growing availability of smart meter data are facilitating customers’ ability to make a range of unprecedented energy choices. A third-party study found that more than half of customers are interested in time-of-use tariffs / flexible tariffs / demand-response options to increase cost savings by shifting their electricity consumption from evenings to daytime / nights.
With the digitization of the broader economy, customers and businesses at each purchasing entry point level have increased desire for flexibility to directly engage in their buy decisions electronically, as well as manage their energy usage digitally in real time. Digital marketplaces and monitoring systems will facilitate greater control and opportunities for customers and businesses to more frequently engage with their energy providers and become more knowledgeable of their energy choices, including the products we provide.
Responding to these evolving customer preferences will facilitate continued innovation in the commercial power space and new opportunities for providers to connect energy decision making more directly to the end-user.
Our Company is America’s leading clean energy company, based on the production of carbon-free electricity. We are the largest supplier of clean energy and sustainable solutions to homes, businesses, public sector, community aggregations and a range of wholesale customers (such as municipalities, cooperatives, and other strategics) across the continental U.S., backed by more than 31,000 megawatts of generating capacity consisting of nuclear, wind, solar, natural gas and hydro assets. In 2020, the Company produced nearly 12% of the nation's carbon-free energy according to published reports on energy delivery by the U.S. Energy Information Administration, making it an important partner to business and state and local governments that are setting ambitious carbon-reduction goals and seeking long-term solutions to the climate crisis.
The Company is comprised of two primary business units: Constellation NewEnergy, Inc. and Exelon Generation Company, LLC. The combined Company operates in 48 states, Canada and the U.K. and employs approximately 12,418 people.
We believe shareholder value is built on a foundation of operational excellence and the pairing of our customer facing platform with our clean energy fleet. We are committed to maintaining investment grade credit ratings. We are focused on optimizing cash returns through a disciplined approach to cost management and efficient operations, underpinned by stable and durable margins from our customer-facing business coupled with visible generation payments associated with our clean energy attributes. We are committed to maintaining a strong balance sheet, to returning value to our shareholders (subject to approval by our Board of Directors) and to investing in clean energy solutions.
Customer-Facing Business: Constellation
Constellation is one of the nation’s largest and most innovative energy suppliers, serving customers of all sizes through the U.S. Constellation is active in all domestic wholesale power and gas markets that span the entire lower 48 states and has complementary retail activity across many of those states.
Constellation Retail has a Diverse Geographic Footprint
Constellation is a leader in power supply serving 215 TWhs annually to a diverse geographic customer base, including utilities, municipality, cooperatives, commercial, industrial, residential, public sector and three-fourths of the Fortune 100 companies. It is the largest retail commercial and industrial power provider and the third largest residential power provider in the U.S., supplying approximately 145 TWh to business and public sector customers and approximately 10 TWh to residential customers.
Power Load is Served Across Regions(a)
|a)||Includes retail and wholesale load auction volumes only. Other includes New England, South and West.|
Constellation is Defined by Consistent Load, Enabling Durable, Stable Cash Flows(a)
|a)||Reflects retail load and wholesale load auction volumes as of December 31, 2020.|
Constellation’s wholesale channel-to-market serves approximately 60 TWh of power load across competitive utility load procurements and bilateral sales to municipalities, coops, banks, and other wholesale entities. Complementary to its national portfolio, Constellation has several decades of relationships with wholesale counterparties across all domestic power markets as a means of both monetizing its own generation, as well as sourcing contracted generation to meet customer and portfolio needs. With the increased trend toward customer demand for sustainability, this ability to source contracted generation has provided a capital-light way for the Company to provide customers with the renewable products they are demanding to support a cleaner energy ecosystem. This creates durable customer relationships and repeatable business through the ability to respond to customer and marketplace trends. Similarly, this contracting acumen provides the ability to supplement our native generation with other non-renewable assets to meet changing portfolio needs in a balance sheet efficient manner.
Constellation is also a leader in gas supply serving 1,600 Bcf of gas annually to a wide range of residential, commercial, wholesale, and municipal customers across many sectors, including manufacturing, services, public sector, transportation, and utilities. Because we have an integrated gas business that focuses not only on supplying customer needs, but also providing fuel for our power plants and sourcing Liquefied Natural Gas (LNG) for the Everett Marine LNG Import Terminal, we have strong capabilities across the entire natural gas value chain allowing us to optimize our portfolio to provide both low cost and customized solutions to our customers. Similarly, the scope of our natural gas business provides us wide geographic coverage across all domestic natural gas markets.
In addition to providing energy management strategies that focus on more than just price, customers are able to focus on actively managing costs, mitigating risk and supporting long-term budget certainty. Constellation’s gas managed products are designed to minimize volatility and achieve budget certainty over time, while providing customers the ability to create a structured plan that reduces the pressure to capture the lowest price to create protection from volatility. It is the breadth of offerings, experience across the value chain, and customer and geographic diversity that contribute to the robust cash flows derived from the gas business. Constellation is committed to the ongoing sustainability needs of gas customers by providing renewable energy products and solutions as options to reduce carbon emissions through Renewable Natural Gas (RNG) and Carbon Offsets for natural gas consumption. Similarly, due to the tight interrelationship between natural gas and electricity markets, Constellation’s natural gas business also provides valuable market intelligence useful to our overall business.
2020 Constellation Gas Sales by Market Sector and Customer Type
Customer Acquisition and Retention
Constellation primarily serves C&I customers across the United States. These strong, proven customer relationships are a key part of our customer-facing business strategy. High customer satisfaction levels, market expertise, stability and scale drive growth and result in historically-proven business consistency and margins. Customer retention rates have been strong over the last five years across C&I power customer groups, with average contract terms of 25 months and customer duration of more than six years, with many customers beyond these metrics. Specifically, Constellation enjoyed a 79% C&I power, a 91% C&I gas, and 78% power and gas residential renewal rate in 2020, consistent with the previous four years, owing to both its competitive pricing as well as its strong customer relationships. Our consistently high renewal rates are driven by our ability to provide customized solutions and deliver focused attention to our customers’ needs, resulting in industry-leading customer satisfaction. Constellation is successful at acquiring new customers by offering a diversity of innovative services and products, meeting customers where they are in the buying cycle. In addition to our high customer retention rates, we are able to acquire nearly one out of every three customers who have chosen to shop. While providing customers with the best possible price is a key focus, Constellation leverages its broad suite of electric and gas product structures, oftentimes customized, to provide customers with the commodity solution that best fits their needs. It is this attention to the customer that creates the durable, repeatable value highlighted in these statistics.
Consumer purchasing strategies have trended from direct supply relationships to third party relationships with a growing number of customers looking to third party consultants to find suppliers like Constellation to reduce costs and evaluate the increasing number of options available for expanding energy solutions beyond commodity. Constellation has seen its third-party sourced business grow from approximately 42% of its C&I Power load to 64% between 2014 and 2020, and 20% of its C&I Gas load to 40% during the same period. In response, Constellation expanded its third-party capabilities, created scale through a comprehensive support structure, and enhanced digital applications providing tools, tracking and measurement as well as the ability to extend the reach of Constellation’s sustainability services and products to drive additional market share.
Constellation Benefits From Strong Customer Relationships, with Leading C&I Renewal Rates
As one of the largest customer-facing platforms in the U.S., Constellation benefits from significant economies of scale, which allow us to provide our customers with competitively priced energy and to structure highly tailored solutions targeted to a customer’s unique power needs and clean energy goals. Our customer solutions include specialty power and gas products matching customers’ risk tolerance and risk management needs, energy efficiency, carbon free products for power and gas (RECs, EFECs, RINs, carbon offsets), energy usage and management solutions, among others. Our volumes across multiple products and markets also provide us with unique market intelligence and expertise, including visibility into emerging trends and opportunities to identify new revenue opportunities and to capture incremental margin. Similarly, the scale and scope of the portfolio provides risk-mitigating product and geographic diversification. The scale of our industry-leading national platform also allows for quick and effective integration of new customers and acquisitions, accelerating the impact of strategic growth to the bottom-line.
Constellation is a leader in enabling a clean energy future for its customers through informative purchasing strategies that expand beyond power and natural gas. Constellation partners with its customers to provide options along the sustainability continuum, including, renewable, efficiency and technology applications to meet their carbon free energy goals. Constellation offers a suite of services and products to its power and gas customers that can be integrated into existing commodity purchasing strategies. Constellation is viewed as a center of excellence for customers looking to evaluate, understand and incorporate innovative solutions, products or technology into their existing energy strategy.
Constellation energy efficiency products provide the ability to optimize performance and maximize efficiency across customer facilities and operations through attractive contract structures including implementation of energy efficiency upgrades at no upfront capital requirements. Additionally, these services provide scalable solutions to meet sustainability goals through investment across the life of the facility or operations and allow for budget certainty. The ongoing ability to optimize energy consumption for customers allows Constellation to support customer demands with the right combination of technology and efficiency program options.
Constellation also offers Pear.ai, a smart utility expense management platform that helps customers proactively manage utility costs, understand trends, and develop strategies to optimize spend and drive sustainability objectives. Pear.ai allows Constellation new avenues to incremental growth by coupling the opportunities for customer usage optimization with accompanying products and solutions that Constellation can provide the customer. Services like Pear.ai allow Constellation to grow its customer base in previously inaccessible regulated markets through the offering of non-commodity energy products.
Further, our CORe (Constellation Offsite Renewables) product serves C&I customer’s sustainability needs by matching contracted, third-party renewable generation with customer desire for additional solutions and geographic preference. In addition to larger-scale CORe offerings, Constellation offers a range of sustainability attribute solutions to its customers (RECs, EFECs, RINs, carbon offsets, etc.) in order to support their energy needs during the transition to a cleaner energy ecosystem.
Constellation Technology Ventures’ commercialization team collaborates with portfolio companies to deploy products and technologies across our broad customer base to drive value for both Constellation and portfolio companies. Portfolio company solutions include electric vehicles and charging infrastructure, sustainability monitoring and reporting tools, distributed energy resources and financing solutions, a web-based energy marketplace, and more. For example, Constellation Technology Ventures’ commercialization of ChargePoint, a company providing a network of electric vehicle charging stations, demonstrates our commitment to the electrification trend and immediately scalable channels-to-market for technology solutions to create value for our customers. Future growth will be driven from new and growing digital channels with a focus on innovative products aimed at clean energy solutions. New products and strategic investments will help our customers positively impact the environment, yield strong customer retention rates, and open up additional revenue opportunities to supplement existing, economically beneficial products with solid margins.
Generation operates the largest zero-carbon fleet in the nation and one of the largest generating fleets in the country.
Generation’s nuclear fleet has current generating capacity of approximately 19 gigawatts and produced 150 terawatt hours of zero-emissions electricity last year – enough to power 13.6 million homes and avoid more than 106 million metric tons of carbon emissions. Generation has ownership interests in thirteen nuclear generating stations currently in service, consisting of 23 units. Generation wholly owns all of its nuclear generating stations, except for undivided ownership interests in three jointly-owned nuclear stations, Quad Cities (75% ownership), Peach Bottom (50% ownership), and Salem (42.59% ownership), and Nine Mile Point Unit 2 (82% undivided ownership interest).
Generation will continue to be a leading advocate for clean energy policies aimed at preserving and growing clean energy to combat the climate crisis.
Generation operates the nation’s largest fleet of nuclear power plants and consistently operates at best in class levels. In 2020, Generation recorded a capacity factor of 95.4%, second only to 2019 performance in fleet history, and an average refueling outage duration of 22 days, 11 days better than the industry average. More broadly, the nuclear capacity factor has been approximately four percentage points better than the industry average annually since 2013. Our stations exclude TMI located in Middletown, Pennsylvania, which permanently ceased generation operations on September 20, 2019 and Oyster Creek located in Forked River, New Jersey, which permanently ceased generation operations on September 17, 2018 and was subsequently sold to Holtec International (Holtec) on July 1, 2019.
We operate more than 12 gigawatts of natural gas, oil, hydroelectric, wind, and solar generation assets, which provide a mix of baseload, intermediate, and peak power generation. Our fossil and renewable fleet has similarly demonstrated a track record of strong performance with a 98.4% power dispatch match and 93.4% renewables energy capture.
Collectively, the combined fleet is nearly 90% carbon-free (based on generation output) and represents the fourth largest generation portfolio in the U.S. in terms of total generation with meaningful geographic diversity.
The charts below illustrate our supply source as of December 31, 2020:
|a)||Nuclear includes the proportionate share of output where Generation has an undivided ownership interest in jointly-owned generating plants and includes the total output of plants that are fully consolidated.|
|b)||Renewable includes wind, hydroelectric, solar, and biomass generating assets.|
The following map illustrates the locations of our
generation facilities as of March 31, 2021:
The Company’s Generation Fleet Map(a)
|a)||Note: One symbol is included per location. Some locations may have multiple generating units. Locations in tight geographic proximity may appear as one symbol. Units that are not currently operational are not captured.|
Constellation employs an integrated, ratable hedging strategy to manage energy price volatility over time. As a policy, we hedge commodity risk on a ratable basis over a rolling three-year period to reduce the financial impact of market price volatility. Constellation uses a combination of wholesale and retail customer load sales, as well as non-derivative and derivative contracts, including financially-settled swaps, futures contracts and swap options, physical options and physical forward contracts, all with credit-approved counterparties, to hedge this anticipated exposure. The scale of our generation portfolio, along with its geographic proximity to our load, allows us to lean heavily on a generation-to-load matching strategy to structurally hedge energy price risk. This helps to mitigate incremental collateral needs to serve load, while still allowing flexibility to serve and grow our customer business. As of May 31, 2021, the percentage of expected generation hedged for the Mid-Atlantic, Midwest, New York, and ERCOT reportable segments was 94%-97% for 2021. The Generation portfolio has enjoyed more than a decade of a risk-mitigated ratable hedging strategy, whereby the prompt three years are hedged on an approximate rolling 90% / 60% / 30% basis, providing cash flow stability for its investors, while still allowing commercial opportunities to generate value for the enterprise. Constellation has been and will continue to be proactive in using hedging strategies to mitigate commodity price risk.
We have a scale presence in key markets, allowing us to operate integrated portfolios and capture operational synergies, including allocation of fixed costs across a broader asset base, enhanced procurement opportunities, and diversity of cash flows. These advantages, in combination with a strong balance sheet and significant liquidity, enable us to operate with more financial flexibility, and as such, optimize our competitive scale and operations.
We have not yet finalized the composition of our Board or management following the separation. We will select the members of our Board and management prior to the separation, and information concerning each member, such as biographies and the qualifications and experience each person would bring to our Board or management, as the case may be, will be included in an amendment to the registration statement of which this information statement is a part.
Our Competitive Strengths
We believe that we are well-positioned to execute our business strategy and create superior value for stakeholders based on the following competitive strengths:
|·||We are positioned to help address the climate crisis and lead to a clean energy future|
As a Company, we are committed to a clean energy future, and we believe our generation fleet is essential to helping meet clean energy policy and targets, at either the state or national level. Approximately 90% of our generation fleet energy output is emissions free (based on generation output), and we do not own coal-fired generation. According to the July 2021 Benchmarking Air Emission report, our Company produces approximately 65% more clean energy than the next leading provider and more than 8 to 15 times the clean energy of independent power producer peers. Our fleet has the lowest emissions intensity – nearly five times less intensive than the next lowest generator.
Our generation fleet is essential to meeting federal and state clean energy goals. Generation produced 12% of the zero-carbon energy nationwide and even more in the states we operate in – 95% in Maryland, 82% in Illinois, 38% in Pennsylvania and 33% in New York. Each state has set decarbonization and clean energy targets. Losing any of our clean assets in these states would be a significant step backward for achieving any clean energy or climate goals while also creating higher costs for customers and significant economic hardship for our plant communities.
Generation Plays a Central Role in Enabling States’ Respective Clean Energy Goals(a) (b)
|a)||Source: 2020 U.S. Energy Information Administration data. Assumes whole unit output of CENG generation. Does not adjust for announced retirements by Company at Byron and Dresden in Illinois and retirement by another operator of Indian Point 3 nuclear unit in New York. Note: Renewables includes hydroelectric, solar, and wind generation and excludes biomass. Reflects clean energy goals as outlined in the state’s existing law or goal established by the state Governor.|
|b)||Generation owns an 82% undivided ownership interest in Nine Mile Point Unit 2.|
We believe these attributes are a clear advantage for us as the federal government and our states pursue policies that will address the climate crisis and a clean energy future. The Company will continue to be a leading advocate for these clean policies aimed at preserving and growing clean energy.
In addition to preserving the environmental value that our existing generating fleet provides, Constellation is committed to further development of customer-focused products and capabilities that provide clean energy solutions across the power, gas, and broader energy solutions spaces. Whether through venture investing via Constellation Technology Ventures, R&D efforts or expansion of our clean products for customers, commercialization of more mature technologies or leveraging our innovation culture, we will proactively drive a clean energy future with our customers.
|·||Industry-leading customer-facing business providing sustainability solutions for our customers|
Geographic scale, diversity, customer-tailored product offerings and services and high customer satisfaction underpin our robust customer-facing platform and allow us to partner with customers to solve their emerging needs on their clean energy goals in a differentiated way.
Constellation is the largest customer facing platform in the U.S., which we view as a source of considerable competitive advantage. Our industry-leading national platform not only allows us to capture operational efficiencies for more effective integration of new customers and acquisitions, but also allows for a scalable go-to-market approach. This allows for rapid deployment of new energy services and products and innovative energy technology applications that are responsive to marketplace trends and demands, improving our position for growth.
Constellation’s heavy customer concentration in the C&I retail space, coupled with high customer satisfaction, further differentiates the business within the competitive landscape in its ability to provide repeatable, derisked value to the shareholder. Customer concentration in C&I enables more predictable load and stable unit margins, lower customer acquisition costs, and insulation from weather driven volatility. Cash flows are further maximized by high customer satisfaction levels resulting in business consistency, stable unit economics, and high win and renewal rates. Since 2016, the Company has achieved retail renewal rates in excess of 70% (74-79% for C&I Power, 90-92% for C&I Gas), and the average customer duration has been six years.
Another advantage is Constellation’s industry leadership in consistently developing and providing clean energy and sustainability solutions for our customers. Partnering with our customers to help them meet their environmental and sustainability goals provides us with solid margins, contributes to strong customer retention rates, and opens up additional revenue opportunities.
|·||Best-in-class nuclear operations|
Our world class operations result in industry-leading operating performance at our generation facilities. Our generation fleet has achieved an industry-leading nuclear capacity factor of approximately 94% or higher since 2013, four percentage points better than the 2020 industry average of approximately 90%. Our 2020 average refueling outage duration was 22 days, 11 days better than the industry average.
Generation is Defined by Best-in-class Operating Performance
Nuclear Capacity Factor(a)
Average Nuclear Refueling Outage Days(b)
|a)||Reflects the Company’s ownership share of partially-owned units. Includes Fitzpatrick beginning in April of 2017, and Oyster Creek and TMI partial year operation in 2018 and 2019, respectively. Excludes Salem and Fort Calhoun. Industry average is for major operators excluding Generation and includes 3 months of Fitzpatrick prior to Generation’s acquisition.|
|b)||Reflects partially-owned units at 100% ownership share. Includes Fitzpatrick beginning in 2018. Excludes Salem. Industry average reflects nuclear refueling outage days as tracked by the Nuclear Energy Institute.|
|·||Disciplined financial management focused on strong balance sheet and optimizing cash returns|
Our continued commitment to investment grade credit ratings remains paramount as we prioritize capital allocation to support a strong balance sheet, invest in both clean energy solutions and our customer-facing businesses, and return value to shareholders. Our financial policy, focused on a prudent hedging strategy and effective cost management, provides us with financial flexibility, reduces the volatility of our cash flows and enables more efficient utilization of both working capital and collateral to operate the business through all cycles.
We view a strong balance sheet as a competitive strength in managing through periods of commodity price volatility with heightened agility. We are focused on allocating available cash flow to manage leverage to meet investment grade targets with incremental cash flows allocated to investing in both clean energy solutions and our customer-facing businesses and returning capital to shareholders. We believe a strong balance sheet and robust cash flow generation, combined with our current presence and scale in diverse markets, will position us favorably in pursuit of value-enhancing growth opportunities.
With high customer satisfaction, strong customer renewal and retention and best-in-class operating expertise, we are well-positioned to deliver sustainable and durable cash flows. To further support cash flow, we will continue to focus on operational efficiencies and cost management while ensuring the safety and reliability of our operations. In addition, our integrated and ratable hedging activities serve to manage commodity price volatility in energy gross margins over time. We believe the stability of our cash flow, coupled with our investment grade rating, provides a competitive advantage by improving resilience during market fluctuations, decreasing reliance on external funding through low financial leverage and positioning the business for growth.
|•||Committed to supporting all stakeholders through a strong commitment to environmental, social and governance practices|
We are committed to the highest standards of corporate governance to help us achieve our performance goals and to maintain the trust and confidence of our shareholders, employees, customers, regulators and other stakeholders. Environmental, Social and Governance principles have been at the core of our business since its original founding and will continue to be core to the Company.
We will continue to support our diverse employees, customers, communities and business partners, ensuring all are able to fully and equitably participate in social, environmental and economic progress. We will maintain the highest standards of corporate governance, operating responsibly and transparently with a continued focus on board refreshment and diversity.
Our Business Strategy
Our business strategy is to maximize value for all of our stakeholders through a particular emphasis on:
Focus on cash returns, business optimization, robust customer revenues, and capital allocation
We run our business with a focus on producing strong, robust cash flows in order to sustain our operations, maintain our investment grade credit targets, and fund shareholder return and growth opportunities. We remain focused on operating efficiency and cost management, while ensuring safety and operational excellence, to support stability in free cash flow generation.
We aim to achieve growth in cash flows from our customer facing business by increasing volumes and driving margin improvement across all channels to market. Increasing volumes can come from organic and acquisitive customer growth, both in commodity offerings as well as reaching previously inaccessible customers through non-commodity energy services and solutions. Increasing margins are expected to come from value-add products, services, and analytics coupled with existing offerings. Additionally, customer loyalty increases with the number of products and services we provide, contributing to repeatable, derisked cash flows. Constellation is a leader in enabling a clean energy future for its customers through informative purchasing strategies that expand beyond power and natural gas, focused on renewable, efficiency and technology applications to meet their carbon free energy goals. We will continue to target growth in volumes through both organic growth channels and disciplined mergers and acquisitions. We can leverage our existing platform to achieve economies of scale benefits on incremental volumes, leading to higher overall margins per customer and improved free cash flow conversion. Cash flows are further maximized by high customer satisfaction levels resulting in business consistency, stable unit economics, and high win and renewal rates. We will continue to manage cash flow volatility through prudent risk management strategies across the customer facing business, as described later in this document.
We also aim to achieve growth in cash flows from our generation business through a rigorous focus on operating performance and cost optimization. We will continue to evaluate the cost-benefit analysis of all operating and capital allocation decisions to optimize value for our stakeholders, without sacrificing our commitment to safety. Further, our ratable hedging strategies, coupled with stable revenues generated through capacity markets and contracts for zero emission attributes will enable the business to continue to mitigate cash flow volatility, while preserving long-term optionality to realize any potential upside from market price improvements and/or state and federal clean energy programs. In addition, we will continue advocating for clean energy policies and seek fair compensation for the zero-carbon attributes of our nuclear plants while maintaining the discipline to retire uneconomic assets.
We will employ a disciplined approach to acquisitions that grows future cash flow and supports strategic initiatives. We will continue to evaluate asset and business divestitures to rationalize the portfolio and optimize cash proceeds.
Capital allocation decisions are made on a cash return basis, as we believe this discipline is necessary to drive consistent long-term value creation for our shareholders. We believe that our management team, reliable operating structure and strong commercial management enables us to deliver sustainable cash flows to support the balance sheet, return value to our shareholders and invest in and grow the existing platform, while achieving attractive returns on investment. In the years ahead, we expect to deliver substantial free cash flow supported by our stable customer facing business, disciplined hedging strategy and effective cost management, with more than $1.1 billion of cost reductions realized since 2015.
Financial discipline and balance sheet commitment.
We are committed to maintaining sufficient financial liquidity and an appropriate capital structure to support safe, secure and reliable operations, even in volatile market conditions. We believe our investment grade credit rating is a source of competitive advantage, and we intend to continue to maintain our credit position and best-in-class balance sheet. In line with that commitment, available cash flow will first be used to manage leverage to comfortably meet investment grade credit targets, with incremental capital allocated towards shareholder return and disciplined growth.
Excellence in operations.
Value is built on a foundation of operational excellence. We recognize operational efficiency, a culture of continuous improvement and disciplined investment, and robust safety practices as critical drivers.
We inherit robust safety programs from our predecessor company, and we have historically demonstrated a deep commitment through our exceptional safety track record, underpinned by a strong compliance and risk management culture. At the Company, we have strong, durable relationships with our customers resulting in stable financial margins, underpinned by strong operational performance in our customer-facing business. Our retail power customer renewal rates have averaged 77% since 2016 and 91% for natural gas customer retention rates.
We will continue to evaluate the cost / benefit of all operating and capital allocation decisions to optimize value for our stakeholders. However, above all, we will continue to prioritize safety, which is a core value for our organization.
Taking the lead on driving toward a clean energy future.
We are committed to enabling a clean energy future through our generation operations and our customer-facing business. Through our two businesses, we aim to serve as an indispensable partner to businesses and the state and local governments that are setting ambitious carbon-reduction goals and seeking long-term solutions to the climate crisis. We advocate for policies that address the climate crisis and preserve and grow clean energy.
We are differentiated by the cleanest generation fleet in the country. Since our generation fleet is nearly 90% emissions-free (based on generation output), we would have minimal compliance costs compared to our peers.
Our Company is the Largest Producer of Clean Electricity in the U.S.(a)
|a)||Source: Benchmarking Air Emissions, July 2021, published by M.J. Bradley & Associates LLC. Reflects 2019 regulated and non-regulated generation. Number in parentheses is the company’s generation ranking in that year.|
As environmental sustainability continues to build momentum and grows for businesses across the country, the demand for clean and sustainable energy solutions increases. Constellation offers clean products to help customers meet their sustainability goals. In addition to our current product offerings, we will innovate and develop new products to meet our customers’ needs.
For nearly two decades, our predecessor company was a strong advocate for policies that would address the climate crisis. We will continue to be a leading advocate at the federal level and in our states for policies that will reduce greenhouse emissions, and preserve and grow clean energy.
Our Key Markets
We operate across various markets in the U.S., as well as Canada and the U.K. Our generation resources allow us to generate, procure and sell electricity to retail and wholesale customers, highlighting the integrated nature of our business. We also have the ability to contract for generation in the markets in which we operate, further facilitating our ability to match generation output to customer demand (gen-to-load) and customer-to-supply as an integrated business. We have five reportable segments consisting of the Mid-Atlantic, Midwest, New York, Texas and Other Power Regions. These reflect the following geographical areas:
|·||Mid-Atlantic: Eastern half of PJM, which includes New Jersey, Maryland, Virginia, West Virginia, Delaware, the District of Columbia, and parts of Pennsylvania and North Carolina|
|·||Midwest: Western half of PJM and the U. S. footprint of MISO, excluding MISO’s Southern Region.|
|·||New York: NYISO|
|·||Other Power Regions: New England, South, West and Canada|
At December 31, 2020, our interests in net electric generating capacity totaled 31,271 MW. Our supply sources by region are summarized below:
|Supply Source (GWhs)||2020|
|Total Nuclear Generation||175,085|
|Fossil and Renewables|
|Other Power Regions||11,121|
|Total Fossil and Renewables||26,553|
|Other Power Regions||51,079|
|Total Purchased Power||79,972|
|Total Supply/Sales by Region|
|Other Power Regions||62,200|
|Total Supply/Sales by Region||281,610|
|(a)||Includes the proportionate share of output where Generation has an undivided ownership interest in jointly-owned generating plants and includes the total output of plants that are fully consolidated.|
|(b)||Includes affiliate sales to PECO, BGE, Pepco, DPL, and ACE in the Mid-Atlantic region and affiliate sales to ComEd in the Midwest region.|
Our integrated business also consists of the physical delivery and marketing of power and natural gas across multiple geographical regions through Constellation, our customer-facing business. Constellation serves power and natural gas across all competitive markets, reaching approximately 2 million customers, including three-fourths of the Fortune 100, approximately 216,500 business and public sector customers, and about 1.6 million unique residential customers. Constellation also has a vibrant non-commodity element of its customer facing business, providing sustainability, efficiency and technology solutions to provide a comprehensive suite of energy solutions to meet customers’ growing and evolving needs.
We have ownership interests in thirteen nuclear generating stations currently in service, consisting of 23 units with an aggregate of 18,880 MW of capacity. These stations exclude TMI located in Middletown, Pennsylvania, which permanently ceased generation operations on September 20, 2019, and Oyster Creek located in Forked River, New Jersey, which permanently ceased generation operations on September 17, 2018 and was subsequently sold to Holtec International (Holtec) on July 1, 2019. We wholly own all of our nuclear generating stations, except for undivided ownership interests in four jointly-owned nuclear stations: Quad Cities (75% ownership), Peach Bottom (50% ownership), Salem (42.59% ownership) and Nine Mile Point Unit 2 (82% ownership), which are consolidated in our financial statements relative to our proportionate ownership interest in each unit.
Our nuclear generating stations are all operated by Generation, with the exception of the two units at Salem, which are operated by PSEG Nuclear, LLC (PSEG Nuclear), an indirect, wholly owned subsidiary of PSEG.
In 2020, 2019 and 2018, electric supply (in GWh) generated from the nuclear generating facilities was 62%, 64% and 68%, respectively, of our total electric supply, which also includes fossil, hydroelectric, and renewable generation and electric supply purchased for resale. Our wholesale and retail power marketing activities are, in part, supplied by the output from the nuclear generating stations.
In May 2021, PJM conducted its first annual capacity auction since May 2018 and posted the results of the 2022/2023 Delivery Year auction on June 2, 2021. All of Generation’s nuclear and fossil generation power plants located in the PJM market cleared in the auction, with the exception of the Byron, Dresden and Quad Cities nuclear generation facilities. The Byron Generating Station, located just outside Byron, Illinois, and Dresden Generating Station, located in Morris, Illinois, are currently scheduled to retire prematurely in the fall of 2021. Despite also not clearing in the auction, the Quad Cities plant will continue to operate with support provided under the Illinois Future Energy Jobs Act, a clean energy law that took effect in 2017. The Minimum Offer Price Rule (MOPR) recently implemented by PJM Interconnection, L.L.C. prevented Quad Cities from clearing in the capacity auction. The result is that customers in Northern Illinois and throughout PJM will pay for more capacity from polluting generation instead of securing carbon-free megawatts from Quad Cities, at what would have been a lower cost absent the MOPR. At the direction of the PJM Board of Managers, PJM plans to submit a FERC filing proposing MOPR reforms to ensure that the capacity market rules respect and accommodate state resource preferences.
Nuclear Operations. Capacity factors, which are significantly affected by the number and duration of refueling and non-refueling outages, can have a significant impact on our results of operations. Our generation operations from our nuclear plants have historically had minimal environmental impact and the plants have a safe operating history.
We manage our scheduled refueling outages to minimize their duration and to maintain high nuclear generating capacity factors, resulting in a stable generation base for our wholesale and retail power marketing activities. During scheduled refueling outages, we perform maintenance and equipment upgrades in order to minimize the occurrence of unplanned outages and to maintain safe, reliable operations. During 2020, 2019, and 2018, the nuclear generating facilities operated by Generation, achieved capacity factors of 95.4%, 95.7%, and 94.6%, respectively, at ownership percentage.
In addition to the maintenance and equipment upgrades performed by us during scheduled refueling outages, we have extensive operating and security procedures in place to ensure the safe operation of the nuclear units. We also have extensive safety systems in place to protect the plant, personnel, and surrounding area in the unlikely event of an accident or other incident.
Regulation of Nuclear Power Generation. Generation is subject to the jurisdiction of the NRC with respect to the operation of its nuclear generating stations, including the licensing for operation of each unit. The NRC subjects nuclear generating stations to continuing review and regulation covering, among other things, operations, maintenance, emergency planning, security, and environmental and radiological aspects of those stations. As part of its reactor oversight process, the NRC continuously assesses unit performance indicators and inspection results and communicates its assessment on a semi-annual basis. The NRC categorizes each nuclear unit into one of five performance bands. All nuclear units operated by Generation are categorized in the Licensee Response Column (highest NRC performance band) except Clinton and FitzPatrick, which are in the Regulatory Response Column (second highest NRC performance band). The NRC may modify, suspend or revoke operating licenses and impose civil penalties for failure to comply with the Atomic Energy Act or the terms of the operating licenses. Changes in regulations by the NRC may require a substantial increase in capital expenditures and/or operating costs for nuclear generating facilities.
The generation of nuclear energy results in spent nuclear fuel (SNF). SNF generated by nuclear generating facilities is currently stored in storage pools or in dry cask storage facilities. As a by-product of their operations, nuclear generating units also produce LLRW. LLRW is accumulated at each generating station and permanently disposed of at licensed disposal facilities. The Federal Low-Level Radioactive Waste Policy Act of 1980 provides that states may enter into agreements to provide regional disposal facilities for LLRW and restrict use of those facilities to waste generated within the region.
Operation of nuclear generation is subject to liability, property damage and other risks associated with major incidents. NRC regulations require that licensees of nuclear generating facilities demonstrate reasonable assurance that funds will be available in specified minimum amounts at the end of the life of the facility to decommission the facility. The ultimate decommissioning obligation is expected to be funded by the NDTs.
Licenses. Generation has original 40-year operating licenses from the NRC for each of its nuclear units and has received 20-year operating license renewals from the NRC for all its nuclear units except Clinton. PSEG has received 20-year operating license renewals for Salem Units 1 and 2. Peach Bottom has received a second 20-year license renewal from the NRC for Units 2 and 3. On August 27, 2020, Generation announced that it intends to permanently cease generation operations at Byron in September 2021 and at Dresden in November 2021.
The following table summarizes the current license expiration dates for Generation’s operating nuclear facilities in service:
|Nine Mile Point||1||1969||2029|
|(a)||Denotes year in which nuclear unit began commercial operations.|
|(b)||Although timing has been delayed, Generation currently plans to seek license renewal for Clinton and has notified the NRC that any license renewal application would not be filed until the first quarter of 2024. In 2019, the NRC approved a change of the operating license expiration for Clinton from 2026 to 2027.|
The operating license renewal process takes approximately four to five years from the commencement of the renewal process, which includes approximately two years for Generation to develop the application and approximately two years for the NRC to review the application. Depreciation provisions are based on the estimated useful lives of the stations, which reflect the first renewal of the operating licenses for all of Generation’s operating nuclear generating stations except for Clinton, Peach Bottom, Byron, and Dresden. Clinton depreciation provisions are based on an estimated useful life of 2027 which is the last year of the Illinois ZECs. Peach Bottom depreciation provisions are based on estimated useful life of 2053 and 2054 for Unit 2 and Unit 3, respectively, which reflects the second renewal of its operating licenses. Byron and Dresden depreciation provisions are based on the announced shutdown dates of September 2021 and November 2021, respectively.
Nuclear Waste Storage and Disposal. There are no facilities for the reprocessing or permanent disposal of SNF currently in operation in the U.S., nor has the NRC licensed any such facilities. Generation currently stores all SNF generated by its nuclear generating facilities on-site in storage pools or in dry cask storage facilities. Since Generation’s SNF storage pools generally do not have sufficient storage capacity for the life of the respective plant, Generation has developed dry cask storage facilities to support operations.
As of December 31, 2020, Generation had approximately 87,100 SNF assemblies (21,600 tons) stored on site in SNF pools or dry cask storage, which includes SNF assemblies at Zion Station, for which Generation retains ownership even though the responsibility for decommissioning Zion Station has been assumed by another party, and TMI, which is no longer operational. See “—Decommissioning” below for additional information regarding Zion Station. All currently operating Generation-owned nuclear sites have on-site dry cask storage. TMI's on-site dry cask storage is projected to be in operation in 2021. On-site dry cask storage in concert with on-site storage pools will be capable of meeting all current and future SNF storage requirements at Generation’s sites through the end of the license renewal periods and through decommissioning.
As a by-product of their operations, nuclear generating units produce LLRW. LLRW is accumulated at each generating station and permanently disposed of at licensed disposal facilities. The Federal Low-Level Radioactive Waste Policy Act of 1980 provides that states may enter into agreements to provide regional disposal facilities for LLRW and restrict use of those facilities to waste generated within the region. Illinois and Kentucky have entered into such an agreement, although neither state currently has an operational site and none is anticipated to be operational for the next ten years.
Generation ships its Class A LLRW, which represents 93% of LLRW generated at its stations, to disposal facilities in Utah and South Carolina, which have enough storage capacity to store all Class A LLRW for the life of all stations in Generation's nuclear fleet. The disposal facility in South Carolina at present is only receiving LLRW from LLRW generators in South Carolina, New Jersey (which includes Salem) and Connecticut.
Generation utilizes on-site storage capacity at all its stations to store and stage for shipping Class B and Class C LLRW. Generation has a contract through 2032 to ship Class B and Class C LLRW to a disposal facility in Texas. The agreement provides for disposal of all current Class B and Class C LLRW currently stored at each station as well as the Class B and Class C LLRW generated during the term of the agreement. However, because the production of LLRW from Generation’s nuclear fleet will exceed the capacity at the Texas site (3.9 million curies for 15 years beginning in 2012), Generation will still be required to utilize on-site storage at its stations for Class B and Class C LLRW. Generation currently has enough storage capacity to store all Class B and Class C LLRW for the life of all stations in Generation’s nuclear fleet. Generation continues to pursue alternative disposal strategies for LLRW, including an LLRW reduction program to minimize on-site storage and cost impacts.
Nuclear Insurance. Generation is subject to liability, property damage and other risks associated with major incidents at all of its nuclear stations. Generation has reduced its financial exposure to these risks through insurance and other industry risk-sharing provisions.
Generation is self-insured to the extent that any losses may exceed the amount of insurance maintained or are within the policy deductible for its insured losses. Such losses could have a material adverse effect on Generation’s and our future financial statements.
Decommissioning. NRC regulations require that licensees of nuclear generating facilities demonstrate reasonable assurance that funds will be available in specified minimum amounts at the end of the life of the facility to decommission the facility. The ultimate decommissioning obligation is expected to be funded by the NDT funds.
Oyster Creek Decommissioning. On July 1, 2019, Generation completed the sale with Holtec and its indirect wholly owned subsidiary, Oyster Creek Environmental Protection, LLC (OCEP), of Oyster Creek nuclear generating station under which OCEP has assumed the responsibility for decommissioning that station.
Zion Station Decommissioning. On September 1, 2010, Generation completed an ASA with EnergySolutions, Inc. and its wholly owned subsidiaries, EnergySolutions, LLC and ZionSolutions under which ZionSolutions has assumed responsibility for decommissioning Zion nuclear generating station.
Fossil and Renewable Facilities (including Hydroelectric)
We wholly own all of our fossil and renewable generating stations, with the exception of: Wyman; certain wind project entities and a biomass project entity with minority interest owners; and EGRP, which is owned 49% by another owner. Our fossil and renewable generating stations are all operated by us, with the exception of Wyman, which is operated by a third party. In 2020, 2019 and 2018, electric supply (in GWh) generated from owned fossil and renewable generating facilities was 9%, 11% and 11%, respectively, of our total electric supply. The majority of this output was dispatched to support our wholesale and retail power marketing activities. On March 31, 2021, we closed an agreement to sell a significant portion of our solar business.
Licenses. Fossil and renewable generation plants are generally not licensed, and, therefore, the decision on when to retire plants is, fundamentally, a commercial one. FERC has the exclusive authority to license most non-Federal hydropower projects located on navigable waterways or Federal lands, or connected to the interstate electric grid, which include Conowingo Hydroelectric Project (Conowingo) and Muddy Run Pumped Storage Facility Project (Muddy Run). Muddy Run's license expires on December 1, 2055. On March 19, 2021, Generation received a new 50-year license for Conowingo.
Insurance. We maintain business interruption insurance for our renewable projects, but not for our fossil and hydroelectric operations unless required by contract or financing agreements. We maintain both property damage and liability insurance. For property damage and liability claims for these operations, we are self-insured to the extent that losses are within the policy deductible or exceed the amount of insurance maintained. Such losses could have a material adverse effect on our future financial conditions and their results of operations and cash flows.
In addition to energy produced by owned generation assets, we source electricity from plants we do not own under long-term contracts. The following tables summarize our long-term contracts to purchase unit-specific physical power with an original term in excess of one year in duration, by region, in effect as of December 31, 2020:
|Mid-Atlantic||8||2021 - 2032||183|
|Midwest||3||2021 - 2032||351|
|ERCOT||5||2021 - 2035||864|
|Other Power Regions||17||2021 - 2032||2,568|
|Capacity Expiring (MW)||884||304||103||101||461||2,113||3,966|
The following table shows sources of electric supply in GWh for 2020 and 2019:
|Purchases — non-trading portfolio||79,972||70,939|
|Fossil (primarily natural gas and oil)||19,501||21,554|
|(a)||Includes the proportionate share of output where Generation has an undivided ownership interest in jointly-owned generating plants and includes the total output of plants that are fully consolidated.|
|(b)||Includes wind, hydroelectric, solar, and biomass generating assets.|
The cycle of production and utilization of nuclear fuel includes the mining and milling of uranium ore into uranium concentrates, the conversion of uranium concentrates to uranium hexafluoride, the enrichment of the uranium hexafluoride, and the fabrication of fuel assemblies. Generation has inventory in various forms and does not anticipate difficulty in obtaining the necessary uranium concentrates or conversion, enrichment, or fabrication services to meet the nuclear fuel requirements of its nuclear units.
Natural gas is procured through long-term and short-term contracts, as well as spot-market purchases. Fuel oil inventories are managed so that in the winter months sufficient volumes of fuel are available in the event of extreme weather conditions and during the remaining months to take advantage of favorable market pricing.
We use financial instruments to mitigate price risk associated with certain commodity price exposures, using both over-the-counter and exchange-traded instruments.
Customers, Marketing and Price Risk Management
Constellation sells electricity and natural gas, including renewable energy and associated attributes, in competitive domestic energy markets to both wholesale and retail customers. We leverage our generation portfolio to serve customers under both long-term and short-term contracts, as well as spot market sales. We also have the capability to contract for generation to meet customer and portfolio needs to complement our existing fleet in a capital light, de-risked way.
Our integrated business operations include physical delivery and marketing of power and natural gas. We largely obtain physical power supply from our owned and contracted generation in multiple geographic regions. The commodity risks associated with the output from owned and contracted generation is managed using various commodity transactions including sales to customers and our ratable hedging program. The main objective is to obtain low-cost energy supply to meet physical delivery obligations to both wholesale and retail customers. We sell electricity, natural gas, and other energy related products and solutions to various customers, including distribution utilities, municipalities, cooperatives, and commercial, industrial, governmental and residential customers in competitive markets.
Price and Supply Risk Management
Constellation uses a combination of wholesale and retail customer load sales, as well as non-derivative and derivative contracts, including financially-settled swaps, futures contracts and swap options, and physical options and physical forward contracts, all with credit-approved counterparties, to hedge the price risk of the generation portfolio. The portfolio has enjoyed more than a decade of a risk-mitigated ratable hedging strategy, whereby the prompt 3 years are hedged on an approximate rolling 90%/60%/30% basis, providing cash flow stability for its investors while still allowing commercial opportunities to generate value for the enterprise. Constellation will continue to be proactive in using hedging strategies to mitigate commodity price. Similarly, the scale and scope of the portfolio provides risk-mitigating technology, product and geographic diversification.
The percentage of expected generation hedged is the amount of equivalent sales divided by the expected generation. Expected generation is the volume of energy that best represents our commodity position in energy markets from owned or contracted generation based upon a simulated dispatch model that makes assumptions regarding future market conditions, which are calibrated to market quotes for power, fuel, load following products and options. Equivalent sales represent all wholesale and retail load sales, as well as hedging products, which include economic hedges and certain non-derivative contracts. A portion of our hedging strategy may be implemented through the use of fuel products based on assumed correlations between power and fuel prices. The risk management group monitors the financial risks of the wholesale and retail power marketing activities. We also use financial and commodity contracts for proprietary trading purposes, but this activity accounts for only a small portion of our efforts. The proprietary trading portfolio is subject to a risk management policy that includes stringent risk management limits.
Our operations are affected by weather, which affects demand for electricity and natural gas, as well as operating conditions. The market price for electricity is also affected by changes in the demand for electricity and the available supply of electricity. With respect to the electric business, very warm weather in summer months and, with respect to the electric and natural gas businesses, very cold weather in winter months are referred to as “favorable weather conditions” because those weather conditions result in increased deliveries of electricity and natural gas. Conversely, mild weather reduces demand. As a result, our operating results in the future may fluctuate substantially on a seasonal basis, especially when more severe weather conditions such as heat waves or extreme winter weather make such fluctuations more pronounced. The pattern of this fluctuation may change depending on the type and location of the facilities owned, the retail load served and the terms of contracts to purchase or sell electricity.
Properties and Facilities
The following table presents Generation’s interests in net electric generating capacity by station at December 31, 2020:
Primary Fuel Type