CEO John Rowe tells WSJ focus is on earnings
Over at Atomic Insights Rod Adams has a long piece in which he tries to figure out what Exelon’s John Rowe is really doing about the nuclear renaissance. Adams has some strong opinions about where Rowe and Exelon are going. Right now the paradox is that Exelon (NYSE:EXC), as the nation’s largest nuclear utility, has no plans to build a new nuclear reactor in the next decade. The question is which way is Exelon headed in the nuclear renaissance?
Rowe is a force to be reckoned with since he is the CEO of Exelon and the past president of the Nuclear Energy Institute (NEI). So, when he has something to say, people listen. Exelon’s corporate web site has the full text of his testimony to the Senate late week plus all his other speeches.
More significantly, Rowe has been talking a lot to the Wall Street Journal about earnings. On Oct 19, Rowe sat for an interview with WSJ reporter Rebecca Smith. A video segment from that interview captures him talking nonstop for almost three minutes about how he makes decisions and what factors drive them. That monolog isn’t in the text of the published interview which makes it is a good place to start.
Discontinuous data can make you dizzy
One of the hallmarks of executive thinking is the ability to deal with discontinuous data, events, and the general panorama of things you cannot control that impact your business. Rowe says he uses time as the organizing principle for investment decisions. He tells the WSJ utility executives have to use multiple time horizons. This is important because what he is saying is that he is focused on earnings and the time it takes to deliver gains from investments to stockholders.
Even though Rowe is the CEO of the largest nuclear utility in the country. he freely admits he is benefiting from 40-60 year investment decisions made by his predecessors. Worse for them, they never got to deliver these gains to stockholders. Rowe made money for Exelon buying nuclear reactors for a song and increasing their operating efficiency.
It’s like saying if a turnip falls off the truck Exelon will be there to pick it up. On the other hand, stockholders taking their dividends to the bank have no complaints. The depreciated assets are cash cows for the firm’s investors especially the big ones who own 5% or more of the stock.
The older plants are also magnets for controversy when it comes to relicensing them for another 20 years. Exelon isn’t alone in this field. Rival utility Entergy (NYSE:ETR) has a similar strategy and multiple headaches relicensing Indian Point and Vermont Yankee. Also, like Exelon, Entergy has no plans to build new nuclear power plants and is yet again reorganizing its assets for maximum earnings rather than growth. Entergy pushed back the dates for new reactors at Grand Gulf and Riverbend sites to the 2020s.
For Rowe, the best investments are those that deliver gains within three years. He tells the WSJ, “from an investor point of view, something that doesn’t pay off in 10 years isn’t viable.” That’s probably a clue why the firm isn’t building any new reactors which take a minimum of 10 years from a cold start to entering revenue service.
Exelon’s failed effort to acquire NRG
In fact, that single sentence is probably the biggest pointer to the reason why Exelon looks like it is exiting its growth by acquisition strategy and concentrating on earnings.
Earlier this year, Exelon tried to acquire NRG (NYSE:NRG) which owns and operates the South Texas Project (STP). Exelon’s $6 billion all stock offer was designed to not only buy two operating reactors, but also NRG’s planned two new units.
Exelon stockholders would have reaped immediate benefits from the cash generated by STP units 1 & 2. The deal looked good to Exelon, but NRG’s stockholders and Wall Street said it was priced too low. Exelon called off the effort after an NRG stockholder’s vote turned down its offer last July.
The value of the transaction was based on the idea it is lot cheaper to buy someone else’s the reactors rather than build new ones. This is how the beer industry grew in the U.S. Chances are your favorite micro-brew is actually owned by a major brewery. Note that Anheuser-Busch (NYSE:BUD) itself got acquired by a Belgian company when the decline of the U.S. dollar put American assets up for grabs at fire sale prices. This is why Exelon went after NRG which itself had grown through acquisitions. It was a case of a bigger fish chasing a smaller one, but it got away.
Victoria Texas two-step
Exelon also exited its near-term plans to license and build twin nuclear reactors in Victoria, Texas. For a while no one, even Exelon’s contractors, were quite sure what the utility was doing in Texas. It finally became clear Exelon would not continue to pursue a license to build twin reactors at that site.
Instead, the firm will develop an Early Site Permit that holds its place in line with the NRC. The project was also complicated by Exelon’s low ranking for Federal loan guarantees when it chose the GE-Hitachi ESBWR reactor for the project. The Department of Energy reviewed the ESBWR’s then long-term prospects to get the design certified by the NRC and raised a red flag about time-to-market. Since then the ESBWR reactor has made progress at the NRC, but it came too late for Exelon.
Federal loan guarantees a long shot. Harvest strategy rules.
Another way to see what Exelon is doing is to call its direction a “harvest strategy.” For instance, if carbon cap-and-trade legislation eventually passes in Congress, Exelon, with 17 carbon emission free reactors, will benefit handsomely without having to invest a single dollar of its own money in new plants or uprates to existing plants.
What will it take for Exelon to invest in new nuclear reactors? Rowe tells the WSJ natural gas prices have to go up, and stay up, and the federal government has to offer substantial support via loan guarantees.
To this end, Rowe testified at a Senate hearing last week. He said the current ceiling of $18.5 billion should be raised to $50 billion. He targeted this number because it is a figure that got enough votes to pass in the Senate in 2008 when it was working on economic stimulus legislation. The Nuclear Energy Institute called for $100 billion.
Rowe also said he thinks the first round of new nuclear power plants will include just four new reactors. He cited as key reasons the current recession, the long-term price of natural gas, and infrastructure and supply chain limitations. He also said it could be as late as 2030 before the nation really gets up a head of steam to build large numbers of new nuclear power plants. Sen. Lamar Alexander may have a long wait for his 100 new nuclear reactors.
Nuclear utility likes sun dials
While Rowe was offering his views on nuclear energy to the Senate, he was also working on following his own advice on investments and earnings. He announced plans to build a $60 million solar energy project in its home town of Chicago. It helps that the Department of Energy is issuing loan guarantees for the project.
Also, the solar energy plants is easily bolted together from readily manufactured components with a robust supply chain. It doesn’t take rocket science to build one or run one. And it takes less than three years to reap returns from one.
Rowe knows the solar plant, even operating at full capacity only 30% of the time, will deliver a reliable carbon emission free revenue stream to his stockholders. Ratepayers might not be happy with $0.15/KwHr electricity, but that isn’t Rowe’s problem.
Rowe isn’t exiting the nuclear renaissance. He just thinks that without federal loan guarantees it makes no sense to be in one even with carbon taxes unless they hit $75/ton for CO2 which is unlikely. So he’s putting his money where his mouth is. At least he is consistent.
And consistent returns and a rising stock price are all that Exelon’s stockholders really care about. They don’t care if it comes from solar, wind, gas, or nuclear so long as it keeps coming. John Rowe says he’s there to make sure that’s what the company delivers.
# # #