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Constellation Seeing Lower Retail Renewal Rates As Competitors "Misprice" Risk, Cuts Retail Growth Outlook

Unlike Run-up To Power Vortex, Says Retail Margins Still Within Historic Range Despite Competitive Intensity

Expects Opportunities To Acquire Retail Competitors When Volatility Returns

November 2, 2017

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Copyright 2010-17 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

Constellation is seeing lower renewal rates for its retail electricity business as competitors "misprice" risk, Exelon executives said yesterday during an earnings call

"After a series of mild summers and winters, we have seen declined power market volatility, which is weighing on the forward power prices, impacting the Constellation business. Just as we experienced during periods of low volatility, we’re again seeing less discipline by some of the wholesale and retail competitors in the market as they become more aggressive with their pricing. We have been through low discipline, low volatility periods before, and they end up in the same way. Those without discipline fail, that is when we can grow our market share by winning business at good margins or acquiring load businesses offered for sale," Exelon CEO Chris Crane said

Executives blamed "smaller players" in the retail market for the lack of pricing discipline on margins and risk, not the "bigger" players.

Specifically, Exelon said that it expects a $100 million decline in gross margins in 2018 and 2019 from the Constellation business, due to a decline in new retail electricity business that had been previously forecast.

"As we’ve witnessed in prior periods with low price volatility, some of our competitors are mispricing risk in an effort to win business. In the wholesale load business, we’re seeing other players mispricing risks as we consider the market risk from weather volatility, basis variability and the likely impact of energy market reforms that Chris talked about earlier. Against this backdrop, we are clearing at margins near the low end of historical realizations," said Exelon CFO Jack Thayer

However, while Constellation is not expected to hit its prior forecast for future retail volumes, Thayer stressed that Constellation is still recording C&I retail electric margins for new origination within its expected historic range of $2-4/MWh. This is in contrast to the period before the polar vortex, where not only did renewal rates decline for Constellation due to less disciplined pricing from competitors, but its retail margins also dipped below $2/MWh

"In the C&I business, the consolidation of the suppliers since the polar vortex has led to better margin discipline with our unit margins holding consistent with prior years," Thayer said

While unit margins have not been hit, the impact from the competitive intensity is being felt in retail electric renewal rates, compared to last couple of years, moving from something closer to 80% to low the 70% range, Thayer said

"At these lower renewal rates, we still expect our volumes to be flat year-over-year whereas our previous guidance assumes higher renewal rates that will drive volume growth at Constellation in 2018 and 2019. Notably, even against the challenged market backdrop, we’re holding volumes and margins flat, which is a testament to the strength of our retail platform and our disciplined approach to bidding business," Thayer said

"We’ve been through these periods of lower load price in the past and has previously created opportunities for us ... Retailers and wholesalers who misprice risk have consistently been driven from the business when we go from a period of low volatility to a volatility event. When the market corrects, we’ll be there to win business at good margins and grow volumes and market share, just as we have in the past. Even against the current market backdrop, Constellation continues to generate strong earnings and free cash flow. Our gen-to-load matching strategy remains a competitive advantage relative to our peers, contributing positive margin and providing a vehicle to bring our generation output to market in a disciplined manner," Thayer said

As noted above, Constellation expects flat combined retail and wholesale volumes this year and in 2018, and the impact from competitive intensity is instead being seen in not achieving prior growth forecasts for volumes. Executives reiterated that Constellation will not "chase" the market, and that Constellation will remain disciplined

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