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Morningstar | Exelon Generation Cost Savings Help Mitigate Unit Headwinds

As the largest nuclear power plant owner in the United States, Exelon has suffered as low natural gas prices have slashed power prices since 2008. We think cheap gas will remain an advantage for competing generators and pressure nuclear plant returns for the foreseeable future. But Exelon has shown its political clout recently, winning subsidies in Illinois, New York, and New Jersey to keep its nuclear fleet economic. Exelon's growth engine is its regulated gas and electric distribution utilities. With the $12 billion acquisition of Pepco Holdings in March 2016, we expect Exelon's regulated electric and gas distribution utilities to drive all of our forecast 6% average annual consolidated earnings growth at least through 2020. By then, the regulated utilities' earnings should easily top Exelon's generation earnings, based on current energy market conditions.The regulatory outlook for Exelon's utilities is improving, supporting its growth plans. In Delaware, legislators approved a distribution customer charge that will allow for more timely recovery and support further infrastructure development. In Pennsylvania, legislation allows state regulators to incorporate more-constructive rate mechanisms such decoupling, formula rates, and multiyear rate plans and rate cases.At its nuclear unit, Exelon can't escape its leverage to Eastern and Midwestern U.S. power prices, which contribute about half of total earnings. Nuclear's low fuel costs and clean emission profile make Exelon the utilities sector's biggest winner if power prices rise, capacity markets tighten, and environmental regulations make fossil-fuel power generation more costly. Management recently announced $150 million in additional cost efficiencies at the generation unit, which we think management can achieve by 2021.Exelon continues to get courts' support for zero-emissions credits, or ZECs, programs that support nuclear fleet economics. In Illinois and New York, both the Seventh and Second Circuit Court of Appeals recently upheld the legality of ZECs supporting Exelon's nuclear fleet in New York and Illinois. In New Jersey, ZEC legislation would go into effect the first quarter of 2019.