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Morningstar | Exelon Moves Its Focus Toward Attaining Pennsylvania Support for its Nuclear Fleet

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 earnings growth through 2022. By then, the regulated utilities' earnings should easily top Exelon's generation earnings, based on current energy market conditions.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 continues to drive costs out of the business. Exelon forecasts $4.2 billion in costs at the unit in 2022, down from $4.8 billion in 2018.Exelon has shown its political clout recently, winning subsidies in Illinois, New York, and New Jersey to keep its nuclear fleet economic. To date, Exelon has secured over $400 million in annual zero emission credits across these three states.The next challenge is winning support in Pennsylvania. What makes Pennsylvania different from Illinois, New York, and New Jersey is the former's abundance of in-state natural gas production and generation. Easy access to low-cost production has kept regional natural gas prices relatively low over the past several years questioning the need to prop up nuclear generation. However, nuclear generation in Pennsylvania still accounts for 39% of the state's electricity, and additional retirements would require a larger ramp-up in natural gas. This would hurt the state's ability to hit lower carbon targets.