Morningstar | Public Service Enterprise, Exelon Nuclear Plants Rise From Dead After Winning New Jersey Subsidies
We are reaffirming our $48 per share fair value estimate for Public Service Enterprise Group and $43 per share fair value estimate for Exelon after New Jersey regulators selected the Salem and Hope Creek nuclear plants to receive state subsidies. We are also reaffirming our narrow moat and stable moat trends for both companies.We expect the companies, which share ownership of Salem, to withdraw the deactivation notice they filed with the mid-Atlantic region grid operator, PJM, on April 16. The filing said they planned to close the plants by fall 2020, which would have led us to cut our fair value estimates. We already assumed the plants would receive the subsidies and continue operating, so there is no impact on our fair value estimates.
The decision comes one year after New Jersey Governor Phil Murphy signed legislation directing regulators to identify facilities that are most important to supporting the state's emissions-reduction goals. Nuclear plays an important role in decreasing the state's carbon emissions.
We expect the nuclear subsidies to generate $200 million of incremental annual pretax profits for the firm, representing 10% of our consolidated pretax earnings starting later this year. However, we expect the subsidies to contribute to depress future PJM capacity prices. We forecast mostly flat PJM capacity revenue for its fossil-fuel fleet between 2019-23.
For Exelon, we expect the subsidies to generate roughly $85 million of additional revenue absent any changes in PJM capacity pricing. Exelon continues to work on attaining subsidies in Pennsylvania.
We expect the subsidies will survive any legal challenges. The U.S. Supreme Court on April 15 declined to accept lawsuits challenging similar nuclear subsidies in Illinois and New York. Lower court ruled in favor of the subsidies. We are awaiting guidance from the Federal Energy Regulatory Commission on how PJM should adjust its capacity and energy market pricing to account for the subsidies.
Public Service Enterprise Group, through its subsidiaries, is engaged in the energy industry. The company conducts its business through two subsidiaries, Public Service Electric and Gas Company (PSE&G) and PSEG Power LLC (PSEG Power). PSE&G is a public utility, which is engaged in the transmission of electricity and distribution of electricity and natural gas in certain areas of New Jersey; and PSEG Power is a multi-regional energy supply company that integrates the operations of its merchant nuclear and fossil generating assets with its power marketing businesses and fuel supply functions through energy sales in energy markets primarily in the Northeast and Mid-Atlantic United States.
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