Exelon Corp. (EXC:US), the largest U.S. nuclear power producer, may begin to see its low-emissions strategy pay off -- four years after it lost a fight for climate legislation it told investors would add $1.1 billion in annual earnings.
The company’s shareholders have paid the price during the wait for U.S. greenhouse-gas emissions limits. The Chicago-based company, which has trailed (EXC:US) the Standard & Poor’s 500 Index for the past five years, has lost $30.5 billion of market value since 2008 as its stock declined 64 percent on falling prices for natural gas and wholesale electricity.
The tide may now be turning for the utility owner after President Barack Obama announced plans this week to limit heat-trapping carbon dioxide emitted from power plants, giving a boost for Exelon and its nuclear reactors. Other winners may include NextEra Energy Inc. (NEE:US), the biggest operator of U.S. wind power, and First Solar Inc. (FSLR:US), builder of utility-scale solar projects. Coal producers like Peabody Energy Corp. (BTU:US) have attacked the plan for its potential harm to jobs and the economy.
“The worse things are for coal, the better they are for nuclear,” Kit Konolige, a New York-based analyst for BGC Partners LP who rates Exelon a hold and doesn’t own the shares, said today in a phone interview. “These guys are the nuclear play.”
Exelon declined 0.8 percent to $31.09 at the close in New York. The shares have increased 4.5 percent this year.
The company, which announced its first dividend cut in February, has 17 nuclear reactors and 44 wind-power projects and much to gain from carbon dioxide, or CO2, regulations. Limits probably will drive up the price of electricity by making coal-fired plants more expensive or even too costly to run, said Andrew Smith, a Houston-based analyst for Drexel Hamilton LLC.
“The one clear winner that I think you can point to out in the industry is zero-emissions generation sources, so nuclear for Exelon, wind and solar farms for NextEra,” Smith said. “Any sort of asset that doesn’t produce CO2.”
Exelon emits a quarter of the greenhouse gases of its next-cleanest competitor to generate the same amount of power, so it has an advantage if government policies crimp the output of competitors, Hugh Wynne, a New York-based analyst for Sanford C. Bernstein & Co. wrote in note to clients yesterday.
Coal-heavy generators including FirstEnergy Corp. (FE:US), PPL Corp. (PPL:US) and Dynegy Inc. (DYN:US) emit 14 times to 17 times more than Exelon, Wynne wrote. Wholesale markets offer no assurance companies can recover the cost of emissions compliance, Wynne wrote.
Exelon’s former Chief Executive Officer John Rowe was a vocal proponent of climate legislation, often flying to Washington to lobby elected officials. During his tenure, Exelon left the U.S. Chamber of Commerce because of a disagreement with business group’s global warming policies. They have since rejoined the Washington-based lobbying group.
In a July 2, 2009 slide show, the company said proposed climate legislation from Democratic Representatives Henry Waxman and Edward Markey would add $1.1 billion to annual earnings before interest, taxes, depreciation and amortization. The legislation failed to win approval from both houses of Congress.
“Any actions that would reduce coal-fueled generation harm Americans, who would feel the same pain at the plug we now feel at the pump,” St. Louis-based Peabody Energy, the biggest U.S. coal miner, said in a statement yesterday.
The latest Obama plan doesn’t specify how deeply and how quickly the U.S. Environmental Protection Agency will curb emissions from existing power plants. In a speech at Georgetown University, Obama called for proposed rules from the agency by June 2014.
Pace of Changes
Obama’s target to cut greenhouse gas emissions 17 percent from 2005 levels by 2020 would require a 21 percent reduction in coal-fired generation if the most-efficient natural gas burning plants take their place and a 13 percent cut in coal if renewables or conservation replace that power supply, according to Wynne.
A key consideration will be what rules take effect and how quickly, Drexel’s Smith said. Carbon-reducing legislation in California took more than five years to implement, he said.
New “meaningful” rules for existing plants probably won’t take effect until about 2020, Julien Dumoulin-Smith, a New York-based analyst for UBS Securities LLC, wrote in a June 25 note to investors. Wynne said the regulations may not be finalized until the end of 2016.
“The regulations should feature reasonable timelines for implementation and be supportive of existing state programs,” Paul Elsberg, an Exelon spokesman, said in an e-mail. Elsberg declined to comment on the potential earnings benefit of Obama’s climate plan and whether the $1.1 billion in added earnings is still applicable.
A spokesman for Juno Beach, Florida-based NextEra Energy declined to comment.
A sharp rise in limits with a short timeframe for compliance will boost power prices, Tom Hahn, executive vice president of U.S. power derivatives at brokerage ICAP Energy LLC in Durham, North Carolina, said in a phone interview.“If the limits are more gradual,and if natural gas stays in this lower trading range, then the price impact should be more muted.”
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