Like many utilities, Exelon Corp. faces an insecure future. Unlike many utilities, however, the largest U.S. operator of nuclear reactors is set to abandon the strategy that made it successful.
After EDF's exit from its U.S. nuclear venture with Exelon sent chills through the sector, Exelon looked long and hard at its nuclear business. With dampened demand and competition from subsidized wind, the company saw little room for growth in nuclear. And that's when Exelon decided to change its strategy.
Take a look below and find out what Exelon is doing to reposition its business for the future:
INVEST IN REGULATED UTILITIES
The company's plan primarily revolves around bolstering its regulated utilities business. Exelon will shift investment away from its merchant generation business and invest $13.5 billion in its three regulated utilities—Commonwealth Edison (Com Ed) in Illinois, Baltimore Gas & Electric (BGE) in Maryland and PECO in Philadelphia.
Senior EVP and Chief Strategy Officer Bill Von Hoene announced at the Barclay's CEO conference that the investments will go towards smart meters, smart grid, upgrading aging infrastructure and improving reliability. "These are investments which we believe will allow us to grow our rate base during the planning period by 5% to 6% annually at these utilities and we are working with our states and our regulators to do that," Van Hoene noted.
CAPITALIZE ON COST EFFICIENCIES
To tighten its finances and realize cost savings, Exelon plans to realize $305 million of cost synergies in 2013 and $550 million in run rate synergies in 2014 from its Constellation acquisition in 2012. Exelon is also targeting $100 million in system savings in 2013 and 2014 by reducing operations and maintenance (O&M) expenses at Exelon Generation. Lastly, Exelon plans to realize up to $50 million to $75 million of savings as EDF transfers management of three CENG nuclear plants to Exelon.
ALLOW MARKET STRUGGLES TO PLAY OUT
Low power prices is one of the primary reasons behind Exelon's new strategy. Lower-than-expected natural gas prices and modest load growth are "creating [...] challenges" for Exelon and other merchant generators, according to Van Hoene.
He told the audience at the Barclay's CEO conference, "we look at the marketplace and we believe there is a disconnect between the forward prices. Van Hoene thinks the market will rebalance itself as coal fleets go into retirement as he expects "20 or more gigawatts of coal to retire in PJM over the course of the next year and a half."
"We can’t accelerate it, we can’t create it, but we can respond to it," Van Hoene says. "And what we’ve done as a result of that is we’ve hedged in a way that, historically, we have not hedged."
Exelon is "7% behind ratable hedging in 2015" and the company is hedging with natural gas, Van Hoene says, giving it "the flexibility to realize some of the escalation in prices that we think will materialize."
STAY FLEXIBLE
How Exelon has responded to the waning nuclear renaissance is unique—the company is neither resisting change nor leaving the nuclear business entirely. Understanding the realities of the industry, the company is not only adapting but preparing itself to adapt even further depending on market conditions. Van Hoene explained, “We can't control these things... [But we can] preserve and enhance the value of the company on a longer term basis.”
Exelon is actively planning to increase its renewable portfolio, particularly in wind, while remaining ready to seize opportunities through consolidations and acquisitions. The company is doing what it can to keep its nuclear business steady as market struggles play themselves out. The key is that Exelon's strategy is flexible enough to shift gears at any given time. Only time will tell how effective this strategy is, but Exelon is repositioning itself for long-term growth.
“We don’t have a philosophy to say we’re going to go do a particular thing. We have a philosophy that says we are value seeking and, because of the perspective that we have, we will continue to do it,” Von Hoene said.
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