Exelon's Three Mile Island Closure a Political Move

We are reaffirming our $32 fair value estimate and narrow moat and stable moat trend ratings for

Although we agree with Exelon that Three Mile Island is probably struggling to meet its cost of capital, we think this announcement is a clear political move to force Pennsylvania policy makers to decide whether to subsidize distressed nuclear generators. Three Mile Island has not cleared the last three mid-Atlantic base capacity auctions, and it was widely anticipated the plant would close in 2019 absent state subsidies.

If Exelon is able to win political support for subsidies, we think regulators and the courts ultimately will find the subsidies illegal based on recent precedent rulings. Subsidies in Pennsylvania would probably be similar to so-called zero emission credits in New York and Illinois, which are supporting three of Exelon's plants that otherwise would have closed this year. We continue to believe Exelon's three distressed nuclear plants in those states ultimately will close when the subsidies are declared illegal, although that could be a multiyear process.

We also expect the courts will require Exelon to refund cash payments it is collecting in New York as of April 1 and starting June 1 in Illinois, pending a ruling from a federal court judge on an injunction filing. Policy-making at the Federal Energy Regulatory Commission and the Illinois injunction ruling are key mile markers. If the subsidies survive legal and regulatory challenges, it could raise our fair value estimate by $2-$3 per share.

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