By Rich Heidorn Jr.

Pennsylvania lawmakers must approve nuclear subsidies by May to prevent the retirement of Three Mile Island Unit 1, Exelon CEO Chris Crane told stock analysts Friday.

Crane’s comments came days after a bipartisan group of legislators circulated a proposal to add nuclear energy to Pennsylvania’s Alternative Energy Portfolio Standards Act. (See related story, Nuclear ‘Bailout’ Memo Circulating through Pa. Assembly.)

Speaking during the company’s fourth-quarter 2018 earnings call, Crane called the legislative effort “promising,” saying, “We have some strong support.”

But he said the company would need to order a new reactor core by May to refuel the 2,568-MW plant if it is to remain in operation. “We’ve let the stakeholders know that. So, if we can get this through in that period of time, we will be able to save the unit. Short of that, we would be beyond the [point of no] return at the end of May.”

The company announced in May 2017 that it would shutter TMI by about Sept. 30, 2019.

Kathleen Barron, senior vice president of federal regulatory affairs and wholesale market policy, said lawmakers have not decided on the value of the support the state might offer its nuclear plants.

“That is subject to discussions that are ongoing among the lawmakers now. So, we don’t have an estimate for you on how the program will look,” she said.

Crane also said the company continues to seek ways to boost the earnings of its Dresden, Braidwood and Byron nuclear plants in Illinois, all or parts of which did not clear PJM’s 2018 capacity auction.

“We will continue to engage with stakeholders on state policies while advocating broader market reforms at the federal level,” Crane said. “We will support PJM price formation changes like fast-start and reserve market reforms with our states to implement the expected FERC order on PJM capacity reforms and preserve the authority of our states to advance their clean energy policies and continue our efforts to seek fair compensation for zero-emitting nuclear plants.”

In June, FERC ruled that PJM’s Tariff was unjust and unreasonable because it allows resources receiving out-of-market revenues to depress capacity prices. The commission suggested modifications to PJM’s fixed resource requirement (FRR) option could allow the removal of state-subsidized resources and corresponding amounts of load from the capacity market. The first round of filings in FERC’s “paper hearing” on the issue were filed in October (EL18-178). (See Little Common Ground in PJM Capacity Revamp Filings.)

Crane said the company could benefit from “market reforms” underway in PJM, including moving some or all of the Illinois plants into the FRR “so we can get better capacity treatment that matches state’s environmental needs.” He also pointed to the RTO’s effort to improve price formation and revise reserve curves.

“So, that’s why we are keeping more of an open position [and not doing more hedging on future prices]. We believe the market will strengthen,” he said.

The company said its nuclear fleet set an all-time production record for 2018, generating 159 TWh.

In response to an analyst’s question, Barron said it was unclear when FERC would act on changes to PJM’s capacity market.

“Clearly, there has been some delay in the schedule, and I think that’s a function of the transition at FERC,” she said, noting the death of former Chairman Kevin McIntyre, and Commissioner Cheryl LaFleur’s announcement that she won’t be nominated for another term.

“So, while they have been able to get out a number of important orders, others have lagged and the capacity market order [is] among them. … We really have no signal yet from them as to when we will see their final decision in that docket.”

Q4 Results, Investment Opportunities

Exelon’s net income for the fourth quarter of 2018 dropped to 16 cents/share from $1.94 a year earlier, while operating earnings rose slightly to 58 cents/share from 56 cents.

The company said it expects operating earnings of $3 to $3.30/share for 2019, based on growth in utility revenue, the impact of zero-emission credits on its New Jersey nuclear plants and previously announced cost reductions.

Exelon officials also discussed capital investments, the Pacific Gas and Electric bankruptcy and ERCOT’s declining reserve margin during the call.

The company’s Utilities unit expects to make $23 billion in capital expenditures through 2022, boosting its rate base by 7.8% annually.

Anne Pramaggiore, CEO of Exelon Utilities, said the company’s investment opportunities include electric vehicle infrastructure at Baltimore Gas and Electric, distribution automation at Commonwealth Edison and security investments “across the utilities.” It expects to spend about $900 million on cybersecurity, substation security and IT systems.

The company noted its Pepco Holdings Inc. unit could see increased electric load as a result of recently approved legislation in D.C. requiring all public buses and taxis to be zero-emission vehicles by 2045.

Everett LNG Terminal

CFO Joe Nigro said Exelon’s fourth-quarter acquisition of the Distrigas LNG terminal in Everett, Mass., will be “earnings negative” through 2021 because of a need for increased operations and maintenance spending. The company paid $81 million for the import terminal to ensure fuel supplies for its nearby Mystic Units 8 and 9.

Nigro said the terminal is “bundled” with Mystic and will begin to add to earnings when the plant’s cost-of-service contract with ISO-NE begins in 2022. The RTO sought the agreement after Exelon said it would retire Mystic when its capacity supply obligations expire on May 31, 2022. The company announced the retirement plans after Mystic Unit 9 failed to clear the RTO’s capacity auction for the 2021/22 planning year. (See FERC Approves Mystic Cost-of-Service Agreement.)

“We are very clear that with any type of asset that is economically viable, we are going to work for solutions and ways to try to make that asset viable,” Nigro said. “But I think you’ve seen with our financial discipline that when we’ve had to, we’ve taken the stance of making the necessary change.”

ERCOT Reserve Margins

Jim McHugh, CEO of Constellation NewEnergy, Exelon’s competitive retail and wholesale supplier, said the company is seeking to profit from the volatility in forward prices in ERCOT. The Texas grid operator expects reserve margins to drop below 8% this summer and was ordered by state regulators in January to tweak its operating reserve demand curve (ORDC) to increase the likelihood of price adders during scarcity. (See Texas PUC Responds to Shrinking Reserve Margin.)

“I think with the ORDC changes, you are just making the likelihood that scarcity is going to play a bigger role in where the summer prices go,” McHugh said. He said on-peak forward prices for summer 2019 rose by $15/MWh since the end of the third quarter but prices have “been more up and down” in the last month.

“I think what we are going to see the market do is really trade on a pretty volatile range as the assessment of how many scarcity hours there may” be varies, McHugh said.

The company “is keeping a relatively significant open position and capability to extract value as we see volatility occur,” Nigro added.

PG&E Bankruptcy

Nigro said the company is “actively following” the bankruptcy of PG&E, which is the sole off-taker of Exelon’s 242-MW Antelope Valley Solar Ranch. “We will remain diligent in protecting the contractual value of AVSR and the role that assets like ours have in California’s clean energy future,” Nigro said. “AVSR provides 3 cents/share to Exelon in operating earnings and is not significant to our credit metrics.”

Earnings call transcript courtesy of Seeking Alpha.