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Exelon Generation’s Fate Relies on Illinois Energy Bill

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May. 2 2016, Updated 8:08 a.m. ET

Exelon Corporation: Segment-wise operating income

Mergers and acquisitions drove Exelon Corporation’s (EXC) growth in the last few years. Its acquisition of Constellation Energy in 2012 catalyzed its performance due to healthy capacity addition.

The synergy from Exelon’s recent acquisition of Pepco Holdings was completed in March 2016 and is expected to expand Exelon’s regulated operations, which may positively impact earnings.

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Exelon’s growth pillars

Exelon’s generation segment is the key performer, as it contributes nearly half of its consolidated earnings. Weaker power prices have been the main reason for the segment’s poor performance in the last few quarters. The segment’s performance now relies heavily  on the Illinois Energy bill, which would create a low-carbon portfolio standard.

The new standard will permit nuclear plants to run on 70% renewable energy (PBWso). However, critics are claiming that the bill would discourage new renewable energy players. Additionally, the rejection of the bill would cost $300 million a year in revenues for Exelon.

Exelon utilities

Exelon (EXC) utilities like Commonwealth Edison, Baltimore Gas & Electric, and PECO Energy are expected to be better positioned in 2016 due to the expectations of normal weather. Negative impacts from energy efficiency programs are likely to be offset by its customer base growth.

PECO’s natural gas sales generally peak during the winter months when heating requirements raise the demand. These subsidiaries of Exelon have a capital spending plan of $18 billion for the next five years, which will be recovered from its service territories by investment rate recovery mechanisms.

Investors can have passive exposure to utilities by investing in the Utilities Select Sector SPDR ETF (XLU). XLU invests 4.6% of its total holdings in Exelon. NextEra Energy (NEE) and Duke Energy (DUK) are some of XLU’s top holdings, each accounting for ~8% of XLU. Southern Company (SO) accounts for 7.5% in XLU.

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