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New York — Exelon is prepared to meet US power market headwinds that include a sharp drop in forward prices by shutting uneconomic power plants if necessary, executives said during the company's second-quarter 2019 earnings call Thursday.

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"We received a number of questions from investors about the impact on our business from the steep decline in power prices," which presents a considerable challenge for us, Christopher Crane, Exelon CEO, said.

There are a number of levers that can be pulled and decisions that can be made if this is the future of energy markets, "and I can assure you that we will not operate unprofitable or negative free-cash flow plants," Crane said.

"You have seen us close money-losing plants in the past and you should expect that discipline to continue," he added.

Streamlining of costs and potential asset sales are additional options, Chief Financial Officer Joseph Nigro said.

Exelon's 837-MW Three Mile Island-1 nuclear reactor in Pennsylvania is scheduled to shut by September 30 due to "economic challenges and market flaws" that fail to recognize the plant's zero emissions value, according to a statement. The plant is licensed to operate until 2034.

The company had been working with lawmakers in Pennsylvania on legislation that would financially support nuclear plants, but it was not ready in time to reverse the decision to close TMI, Crane said on the earnings call. There have been continued discussions on a path forward for the remaining nuclear plants in the state, including considerations of pricing carbon dioxide emissions through regional carbon trading, he said.

Three of the company's nuclear plants in Illinois will also face economic hurdles if current power market conditions continue. "You can see a challenge in the future if this market persists between the [PJM Interconnection] capacity and the energy market that Dresden, Byron and Braidwood are financially challenged," Crane said.

However, he added the company thinks it has a "clear path," with a coalition to support "fixing some of it at the state level" and it is working with PJM to get the US Federal Energy Regulatory Commission to carry out baseload, scarcity pricing and other capacity market reforms that should "correct and make a fair market."

But short of that, the three plants will be challenged in the future, Crane said. The 1,845-MW Dresden, 2,347-MW Byron, and 2,386-MW Braidwood nuclear plants in Illinois are "showing increased signs of economic distress," which could lead to early retirement, Exelon said in its most recent annual Securities and Exchange Commission filing.

The May 2018 PJM capacity auction for the 2021-2022 planning year resulted in the "largest volume of nuclear capacity ever not selected in the auction," including all of Dresden, and portions of Byron and Braidwood, according to the filing.

Exelon's Clinton-1, Quad Cities-1 and Quad Cities-2 reactors in Illinois are currently receiving state-level support through zero-emissions credits that generated revenue of $373 million in 2018.

PRICE DECLINES

There was a drop in the illiquid forward power curves during Q2 and particularly in June, Nigro said.

PJM prices in 2020 and 2021 declined sharply, with NI Hub around the clock prices falling nearly $3/MWh or roughly 11% in 2020 and about $2.40/MWh or close to 10% in 2021, Nigro said.

PJM West Hub prices fell more than $4/MWh and roughly 13% to 14% in 2020 and 2021, respectively, he said.

"At a high level, we think these declines reflected some combination of ... lower natural gas prices, a mild start to [the] summer that weighed on prompt prices, which then cascaded out onto the forward curve," Nigro said.

Additional factors driving down prices included market anticipation of plants targeted for retirement looking less likely to retire and "hedging activity likely including market participants selling based on changes in the economic value of revenue put options sold or written to support newbuild power plants over the last few years," he said.

Exelon's generally accepted accounting practices net income for Q2 decreased to 50 cents/share from 56 cents/share in Q2 2018.

The company's generation segment saw its Q2 GAAP net income decrease to $108 million from $178 million in Q2 2018. Its adjusted non-GAAP operating earnings for Q2 decreased to $202 million from $331 million in Q2 2018, primarily due to lower realized energy prices, although this was partially offset by increased revenue from zero-emissions credits in New York and New Jersey, Exelon said.

-- Jared Anderson, jared.anderson@spglobal.com

-- Edited by Keiron Greenhalgh, newsdesk@spglobal.com