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By Erik Kobayashi-Solomon | 02-24-2010 02:07 PM

A Rider on Economic Recovery

Despite some legislative setbacks, this utility is still well positioned to benefit from the recovering economy says Morningstar senior utility analyst Travis Miller.

Erik Kobayashi-Solomon: Hi, I'm Erik Kobayashi-Solomon, one of the co-editors of Morningstar's OptionInvestor. And today it's my great pleasure to welcome Travis Miller, senior equity analyst in charge of utilities. Travis, thanks for coming.

Travis Miller: Thank you, Erik.

Kobayashi-Solomon: And thanks for coming back, after we did a Westar video as well.

Miller: Absolutely, yes. We still like Westar, and now we're going to talk about Exelon.

Kobayashi-Solomon: Great.

Miller: We think that's another good name in the utilities space.

Kobayashi-Solomon: Got a lot of interest in this Exelon investment. And just recently, I know there's been a lot of political developments that have kind of changed the landscape for Exelon. Can you talk a little bit about those, and where you see Exelon's fair value?

Miller: Sure. Everybody knows about what happened in Massachusetts in January. The Republican victory there with the Senate seat took away the Democrats' super-majority in the Senate. And that's a big blow to President Obama's energy legislation package, which included carbon caps. That was one of his key themes.

Kobayashi-Solomon: And carbon caps are, basically, increasing the price of inputs for energy, coal, or, let's say, natural gas, right?

Miller: Yeah, absolutely. They would increase the cost of generation for about 70% of the nation's power.

Kobayashi-Solomon: How does this affect our bullish position in Exelon?

Miller: Sure. Well, I think there's about $6 of value from carbon caps being instituted. So, if you think about that $6 coming off of our $73 fair value, it's a slight hit, but we still think there's a lot of value in the generation unit, even if you don't believe in carbon caps coming on in the 2013-2014 time period. We also see a little bit of incremental value at the regulated units.

Kobayashi-Solomon: Are carbon caps dead? I mean, do you think that this is really a done deal at this point?

Miller: Sure, it's a good question. It's one that everybody's asking. They're probably done for the near term in the Senate and the Congress and the House. They're probably not done in the near term at the EPA level. So there could be further regulation, around either emissions or other coal plant operations, that could force utilities to either shut down, retire, or just reduce production from the cheap coal plants that now exist.

Kobayashi-Solomon: I heard in the news the other day that the Obama administration have given some loan guarantees to a big Southeastern energy producer, Southern. And I wonder, first of all, how does this affect the political landscape? And also, is this something to worry about from Exelon's perspective? Can Southern start competing with Exelon, for instance?

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