The election of President Obama in 2008 created a great deal of concern amongst investors and the business community. As his first year in office draws to a close, we know now that some fears were overblown, while others were completely justified. But investors in this utility needn’t worry about regulatory uncertainties related to proposed limits on carbon emissions; this power company will thrive under a cap-and-trade system.

With carbon regulation a major component of the Obama administration’s ambitious legislative agenda, many investors have expressed concern about the long-term profitability of electric utilities that depend on fossil fuels to generate power. Because the US appears to be committed to a cap-and-trade system, many utilities will either have to undertake intensive capital spending programs to upgrade their generation facilities or buy carbon credits on the open market.

Those concerns barely register a blip for Exelon Corp (NYSE: EXC), the nation’s largest nuclear plant operator with 11 nuclear power stations. Situated in the Midwest and mid-Atlantic regions, Exelon generates 18 percent of US nuclear power and 4 percent of all the electricity consumed in the country. It’s also extensively involved in renewable energy, operating four wind energy centers, a solar center, a landfill gas facility, and two hydroelectric stations. Finally, it has eleven power stations fired by coal, oil or natural gas.

That leaves Exelon in the enviable position of being a net creditor under any cap-and-trade regime, able to either hold onto its credits or sell them to the highest bidder.

Aside from that advantage, Exelon also enjoys its position as a cost leader. Whereas power prices currently hover around $70 per megawatt hour (MWH), the company’s nuclear plants generate electricity at just over $15 per MWH. With profit margins that fat for the last half of the decade, it’s no surprise that Exelon managed to grow earnings rapidly even though electricity demand has leveled off somewhat because of the recession.

Analysts expect the utility’s earnings to dip slightly in 2010 when it experiences the full effects of weaker demand, but a recent stream of positive economic data suggests that demand might recover sooner than many believe. In fact, recent reports from the Federal Reserve as well as various industry groups indicate that manufacturing activity Exelon’s business footprint is on the mend. On top of that, the company hedged almost all of its output through 2010 against falling prices.

Given these developments, it’s likely that analysts are being overly conservative in their forecasts.

And Exelon is extremely generous to its shareholders. Generating huge amounts of free cash flow–more than 26.2 percent of revenues over the trailing twelve months–Exelon has steadily grown its dividend over the past five years and currently yields 4.3 percent. The utility also has a history of sizable share buybacks, though in the current business environment the company has opted to reinvest cash into the business.

Plans to construct a smart grid are just one example of that investment; management estimates that this project will cost about $1 billion, a portion of which will be financed through government grants. Although this ambitious project will require upfront investment, a smart grid will enable Exelon to better predict and meet power demand, creating long-term cost savings.

This is yet another instance which demonstrates that reform isn’t always bad for investors, particularly those with a contrarian mindset. In fact, given the steady business and strong revenues, reform will simply add another layer of profitability for Exelon.

WHY TO BUY
EXELON CORP (NYSE: EXC, $49.42)

• Long-term track record of profitability

• Coming carbon regulations pose little risk

• Secure dividend with a payout ratio of just 37.1 percent