EXC 3Q2017: Upside from FERC redesign of power pricing may boost EXC by 36%

3Q2017 results and earnings call didn’t change our thesis that EXC’s endgame is to create optionality for ExGen
To do so, we believe that EXC plans to use ExGen cash flow to propel Utilities’ CAGR in AEPS at some 6%-8% through 2020, while lagging dividend CAGR at 2.5%, allowing Utilities dividend payout to go from almost 100% to about 77%, making it possible for Utilities to self-fund equity needs beyond 2020
Key to this strategy is to ensure ExGen cash flow, which drives need for very high hedging levels far in advance
We look for EXC to expand its Retail business, curtail its hedging program commensurately, and potentially take a more open position
The plan also requires EXC to continually make timely regulatory filings to ensure returns consistent with authorized ROEs
We believe that EXC’s next major acquisition would continue in the utility space
EXC has upside from resiliency pricing, if FERC gets there.

Continue Reading →

EXC 2Q2017 Earnings Note: Regulatory filings continue; strong execution; valuation compelling

Regulatory filings continue; strong execution; valuation compelling || 2Q2017 results and earnings call did not add any to or take away from our thesis that EXC’s endgame is to create optionality for ExGen. To do so, we believe that EXC plans to use ExGen cash flow to propel Utilities’ CAGR in AEPS at some 6%-8% through 2020, while lagging dividend CAGR at 2.5%. allowing Utilities dividend payout to go from almost 100% to about 77%, making it possible for Utilities to self-fund equity needs beyond 2020. This then creates ExGen optionality for EXC, in our opinion. Key to this strategy is to ensure ExGen cash flow, which drives need for very high hedging levels far in advance. However, given liquidity issues in hedging market, we look for EXC to expand its Retail business, curtail its hedging program commensurately, and potentially take a more open position, taking advantage of its strong financial position. The plan also requires EXC to continually make timely regulatory filings to ensure returns consistent with authorized ROEs. We believe that EXC’s next major acquisition would continue in the utility space. Despite court results in NY and IL, we are still of the opinion that legal challenges to zero emissions credits (ZEC) in NY and IL will prevail, because ZECs do distort pricing in wholesale markets by increasing supply that otherwise would not be economic.

Continue Reading →

The Logic NY Fed Court Decision to Uphold ZECs is Spurious

The US District Court of the Southern District of New York (Fed District Court) yesterday ruled through New York Southern District Judge Valerie Caproni dismissed all challenges to New York’s Zero Emissions Credit (ZEC) program
The decision by Judge Caproni, though seemingly logical, is actually spurious, in our opinion. The decision was based on the following logic and comparison:
While we do appreciate Judge Caproni’s position and interpretation of the law, we note several inconsistencies in the Judge’s arguments

By acknowledging that financial subsidies do allow otherwise uncompetitive sources of generation to be built, Judge Caproni is acknowledging that financial subsidies do distort market pricing because it increase supply into the market relative to demand, which by definition, ALWAYS NEGATIVELY affects pricing

Conclusion: Therefore, we continue to believe that as the case is appealed to higher judicial authority, we maintain that the most rational outcome is the reversal of both NY and IL subsidies for nuclear power. However,

Continue Reading →

EXC 1Q2017 Earnings Note

Regulatory steps brighten prospects while ExGen continue to languish ||

We continue to believe EXC’s endgame is to create optionality for ExGen. To do so, EXC plans to use ExGen cash flow to propel Utilities’ CAGR in AEPS at some 6%-8% through 2020, while lagging dividend CAGR at 2.5%. This allows Utilities dividend payout to go from almost 100% to about 77%, making it possible for Utilities to self-fund equity needs beyond 2020, negating need for ExGen ATM, which then creates ExGen optionality for EXC, in our opinion. Key to this strategy is to ensure ExGen cash flow, which drives need for very high hedging levels far in advance. This sacrifices upside potential and sub-optimizes ExGen, but enables EXC to execute its LT plan. This plan also requires EXC to continually make timely regulatory filings to ensure returns consistent with authorized ROEs. This plan may also change what EXC pursues next, which we believed would be another hybrid. Instead, it may pursue pure utilities. Still we’d like EXC to buy nuclear, gas and renewable plants, while cheap, so we like EXC’s purchase of Fitzpatrick nuclear plant in NY. Regardless, we like EXC’s plans for Utilities and believe it will eventually help drive upside valuation, and reluctantly support ExGen strategy. We are of the opinion that legal challenges to zero emissions credits in NY and IL will prevail.

Continue Reading →

EXC 4Q2016 Earnings Note

Utes continue to drive strategy but ExGen optionality powers upside || We feel 2017’s debut AEPS guidance of some $2.50-$2.80 is conservative, in particular, at the low end. We continue to think EXC’s endgame is to create optionality for ExGen. Until then, EXC plans to use ExGen cash flow to fund utility growth that would power Utilities CAGR in AEPS of some 6%-8% through 2020, while dividend grows only at a 2.5% CAGR. This enables the Utilities dividend payout to go from almost 100% to about 77%, making it possible for Utilities to self-fund equity for future growth beyond 2020, largely negating need for ExGen ATM, which then gives EXC ExGen optionality, in our opinion. Key to this strategy is to ensure ExGen cash flow, which then drives need for very high hedging levels far in advance. This sacrifices upside potential and sub-optimizes ExGen, but enables EXC to execute on its LT plan. This strategy may change who EXC pursues next, which we believed would be another hybrid. Instead, it may pursue pure utilities. Still we’d like EXC to buy nuclear, gas and renewable plants, while cheap, so we like Fitzpatrick nuclear plant buy in NY. Regardless, we like EXC’s plans for Utilities and believe it will eventually help drive upside valuation, and reluctantly support ExGen strategy, given Utilities need for equity funding. We keep our $46/share ST-Target, but our NIV/share moves up $3 to $80 from $77.

Continue Reading →

EXC 3Q2016 Earnings Note

Generation optionality still EXC bright future || Given exceptional performance at Utilities, EXC is raising its AEPS guidance to $2.55-$2.75 from $2.40-$2.70. Partially surprisingly, much of 3Q2016 upside performance came from ComEd and PECO, and Generation lagged. Regardless, we think EXC’s endgame is to create optionality for ExGen. Until then, EXC plans to use ExGen cash flow to fund utility growth that would power CAGR in AEPS of some 7%-9% through 2020, while dividend grows only at a 2.5% CAGR. This enables the Utilities dividend payout to go from almost 100% to about 77%, making it possible for Utilities to self-fund equity for future growth beyond 2020, largely negating need for ExGen ATM, which then gives EXC ExGen optionality, in our opinion. Key to this strategy is to ensure ExGen cash flow, which then drives need for very high hedging levels in advance. This sacrifices upside potential and sub-optimizes ExGen, but enables EXC to execute on its LT plan. This strategy may change who EXC pursues next, which we believed would be another hybrid. Instead, it may pursue pure utilities. Still we’d like EXC to buy nuclear, gas and renewable plants, while cheap, so we like Fitzpatrick nuclear plant buy in NY. Regardless, we like EXC’s plans for Utilities and believe it will eventually help drive upside valuation, and reluctantly support ExGen strategy, given Utilities need for equity funding. We keep our $46/share ST-Target.

Continue Reading →

EXC 2Q2016 Earnings Note

It seems that EXC is setting up for Generation optionality || We think we finally see EXC’s endgame: Creating optionality for its Generation business (GenCo). Until then, EXC plans to use GenCo as an ATM to fund utility growth that would power CAGR in AEPS of some 7%-9% through 2020, while dividend grows only at a 2.5% CAGR. This enables the six utilities (Utilities) combined dividend payout to go from almost 100% to about 77%. This gap makes it possible for Utilities to self-fund equity for future growth projects beyond 2020, largely negating need for GenCo ATM. This then gives EXC optionality with GenCo, in our opinion. Key to this strategy is to ensure GenCo cash flow, which in turn drives need for very high levels of hedging well in advance. This sacrifices upside potential and sub-optimizes GenCo, but enables EXC to execute on its LT vision. This strategy changes who EXC pursues next, which we thought would be another hybrid. Instead, it may pursue more pure utilities. Still we’d like EXC to buy nuclear, gas and renewable generation, while cheap, so we applaud acquisition of Fitzpatrick nuclear plant in NY. Regardless, we like EXC’s plans for the Utilities and believe it will eventually help drive valuation to the upside, but we reluctantly support its strategy for GenCo, given Utilities need for equity funding. We maintain our $72/share NIV and $46/share ST-Target.

Continue Reading →

EXC 1Q2016 Earnings Note

We feel like EXC is moving away from its core competency || We still like EXC as a generation company, but understand the pivot towards utilities, even though we’re not thrilled about it. We still expect EXC to be leading candidate to roll-up assets, even utilities in Northeast US. Acquisition of PepCo Holdings (PHI) has closed, but cost $508MM of “giveaways” to make it happen. EXC reaffirms strategy of “harvesting” Generation cash flow and investing in utilities, returning capital to shareholders and investing in contracted assets. Plans dividend increase of some 2.5% per year starting with 2Q2016 dividend for 3 years, ahead of our schedule by about 2 quarters. By 2018, EXC expects utilities to cover dividends and seeking payout to increase dividend payout from utilities to some 65%-70%. Still, we’d like EXC to buy nuclear, gas and renewable generation, while cheap. In this regard, we don’t like that EXC is making decision to close Quad Cities & Clinton (QCC) at bottom of commodity cycle. New York nuclear assets still under pressure and EXC expects to shut-down without long-term solution. When commodity prices turn and environmental regulations get tighter, we believe EXC is very well situated to deliver LT-shareholder value, almost exclusively through its Generation subsidiary. Raising ST-Target to $46/share from $43 and NIV to $72/share from $69.

Continue Reading →

EXC 4Q2015 Earnings Note

No new revelations; EXC’s still a thoroughbred waiting || We still like EXC as a generation company, but understand the pivot towards utilities. We still expect EXC to be leading candidate to roll-up assets, even utilities in Northeast US. Acquisition of PepCo Holdings (PHI) appears to remain on track for early March close, despite DC “redmailing.” EXC reaffirms strategy of “harvesting” Generation cash flow and investing in utilities, returning capital to shareholders and investing in contracted assets. Plans dividend increase of some 2.5% per year starting with 2Q2016 dividend for 3 years, ahead of our schedule by about 2 quarters. By 2018, EXC expects utilities to cover dividends and seeking payout to increase dividend payout from utilities to some 65%-70%. Still, we’d like EXC to buy nuclear, gas and renewable generation, while cheap. Combined capital expenditures with PHI is estimated at $25B over 5-years. BG&E rate case decision expected in June and ComEd’s formula rate-base filing expected in April. New York nuclear assets still under pressure and EXC expects to shut-down without long-term solution. When commodity prices turn and environmental regulations get tighter, we believe EXC is very well situated to deliver LT-shareholder value, almost exclusively through its Generation subsidiary. EXC turned in about $0.38/share on an AEPS basis for 4Q2015 vs. our estimate of some $0.35/share.

Continue Reading →

EXC Initiation Report

EXC: Thoroughbred ready to race || We like EXC’s generation portfolio, which consists heavily of nuclear energy; however, we’re concerned about direction EXC’s is taking with its purchase of Pepco Holdings Inc. (PHI). We’d rather see EXC buy more nuclear plants and generation assets in general while prices are relatively cheap. At least, we’d like to see EXC buy utilities with competitive generation. EXC was using utilities as a sort of long-term hedge for generation but PHI doesn’t fit this mold, so we wonder about ulterior motives such as lead into other acquisitions. We are concerned with “redmailing” by DC regulators regarding PHI acquisition. We believe EXC should continue with nuclear uprate program and enter into more operating agreements. We look for synergy upside and agree with PHI deal being accretive to AEPS. We believe EXC should grow its marketing and trading business, given its footprint, access to information, balance sheet and visibility. We believe EXC has room to raise its EXC 2020 goal of GHG reduction. Utilities generally have good rate structures and appear to have good relations with regulators. However, we are not sure if EXC is still focused on generation or is starting to shift towards utilities with an eye towards exploring alternative strategies. ST per share target of $43 is predicated on realization of good PHI integration, commodity upside starting 2H2016, and $69/share NIV is based on improving business fundamentals.

Continue Reading →