EXC Initiation Report

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Market Price (1/29/2016): $29.57/share; ST-Target: $43/share; NIV: $69/share

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 “redmailingby 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.

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