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Market Price (5/6/2016): $35.68/share; ST-Target: $46/share; NIV: $72/share
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.