To read the full note, please log-in and click on the following link:
Market Price (2/3/2016): $31.61/share; ST-Target: $43/share; NIV: $69/share
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.