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Market Price (10/26/2016): $33.26/share; ST-Target: $46/share; NIV: $77/share
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.