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Market Price (5/3/2017): $33.98/share; ST-Target: $46/share; NIV: $84/share
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.