To read the full note, please log-in and click on the following link:
Market Price (8/2/2017): $38.42; ST-Target: $48/share; NIV: $78/share
2Q2017 results and earnings call did not add any to or take away from our thesis that EXC’s endgame is to create optionality for ExGen. To do so, we believe that 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%. allowing Utilities dividend payout to go from almost 100% to about 77%, making it possible for Utilities to self-fund equity needs beyond 2020. This 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. However, given liquidity issues in hedging market, we look for EXC to expand its Retail business, curtail its hedging program commensurately, and potentially take a more open position, taking advantage of its strong financial position. The plan also requires EXC to continually make timely regulatory filings to ensure returns consistent with authorized ROEs. We believe that EXC’s next major acquisition would continue in the utility space. Despite court results in NY and IL, we are still of the opinion that legal challenges to zero emissions credits (ZEC) in NY and IL will prevail, because ZECs do distort pricing in wholesale markets by increasing supply that otherwise would not be economic.