Jonathan Arnold Deutsche Bank 212-250-3182 [email protected]
Exelon (EXC) still expects $3-$6/megawatt hour of upside to power forwards by 2015-2016 from coal retirements, but are less certain on timing. While time will tell if the thesis plays out, the business plan and dividend are now positioned to weather the status quo.
We think investors should find comfort in the sustainability of the dividend under EXC’s stress cash scenarios, while those looking for an even more conservative approach likely aren’t invested in the power-levered EXC story to begin with. Looking forward, EXC intends to utilize its increased financial flexibility to refocus on regulated and/or contracted growth opportunities, or at a minimum pursue value-additive debt reduction.
Solid 2013 guidance looks stronger at ExGen, weaker at the utilities. Initial 2013 EPS guidance of $2.35-$2.65 and the cash flow outlook were slightly stronger than our forecasts. [We are] trimming [our] 2013-2014 estimates on higher cost assumptions. We are maintaining our 2013 EPS estimate of $2.45 while lowering 2014-15 by a nickel in each year to $2.20 and $2.35 on higher cost assumptions at ExGen. Our estimates embed modestly above-market power prices, but also haircut EXC’s retail/optimization margin outlook.
[We] reiterate [our] Buy rating and $34/share price target. Our price target remains at $34 despite lower estimates due to stronger-than-expected cash flows. Downside risks are weak electric demand, disappointing reliability pricing-model (or RPM) auction results, and prolonged low gas prices.
Neil Kalton, CFA Wells Fargo 314-875-2051 [email protected]