Exelon Corp (EXC) — Q4 2017 Earnings Call Transcript

Thank you, Sarah. Good morning, everyone, and thank you for joining our fourth quarter 2017 earnings conference call. Leading the call today are Chris Crane, Exelon's President and Chief Executive Officer; Jack Thayer, Exelon's Chief Financial Officer; and Joe Dominguez, Executive Vice President and Government Regulatory Affairs and Public Policy. They're joined by other members of Exelon's senior management team who will be available to answer your questions following our prepared remarks. We issued our earnings release this morning along with the presentation, both of which can be found in the Investor Relations section of Exelon's website. The earnings release and other matters, which we discuss during today's call, contain forward-looking statements and estimates that are subject to various risks and uncertainties. Actual results could differ from our forward-looking statements based on factors and assumptions discussed in today's material and comments made during this call. Please refer to today's 8-K and Exelon's other SEC filings for discussions of risk factors and factors that may cause results to differ from management's projections, forecasts and expectations. Today's presentation also includes references to adjusted operating earnings and other non-GAAP measures. Please refer to the information contained in the appendix of our presentation and our earnings release for reconciliations between the non-GAAP measures and the nearest equivalent GAAP measures. I'll now turn the call over to Chris Crane, Exelon's CEO.

Thank you, Dan, and good morning everyone. I appreciate you joining us today. I want to begin by apologizing for my voice as I am recovering from a cold. Some of our other speakers are also in a similar situation, so we'll do our best to communicate clearly without too much distraction. 2017 was an excellent year for Exelon, and I’d like to take a moment to discuss our business performance and significant achievements over the past year. I am happy to report that Exelon delivered $3.97 per share in GAAP earnings and $2.60 per share in operating earnings for 2017. Jack will provide more details, but I want to highlight that these earnings are well within our guidance range due to improved utility performance and cost discipline, despite a $0.09 timing shift related to the Illinois ZEC contracts and a $0.04 impact from FERC-related accounting changes. Last week, our board approved an updated dividend policy targeting a 5% annual growth from 2018 to 2020, building on the previous plan of 2.5% growth from 2016 to 2018. This maintains our goals of offering competitive dividend growth rates while also providing multi-year visibility. We are confident in this accelerated growth rate, especially given the significant positive developments in our business since 2016. We completed the PHI acquisition, enhancing our earnings mix from utility operations. Our New York and Illinois ZEC programs have helped maintain and extend the lives of our most valuable nuclear plants. Consistent with our strong cost discipline, we expect our forecast OEM spending to be approximately $725 million lower per year in 2020 as a result of cost reduction initiatives we’ve identified since 2015. Jack will cover our capital allocation plans shortly, but we are assured of our ability to competitively grow our dividends while fulfilling all other capital commitments. I’m proud that we can share more of our financial success with our shareholders through this updated dividend policy. The tax reform passed at the end of the year has been clearly beneficial for us, resulting in significant savings for our utility customers as the new tax rate is reflected in their lower bills. ExGen will also benefit from the lower tax rate and 100% expensing, leading to an estimated run rate EPS benefit of $0.10 in 2019. Operationally, we performed well across all areas of our business. Our utilities invested a total of $5.3 billion in capital for infrastructure and technology to enhance customer experience, reduce outages, and improve response times, leading to higher customer satisfaction scores. In fact, our utilities achieved multiple record operational metrics and gained national recognition for exceptional customer satisfaction. In line with our improved service and performance, we were active on the regulatory front, resolving seven distribution and five transmission rate cases in 2017, gaining roughly $400 million in revenue increases. Timely and reasonable regulatory outcomes enabled us to fund future investments in the grid and enhance the customer experience. Our generation fleet also excelled. The nuclear fleet produced a record-setting 157 million megawatt-hours, and we commissioned a turbine CCGT in Texas. I am pleased to note that our fleet performed excellently during the cold spells in December and January in the northeast, once again underscoring the value of liquid generation as a reliable and carbon-free power source. Regarding regulatory policy, the ZEC programs in New York and Illinois were introduced to support our at-risk nuclear stations and the benefits they provide in terms of reliability, economics, and environmental impact. We remain committed to defending these programs as we pursue similar initiatives in New Jersey and Pennsylvania for the benefit of our customers, communities, and employees. There is also a recognized need to enhance the resiliency of the power system, which stems from FERC’s January order. We view this order as a crucial step towards addressing new resiliency concerns, and we encourage FERC to adopt PJM’s proposal regarding power price formation and to develop a comprehensive resiliency solution, which we understand will require more time to finalize. Joe Dominguez will provide more details on this later in the call. We cannot discuss our successes this year without emphasizing our strong commitment to corporate responsibility and community support. In 2017, we became the first utility to be recognized by the $1 billion roundtable for spending over $1 billion with Tier 1 diverse and minority-owned suppliers. Being an active part of our community is a core principle at Exelon, and this award reflects our longstanding efforts. Additionally, DiversityInc listed us among the top 50 companies for diversity, and U.S. Veterans Magazine recognized Exelon on its Best of the Best List of Veteran-Friendly Companies. We also made significant strides in initiatives that will greatly benefit our communities in 2017, including the announcement of a new job training center in Washington, D.C., modeled after our center in Chicago. We were named to the Civic 50, identifying us as a leader among community-minded companies in the utility sector. Exelon and its employees achieved new records in operational activities, contributing over $52 million in donations and volunteering more than 210,000 hours in 2017. Looking back at our management model's impact on utility operations, since the Constellation merger for the legacy Exelon Utilities or following the PHI merger, we have seen meaningful improvements in operations across our utilities. The dedication of our employees and the advantages of our scale are clearly yielding benefits. Our utilities generally operate at top efficiency in key reliability, safety, and customer service areas, but many performance metrics rank in the top tier across these measures. Several of our utilities had their best performances on record in 2017: BGE, ComEd, and PHI excelled in SAIFI and CAIDI, while Pepco, BGE, and ComEd stood out in customer satisfaction. Customer service remains central to our strong utility performance, and we excelled in this area in 2017. In J.D. Power's customer satisfaction study, BGE was recognized as the top provider of business electric service among large utilities in the East, outperforming 11 utilities in the region and ranking highest nationally among 87 utilities for employee professionalism. Kudos to our utility professionals for their hard work in providing superior service. In Generation and Constellation, we also had another strong year. Our nuclear assets continue to rank at the highest levels, achieving an average capacity factor of 94.1%, which reflects over 94% utilization for four of the past five years. In 2017, we had 13 refueling outages averaging 23 days in duration. With the addition of the FitzPatrick plant operating at high utilization, we generated a nuclear fleet record of 157 billion megawatt-hours. On the Constellation side, our commercial and industrial metrics remain robust, with 74% of customers using renewables, an average customer contract duration of over five years, and power contract terms exceeding 25 months on average. These figures illustrate the strength of our customer relationships, which have been foundational to the Constellation business. We continue to observe stable unit margins with our C&I customers, and our proactive cost management is further bolstering our operating margins. Now, I’ll hand it over to Jack to review some of the numbers.

Thank you, Chris, and good morning, everyone. Today, I will discuss our financial results for 2017, provide guidance for 2018 earnings, and share annual updates on our financial exposures. We had a strong year both financially and operationally across the company. Our adjusted non-GAAP operating earnings for the full year of 2017 were $2.60 per share, which is within our guidance range. We are pleased with these results, especially considering the unexpected $0.09 timing impact from the Illinois ZEC contracts that were finalized in January instead of December, along with a $0.04 effect from our FAS 109 asset impairment related to income taxes for our FERC-regulated assets. For the fourth quarter, we earned $0.55 per share. Utilities less holding company EPS was $0.29 per share, benefitting from favorable storm expenses and reduced O&M expenses, which were somewhat offset by the FAS 109 impairment. Generation met our expectations, as our cost optimization efforts mitigated some market softness earlier in the quarter. For 2018, we are providing adjusted operating earnings guidance in the range of $2.90 to $3.20 per share. The growth in utility earnings reflects ongoing rate base growth as we allocate capital to benefit our customers, along with improvements in PHI's earned ROEs. Exelon Generation's year-over-year growth is mainly driven by full-year recognition of ZEC revenue from New York and Illinois and the $0.11 recognition of the 2017 Illinois ZEC payments; the impact of tax reform; and cost-optimization efforts, partially offset by lower energy prices. We anticipate our first-quarter earnings to fall between $0.90 to $1 per share. We have rolled forward our outlook for utility CapEx rate base, now covering 2018 through 2021. We plan to invest $21 billion into our utilities over the next four years to ensure reliable, resilient, and efficient transmission and distribution of electricity and gas, enhancing the customer experience. Our capital strategy is scaled up from what we shared last year as we fast-track gas payment replacement programs at BGE and PECO and seize opportunities to improve reliability and resiliency, ensuring we provide our customers with safe and reliable service. This leads to a capital plan across the utilities with an annual run rate of $5 billion. We project annual growth in rate base at 7.4%, compared to 6.5% at the last update, reflecting an expanded CapEx budget and tax reform impacts. Tax reform will boost rate base by about $1.7 billion in 2020 compared to previous expectations. Timely revenue recovery is equally important as we strengthen our systems through capital deployment. Of the projected $11.5 billion rate base growth for 2021, around 70% is covered under formula rates or similar mechanisms that support our capacity to make additional investments and earn a fair return on capital. In areas where we lack such mechanisms, we will actively work with stakeholders to implement these tools. Notably, over 70% of our rate base is in jurisdictions decoupled from volumes, enhancing our earnings visibility while aligning with ambitious energy efficiency goals. Our utilities have delivered solid earned returns for the year, alongside robust operational performance already highlighted by Chris. PHI's earned ROEs improved at Delmarva and Pepco, while remaining flat at Atlantic City Electric, though I should mention the FAS 109 impairment cost approximately 60 basis points at each utility. We're optimistic about PHI's improvements and expect further gains as pending rate cases resolve throughout 2018. The legacy Exelon utilities performed well in 2017, earning a collective 10.3%, aided by favorable storm expenses and O&M, partially offset by the FAS 109 regulatory asset impairment in Q4 2017. Sustaining strong earned ROEs at PHI and the legacy Exelon utilities will be critical to achieving our overall utility earnings growth objectives, with expected ROEs of 9% to 10% across our utilities in 2019. On the regulatory front, since our last earnings call, ComEd was granted an order for a revenue increase exceeding $95 million. Since the formula rate structure was implemented, over 90% of our assets have been recovered, with this year marking our first 100% recovery. Pepco has filed electric rate cases in Maryland and the District of Columbia, expecting orders in Q3 and Q4 of this year, respectively. We also have pending rate cases at Delmarva, with orders expected in 2018. In total, we seek $133 million in revenues, covering recovery for multiple years of reliability improvements, smart meter installations, and other capital investments across these jurisdictions. This spring, we plan to file a rate case at PECO for the first time in three years and will submit our regular formula update at ComEd in April. Our forecast for utility EPS continues to indicate 6% to 8% growth. Compared to last year, our EPS estimates for 2019 and 2020 have both increased. The anticipated benefits from tax reform in utilities, driven by a larger rate base, are somewhat offset in the early years by increased holding company expenses, as a lower tax rate translates to a decreased tax shield. As we progress into the latter half of this period, we expect to see a net advantage from the tax policy changes. Overall, the combination of strong rate base growth, timely regulatory recovery, and tax reform positions us to maintain our leading utility EPS growth trajectory. Regarding our gross margin outlook, we have incorporated our decision to retire Oyster Creek a year earlier than initially planned into all disclosures for gross margins, O&M, and depreciation expense, resulting in an EPS uplift of $0.03 in 2018, $0.07 in 2019, and $0.01 in 2020 relative to previous expectations. In 2018, our total gross margin remains consistent with prior disclosures, as lower contributions from Oyster Creek are balanced by the Handley Generating Station being included as a cost-effective resource for our Constellation retail operations. Total gross margin for 2019 has increased by $50 million since last quarter, primarily due to elevated West Hub and NiHub power prices and improved ERCOT spark spreads, along with additional generation from Handley, though this is partially countered by Oyster Creek's early retirement. In terms of 2020 gross margins, our current total gross margin stands at $300 million, divided into two components: a $150 million reduction to open gross margin mainly from the announced retirement of TMI and a $150 million decrease to the capacity in ZEC line reflecting the roll-off of previously disclosed robust PJM capacity prices from the 2018 and 2019 options. We ended the quarter roughly 13% to 16% behind our ratable hedging program for 2018 and 8% to 11% behind for 2019, factoring in cross-commodity hedges. We remain comfortable being more open in our approach as we observe market fundamentals and see opportunities for changes in PJM price formation. Our O&M expense outlook aligns with our previous earnings call disclosures, which include our expanded $250 million cost-reduction program, in addition to an extra $50 million and $120 million in O&M savings for 2018 and 2019, respectively, due to the earlier-than-expected closure of Oyster Creek. Our liquid fuel baseline capital expenditure projections are declining, benefiting from earlier proactive investments across the fleet. Our nuclear fuel expenditures are decreasing as we leverage excess fuel processing capacity. We will continue to operate efficiently, seeking ways to reduce costs and manage our fleet more effectively while prioritizing safety and reliability. The ZEC programs in New York and Illinois have prolonged the usefulness of our most at-risk assets; we are addressing ongoing capital needs for the facilities, presenting a stronger case for the long-term value of these assets, which have yet to gain full market recognition.

Thanks, Jack, and good morning, everyone. I'll discuss Slides 21 and 22 of the materials. Since our last earnings call, we have seen positive momentum for policy changes at the State, FERC, and RTO levels. The value of zero-emission numbers will enhance resources that benefit our customers and the environment. As Chris mentioned, we remain focused on three areas: first, ensuring fair compensation for resilient resources; second, addressing the price formation issues identified by PJM; and third, preserving and expanding state policy initiatives like the ZEC programs, which include nuclear energy in state-sponsored programs. I'll go through each of these. Regarding resilience, FERC issued its order on January 8 in response to the DOE number. Consistent with Exelon's indications, this order started new resilience proceedings and directed the RTOs to assess grid resiliency and provide a report within 60 days. FERC emphasized that the report should include any recommended changes. In our filings at FERC, we encouraged the commission and the RTOs to view resilience as encompassing broader issues than traditional reliability concerns focused on electric generation, transmission, and unit performance. We've highlighted in previous calls the risks posed by natural gas infrastructure failures on the electric system. We anticipate that the resilience proceedings and solutions will take time, as Chris mentioned earlier. The FERC's order gives PJM the chance to address immediate solutions, including medium price formation reforms, which PJM claims can be implemented this calendar year. Based on PJM's comments, including recent testimony before the Energy Committee of the U.S. Senate, we expect PJM to push strongly for price formation reforms in its filings. Looking ahead, we see two alternative pathways progressing simultaneously: one, achieving a FERC-directed PJM filing resulting from the resilience docket; and two, a stakeholder process at PJM, followed by a successful 206 filing through its existing enhanced liaison committee process. PJM already has the price formation stakeholder process in motion, set to conclude by the third quarter. Meanwhile, PJM is making limited changes to price formation in the docket for filings due next week. In summary, the commission's focus on resilience and the chairman's urgent call for action, along with PJM's commitment to address market flaws, inspire confidence that reforms will be instituted in 2018. That being said, there is much work ahead as PJM engages with stakeholders to refine its proposal. Moving on to the next slide, concerning state policies that value zero-emission nuclear resources, Jack already mentioned that we reached an essential milestone last month in Illinois with the completion of the state procurement process in New York ZEC and Quad Cities and Clinton. Both the Illinois and New York programs are now fully operational. We are confident in our ability to defend these legitimate state programs in federal and state appeals courts, as they provide our customers with the lowest cost and most reliable zero-emission resources. The precedents we've established in New York and Illinois have been filed and are under consideration in New Jersey. As many know, the bill passed through two committees in the New Jersey Legislature in late 2017, with unanimous support for the nuclear provisions. However, a floor vote was not held because then Governor-elect Murphy expressed a wish for a more comprehensive approach. Since December, we have continued collaborating with our partners at PSEG and other stakeholders on new legislation. I can report we are making significant progress and I hope for legislative action in early 2018. With that, let me turn it back over to Chris.

Thanks, Joe. Turning to Slide 23, we have updated some of the numbers behind our value proposition, which highlights our strategy and commitment to our shareholders. We will continue to focus on growing our utilities, targeting 7.4% rate base growth and 6% to 8% EPS growth through 2021. Rolling forward for another year at above group trajectory, we continue to use our free cash flow from ExGen to fund these incremental equity needs at the utilities, pay down debt over the next four years at ExGen and the holding company, while part of a faster dividend growth rate. We will continue to focus on optimizing value for our ExGen business by seeking fair compensation for our carbon-free generation fleet in New Jersey and Pennsylvania, as we have done with the ZECs in New York and Illinois. We will continue to pursue the adoption of price formation with PJM and resiliency initiatives at FERC; closing uneconomic plants, including GMI in 2019 and the early retirement of Oyster Creek in 2018; selling assets where it makes sense to accelerate our debt-reduction plans; and maximizing value through our GEN to load matching strategies at Constellation. We continue to sustain strong investment-grade credit metrics, while also growing our dividend consistently at 5% through 2020. However, turning to Slide 24, I want to leave you with some key focus areas for 2018. We will continue to deliver operational excellence across all our businesses, focusing on modernizing the grid and improving our customer experience at the utilities. We plan to invest $5.4 billion in capital to benefit our customers. We will file a total of five distribution rate cases with the goal of achieving our targeted 9% to 10% ROE across the utility families in 2019. In Generation, we will work to establish PJM price formation changes in 2018; we will start working on a broader resiliency initiative at FERC, which will take more time; we will continue to defend the Illinois and New York ZECs in courts; and we will work with our stakeholders to establish fair payment for the environmental attributes of our nuclear plants in New Jersey and Pennsylvania. Financially, we will begin to grow the dividend as discussed, at 5% annually, continue to execute on our previously announced cost management initiatives, and finally, we will continue with our corporate responsibility initiatives, including a focus on gender parity issues through participation as the only energy company in the UN HeForShe campaign, building on last year's expansion of pay leave policies and our signing of the President's Equal Pay Pledge. The strategy underpinning the value proposition we rolled out a couple of years ago is proving very robust. We are well-positioned to capture additional upside and feel confident about the prospects for Exelon in 2018 and beyond. With the many successes we've had in recent years and the relative stock outperformance, we still believe our stock is undervalued in absolute terms, and particularly compared with our peers. We remain committed to optimizing the value of our business and earning your ongoing support for Exelon. Operator, we can now open it up to questions.

On the stock valuation, Chris, you and I definitely agree. A couple of questions. Just to be clear on the rollout of the 2020 disclosure, when we look at that, the lower gross margin associated with the TMI shutdown is actually earnings—just to be clear, these are earnings-accretive, so we should think about the year-over-year to getting a sort of negative comp as falling from the other two items? Is that correct?

The TMI, Greg, it is EPS accretive.

So now that will be offset by $200 million of energy price and capacity revenues. But then, you also have the cost-cutting on Page 26 that we have to factor in to come up with a sort of net impact from the Q3 call, right? There was a...

That's correct. So there's a full breakout of O&M expenses that we detailed in the appendix. You'll see the impact both in '18 as well as '19 and beyond from Oyster as well as TMI.

Great. And you also said you plan on retiring some impairment maturities now. Looking at the maturity schedule on Page 40, I see that Holdco, with $6.3 billion of the Holdco debt, there's a $900 million maturity in 2020 and $300 million in 2021. Should we think about that as the timing? Or is there other debt that's callable or revolver capacity that you can bring down in the interim?

I apologize; I'm turning those slides. So in terms of the holding company maturities, you should expect us to tilt more heavily towards holding company in '20 and '21. You will also see us pull—retire some 365-day paper we have in '18 that retires in '19, and then you'll see us work down the ExGen maturities as we get up the curve as well.

Okay. So I have one for Joe Dominguez and one for Joe Nigro. Joe Dominguez, is it your expectation, and clearly, you can't speak for PJM, so is it your expectation to kind of get this stakeholder process completed at—that may go through the enhanced liaison process? Or in fact, they would probably have to go through the enhanced liaison process to get a stakeholder process done in '18? Or is it too soon for us to sort of call that? And then the alternative, is it legally viable—does it seem that at the end of the resiliency proceedings, that the FERC actually has the record in place to call PJM in to change its tariff?

Yes. Let me answer the second question first. And just simply say yes. I think they may have to open in a different proceeding, but obviously, they could issue a 206 order at any point in time. We believe that they have sufficient record already to do so. Very clearly, PJM is going to supplement that record here in March, and I expect that other parties in their response, 30 days later, will do the same. Greg, it's my expectation that PJM is going to continue to urge for us to do exactly that, to give it some direction to come in and resolve the price formation issues that it's identified. But at the same time, they have this alternative pathway that they're going to walk down in parallel with when they conclude the stakeholder process. And my expectation is that, as the order of the tariffs that PJM continues to be acknowledging the significant price formation flaws. And they've said that repeatedly in many forums, then the next step for them is to bring it to FERC and utilize the enhanced Liaison Committee process if the stakeholder process doesn't work.

And then for Joe Nigro, the initial option parameters for the next capacity auction came out several days ago. There was a significant change in FERC capacity and into ComEd. And some concern from investors that perhaps that would disadvantage the incumbent generation vis-à-vis your capacity price outcomes. Can you give us some color on your thinking there?

Greg, we expected to see an increase in both into Eastern PJM and into ComEd and an increase into the import capability, and it may have been slightly higher than what we expected. There were obviously other variable changes as well when you think about the increase and the impact of all of the things equal that could have on the demand curve and shifting the demand curve. We're still, like everyone else, in analyzing this. I think at the end of the day, what's been said for years—the big thing it's just going to come down to bidding behavior, and it always does. So I—there's a lot of variables in play here, including those changes to the imports, but bidding behavior will matter.

It's Joe Dominguez; I would like to add that the sequel has shifted in recent auctions. We are now looking at 1.7 gigawatts in the opposite direction. A year ago, we had two options, with 1 gigawatt of that already within the transmission limit. We have observed the zone separately working with these higher numbers.

I wanted to follow up a little bit more strategically on the ExGen side. Obviously, well done on Handley. Curious as to your thoughts about the desire to hold on to the Texas combined cycles. Can you read into some of the commentary around the desire to back that Constellation here? Or is there still kind of a broader thought process around looking for Generation? We just kind of wanted you to elaborate on that.

Those assets, as we've discussed in the past, are highly efficient and they're a very good match for our load book in Texas. The capabilities that we have, the heat rates on the ramping, they are very practical. Their capacity factors have been some of the highest for the CCGTs in Texas. So we'll continue to operate this part of the fleet and be able to reap the benefits of their efficiency as we manage that book in Texas. As always, we look at all of our assets on an annual basis, but the previous review of those assets said they're more valuable in the fleet than not.

Right. And then secondly, I know you commented on New Jersey with respect to legislation. But can you comment a little bit on how the Oyster Creek development reflects on the profitability of the nuclear units in that region? Just curious if you can give us a little bit of a sense of the latest on those assets and the profitability, maybe from an ROE perspective. Obviously, your peer in the region comments on that.

The Oyster Creek decision was simply site-specific. The market has tightened over the years in that location. But running an additional year with losses in the investments that we would have had to make was not financially prudent. Knowing that the reliability in the system can be sustained in that area without that asset, we're comfortable with that decision. Most importantly, we have an employee transition program that we're implementing, allowing those who are not at retirement age and wish to retire to transition into our vast fleet and continue to pursue their careers. So, employee-wise, it was the right thing to do. Moving forward, allowing people to make the transition. And economically, there was no sense in continuing for losses for another year, so it was an easy decision. The other assets have been openly discussed, as the challenges happen in that part of the market. And that's why we're pursuing and supporting our co-owner on that legislative agenda.

Just wanted to hit on the retail business and just overall get your sense for the competitive environment in the retail business. Any trends you're seeing on that side of the business?

Steven, it's Joe. I'll talk a bit briefly about that. You see the metrics on our business on Slide 7, and Jack talked to those in his prepared comments. We still have the best and the largest customer-facing business in the industry. As recently as late December and early January, our generation to load strategy continues to serve us well. The market remains competitive. It's still too early to see if what, if any, impact the current cold snap or the previous cold snap had on competitive behavior. As we've said all along, we're going to remain disciplined to what we think is fair pricing and not just chase volume. What we have seen now from competitors, which is kind of interesting, is two things. One, we've seen one of our large competitors back away in certain regions from selling a full-pitched price for requirements products to the customers. We will continue to do that as we have historically with all the commitments we have. In addition to that, we've seen some of our competitors try to pass through costs that we've honored through our contractual arrangements with our customers' costs that we will bear. So I won't say we've seen the competitive aspect of the market change. And as I said, we'll remain disciplined, but we have seen some things from competitors that we haven't seen in the recent past, which may or may not lead to different outcomes in the future.

Very helpful color. And just shifting over to the ZEC litigation in Illinois. We continue to sort of like your overall legal position. It seems like there's some chance that the court might actually kick the decision over to FERC effectively. Is that a fair reading as terms of a possibility? And what's your sense in terms of your outlook should sort of the decision go back to FERC?

It's Joe Dominguez. Let me respond to the last question. The four new FERC commissioners were asked during their confirmation hearings about their views on state programs. They all expressed that they did not believe FERC needed to halt these programs or claim preemption. Instead, they felt that FERC could use tools like mitigation to address any market impacts. Therefore, if the issue is brought to FERC, we anticipate that, based on the new testimony before the U.S. Senate, the commissioners would suggest using their existing tools to mitigate the market rather than favoring preemption. It’s clear that the plaintiffs in Illinois share this perspective, as they have encouraged the court not to refer the matter to FERC for that reason. Regarding your interpretation of the argument, you are correct. The issue of primary jurisdiction has been introduced, which is a discretionary tool that allows the court to send the matter to FERC if it chooses to do so. At this point, both parties are in agreement on that.

So first on the may be high level at ExGen. So obviously, you have the gross margin numbers and then 2020, they fall sort of out. Is it fair to say kind of at the high level all the below-the-line stuff O&M interest as you're paying down debt, depreciation as your closing plants or all those kind of offset? So you'll end up mitigating some chunk of that gross margin hit?

Steve, if you look at Slide 54, we provide the additional ExGen modeling data. As we look at the ExGen's EPS profile out the curve, to your point, the lower depreciation, the lower operating O&M leads to these retirements being accretive. So we should see strong and better than last quarter performance anticipated from ExGen as we look out the ERP.

Okay. And then one other question just in the event that the energy price formation changes are just done at PJM through the enhanced liaison process, could you just clarify the timeframe on that in process?

So again this is, as Greg said earlier, ultimately PJM's discretion when to pull the trigger on that. But right now, it's said to conclude its stakeholder process in Q3. At that point, PJM will have all the input from stakeholders. And as usual, we want to refine its proposals along the way. And at that point, in our view, we'll be in a position to make a filing with FERC.

And then how long FERC takes to rule, I guess, depends on—that's FERC's call?

That's FERC's call. This is a 206 proceeding, so there's no mandatory clock like we see in the 205 proceedings.

Hey, the target for ExGen is still 3.0 debt-to-EBITDA. Is that—I mean considering that you're already below that, is that something that used to come down at some point? Or is there a reason why it would increase over time?

So Michael, as you see the gross margin expectations for—and EBITDA expectations for the ExGen business go down, that 2x nonrecourse or 2x recourse debt-to-EBITDA, 2.5x gross debt-to-EBITDA number will move up. We will be paying down debt as maturities come, but we'll also be shifting our focus to the holding company that uses the flexibility we have around the strong balance sheet of ExGen to target retirements of other portions of our good amount of holding company bonds as they mature.

I see. I mean what's the purpose of having a 3.0 target? Is there something you're trying to achieve with ExGen at that point?

I think the differentiation from our IPP peers, we have, I believe, the strongest balance sheet in the integrated space. That takes the risk of that overhang that we've seen come pop up from time to time among semesters off the table. That positions us to maintain a strong investment-grade rating from all the agencies. It's an important competitive advantage in the Constellation business. And as we clarified, the longevity of these nuclear assets, we believe, over time, that while we trade currently at 5x EBITDA from a valuation standpoint, we are making the case that we should trade in line with our IPP peers, which should be 7x to 8x. So while the market is not recognizing that now, this is certainly part of our strategy to accomplish that.

Great. You guys mentioned the enhanced liaison process. Just wondering, if that's something that you simply expect PJM to use? Or is that something that PJM is telling you they will be using for sure?

As I said earlier, PJM has made no announcement in that regard. The point I'm trying to make here is that PJM and a lot of different audiences have now come forward and said we have major flaws in price formation. The PJM work historically has had significant issues in its market design, with price performance being the most recent example. As we use the enhanced liaison committee process mechanism to get matters to FERC where stakeholders can agree on supporting a particular proposal, given the gravity of this issue on the significance of it—and its connection to the resilience issues that FERC is already looking at— it would be our expectation that PJM would follow its strong words to the U.S. Senate, to FERC, and others, and proceed to making a filing at the conclusion of the stakeholder process. That's the point I'm making.

Strategy-wise, I mean, Chris, Jack, you've both alluded to the value disconnect. And it's hard to imagine that you could be doing that much more to execute the current plan, which seems to be going along. What's your level of patience to see the market reflect this under the current kind of dual strategy, and just can you give us a refresh on how you're thinking?

As I have mentioned for a couple of years, our level of patience is likely low. However, we recognize our duty to deliver results and improve the situation. Five and a half years ago, we embarked on a journey toward increased regulated revenues, aiming for more certainty regarding our balance sheet, total optimization of the generation-to-load match at Constellation, while maintaining world-class operations and cost efficiency. Today's call illustrates that. Furthermore, let me elaborate on why we believe our stock is undervalued. Simply put, with the $3.05 midpoint for our 2018 earnings per share, the stock trades at approximately 12 times price-to-earnings compared to our cheapest comparable company at 15 times and the regulated utility sector averaging around 16 times. Even when looking at consensus estimates for 2019 and 2020, we trade around 12 to 13 times, whereas our comparable companies are roughly 15 times, and utilities are about 15 to 16 times. With our dividend growth at a competitive rate of 5%, our 3.7% dividend yield is comparable to many others in our sector. Our utility operations contribute 70% to our 2020 earnings per share; when compared to consolidated Exelon estimates from the market, we appear more aligned with the business models of our peers than the 2% to 4% price-to-earnings multiple discount that we are currently experiencing. In assessing our valuation, particularly our regulated utilities after accounting for holding company expenses, we suggest a fair market value of $31 to $32 per share based on consensus price-to-earnings for 2019 and 2020. Considering our utility growth rate of 7% and our earnings per share growth rate of 6% to 8%, which we anticipate will persist, we are positioned well, particularly with lower risk transmission and distribution utilities that cover 70% of our rate base additions, and we have decreased volumetric risk. Our collective earnings are achieving a return on equity of 9.5% with strong credit metrics that exceed agency expectations, all without the need for external equity to fund growth. We should be valued as a premium utility. The $31 to $32 estimation, derived from peer evaluations, indicates an implied value of ExGen at around $4 per share, which we believe is insufficient. The implied multiples for the business are approximately 6 times price-to-earnings and 5 times earnings before interest, taxes, depreciation, and amortization. Currently, we are trading at around 7 to 8 times EBITDA. We have worked to address the valuation discrepancies, especially considering our leverage is significantly below our 3 times net-to-EBITDA goal at 2.5 times; it's effectively about 2 times regarding recourse debt. Our funds from operations debt ratio is expected to remain above 40% due to long-term planning, with zero-emission credit programs in New York and Illinois protecting most of our at-risk nuclear plants and our Constellation business offering a generation-to-load match advantage. Our disciplined bidding strategy is proving advantageous as we begin to see others changing their approach in recent months. Over the next four years, our free cash flow generation from this business is projected at $7.6 billion, which represents more than half of ExGen's implied enterprise value, with assets that have operational visibility extending well into the 2030s. We believe we have significantly added value for our shareholders over the past few years, evidenced by our stock's outperformance. Unfortunately, the current share price does not reflect the value we perceive. We remain committed to executing our long-term strategy and our 2018 business priorities, which we believe will yield considerable value for our investors. Therefore, I am confident about the stock's potential.

You sound impatient with the market too to me.

Jonathan, that doesn't even build in the fact that where there is price formation in New Jersey, the facts—in fact, there are a lot of incremental catalysts even beyond the robust story that Chris just described in the valuation where we currently see. So this is the strongest, long-range plan that we've had since coming together as Constellation and Exelon, and we're excited about the outlook. The market is just not paying for it right now.

Well, again, I want to thank you all for participating today. I want to thank the team here and the employees of Exelon for really delivering on a strategy that's taken a few years to get here, but we are operating on all cylinders. I appreciate the dedication. So with that, I'll close it out, and thank you.