Exelon Corp (EXC) — Q3 2019 Earnings Call Transcript

Thank you, Tamara. Good morning, everyone, and thank you for joining our third quarter 2019 earnings conference call. Leading the call today are Chris Crane, Exelon's President and Chief Executive Officer; and Joe Nigro Exelon's Chief Financial Officer. They're joined by other members of Exelon 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 turn the call over to Mr. Chris Crane, Exelon's Chief Executive Officer.

Thank you, Dan, and good morning, everyone. We had a good quarter delivering strong earnings, excellent customer service across our utilities and our nuclear units ran at high levels of reliability. I want to address a matter that I know is on all of our minds. We have publicly reported we have received two grand-jury subpoenas; the subjects which are lobbying practices in Illinois and the company's relationship with an Illinois state senator. These subpoenas and the speculation about what's behind them have dominated the news about Exelon and ComEd. Given that the investigations are ongoing we cannot discuss many details, but I can tell you this: when we learned of these investigations we pledged complete cooperation with the government and that is the path we have taken. The company's outside lawyers are undertaking an exhaustive investigation of the facts relevant to the subpoenas, and a special committee of the Board represented by its own outside counsel has also been informed and is being briefed on the investigation. Exelon's outside lawyers are sharing the results of the investigation with the government on an ongoing basis. Their investigation is enabling us to determine what changes are necessary internally to ensure that going forward we operate at the highest possible standards, not just whether actions have been legal or not, but rather which go beyond ethical reproach. We are keeping our eye on the ball by staying focused on the operational and strategic path that has delivered success. Now I want to address our regular reporting of our financial performance. Starting on Slide 5, we've had positive developments over the quarter. First, we were named to the Dow Jones Sustainability Index for the 14th year in a row, with Exelon continuing to score in the top 20% of North American companies in all industries. Second, we launched a Climate Investment Initiative to invest $20 million in start-ups in our service territories that are working on new technologies to reduce greenhouse gas emissions and mitigate climate change. Third, Pepco Maryland was granted a 9.6 allowed ROE in its most recent rate case. This is an improvement and the results continued through the enhancement in our reliability and customer service for our customers. Fourth, the Maryland PSC issued an order in the alternative rate-making proceeding known as PC 51, allowing Maryland utilities to file a multi-year rate plan as soon as next year. Fifth, the New York Supreme Court rejected challenges to the New York ZEC program, removing the last remaining legal challenge in front of us. Sixth, the Governor's executive order began the process for Pennsylvania to join REGI, the Regional Greenhouse Gas Initiative. This will allow Pennsylvania to achieve its climate goals while helping to preserve the state's remaining zero carbon nuclear plants. Seventh, earlier this week, we announced an agreement with Governor Hogan in Maryland that will allow us to continue to operate Conowingo Dam and protect the long-term health of the Chesapeake Bay. Continued production of carbon-free energy from the dam is vital to support Governor Hogan's goal of generating 100% clean electricity in Maryland by 2040. Finally, we're announcing a new round of cost savings at ExGen, finding an additional $100 million in savings. We continue to work hard at driving efficiencies and adapting to current market conditions. These savings will help ExGen navigate the depressed forwards but will not be enough to overcome the financial challenges of some of our Illinois nuclear plants. I realize there has been some discussion on the potential impact of the investigation on the prospects of clean energy legislation in Illinois. The need for clean energy legislation is bigger than just one stakeholder or one company. We are one part, but only one part of the ongoing discussion about the urgent need for legislation in Illinois. With the rollback of environmental regulations in Washington, states across the country are taking action to require emission reductions so they can benefit from the clean energy economy that will result. This is true in Illinois, where many stakeholders and policymakers want for Illinois on a path to 100% clean energy, electrification of transportation, and to protect our communities. They believe action is urgently needed in Illinois to ensure clean air, reliable service, and affordable rates for Illinois consumers. Exelon nuclear plants are essential to achieving these goals. The four plants without ZECs avoid 45 million metric tons of carbon dioxide emissions, contribute $4.5 billion to the state's gross domestic product, pay $149 million in state taxes, and if they were to retire prematurely, Illinois consumers would pay more than $483 million more in electricity annually. I should point out that the delays in enacting the legislation are partly linked to FERC's delay in issuing an order on PJM market capacity. This is due to the lack of quorum until the end of November when Commissioner Glick completes his recusal period. While the FERC delay is very frustrating, it does allow Illinois more time to enact and implement the legislative changes in time to protect the clean energy programs from negative treatment in PJM capacity auctions. The delay in the FERC order will push back the 2022 and 2023 auctions until at least late fall of 2020. Spring passage of legislation will allow for Illinois clean energy procurement mechanisms to be in place before the 2023/2024 capacity auction and potentially before the 2022/2023 auction as well. Moving to our financial results, we have had a strong quarter with the earnings above our guidance. Our GAAP-based earnings, on a GAAP basis, were $0.79 per share versus $0.76 per share last year. On a non-GAAP basis, we earned $0.92 per share versus $0.88 per share last year. Joe will cover these details in his remarks. Moving onto Slide 6, operational performance at the utilities was mixed this quarter. Each of our utilities performed well on the customer operations side, with mostly top quartile performance. However, only ComEd performed in the first quartile in outage frequency and duration metrics. This year, in the Mid-Atlantic, we have seen significantly more storms and abnormally higher temperatures which increased vegetation impacts and caused reliability-related issues. For instance, PHI had 27 minor storms in 2019 compared to four in 2018. These drove the lower reliability metrics for our Mid-Atlantic utilities. Generation performed well during the quarter. Nuclear produced 39.2 terawatt-hours of zero-emission electricity with a capacity factor of 95.5. Exelon Power exceeded our plan and had a gas and hydro dispatch match of 97.5 and a wind and solar capture of 96.5. That said, we also had some outages in Texas during critical hours that were disappointing and caused us to miss out on some of the bigger opportunities in ERCOT. For now, I'll turn it over to Joe, and then we'll go to the questions after. Thank you.

Thank you, Chris, and good morning, everyone. Today, I will cover our third quarter results, quarterly financial updates, including trailing 12-month ROEs at the utilities and our hedge disclosures. I will also provide an update on our full year 2019 guidance and our cost management program. First, turning to Slide 7, we earned $0.79 per share on a GAAP basis and $0.92 per share on a non-GAAP basis, which exceeded our guidance range of $0.80 to $0.90 per share. The outperformance was driven by Exelon utilities, which delivered a combined $0.56 per share net of holding company expenses. Utility earnings were higher relative to guidance, driven largely by O&M timing during the quarter and favorable weather in our non-decoupled jurisdictions including PECO, Atlantic City Electric, and Delmarva Delaware. As a reminder, in total, we are approximately 70% decoupled across our utilities. ExGen earned $0.36 per share, which was a little behind our plan. The third quarter was impacted by unplanned outages at owned and contracted assets in ERCOT which hit during periods of high prices. Although we had one of the top 10 hottest summers in 70 years in PJM and the third hottest September on record, we saw lower prices and volatility which resulted in less ability to optimize our wholesale portfolio during the quarter. Turning to Slide 8, we show our quarter-over-quarter walk. The $0.92 per share in the third quarter of this year was $0.04 per share higher than the third quarter of 2018. Exelon Utilities less HoldCo earnings were up $0.001 per share compared with last year. The earnings growth was driven primarily by higher distribution rates associated with completed rate cases relative to the third quarter of 2018. This was partially offset by unfavorable weather in load at PECO. ExGen's earnings were up $0.03 per share compared with last year, benefiting from fewer planned nuclear outage days at our owned and operated plants and savings associated with our cost management program. Higher ZEC revenues from the increase in New York ZEC pricing and the start of the New Jersey ZEC program in April of 2019 also contributed to ExGen's year-over-year earnings growth. These were partially offset by lower capacity pricing, primarily in PJM. Turning to Slide 9, we are narrowing our 2019 EPS guidance range to $3.05 to $3.20 a share from $3 to $3.30 per share. As you are aware, ComEd's ROE is tied to the 30-year treasury rates, which have declined about 70 basis points since the beginning of the year. Our updated guidance takes into account the slight degradation in earnings we are seeing from the decline in treasuries. We are delivering on our financial commitments and are confident we will be within our revised guidance range at year-end. Moving to Slide 10, looking at our utility returns on a consolidated basis, we continue to exceed our consolidated 9% to 10% target with a 10.1% trailing 12-month ROE. Earned ROEs for the legacy Exelon utilities remained above 10% but dipped modestly last quarter, primarily due to a BG&E equity infusion to support capital investments as well as declining treasury yield which impacted ComEd's ROE. The decline in treasuries will continue to impact ComEd's ROE for the remainder of the year and going forward if they do not rebound. The consolidated PHI utilities earned a 9.4% ROE for the trailing 12 months, a 30 basis point increase from last quarter driven by higher distribution revenue from the constructive distribution rate order at both Pepco Maryland and the settlement at Atlantic City Electric. We remain focused on meeting our utility earnings growth target by maintaining the earned ROEs at PHI and sustaining strong performance at our other utilities. Turning to Slide 11. During the quarter, there were some important developments on the regulatory front outside of our rate cases. First, as Chris mentioned, in August, the Maryland PSC in its PC 51 proceeding found that alternative rate plans can be beneficial to both customers and utilities by reducing administrative costs caused by the frequent filing of traditional rate cases and providing customer rate predictability. The order supports the implementation of multi-year rate plans of a three-year duration and established a working group to develop the rules. We are actively participating in the group process. Once the commission issues its final order, Maryland utilities will be able to file a multi-year rate plan on a staggered basis consistent with the Commission's order. Second, the DC Public Service Commission approved Pepco's DC notice of construction request for Phase 1 of the capital grid project. It will strengthen the capital area electric system, improve reliability and resiliency, and help facilitate the district's climate commitments. This phase includes rebuilding two substations and constructing approximately 10 miles of two 230kV underground transmission lines that are scheduled for completion by 2026. On our current rate cases, Pepco Maryland received a final order on August 12th. The Maryland Commission approved a $10.3 million increase in annual electric distribution revenues. Importantly, the order increased Pepco's allowed ROE by 10 basis points to 9.6%, recognizing strong performance in reliability and customer satisfaction. Rates went into effect on August 13th. We also have several rate cases still in progress. On October 23rd, the administrative law judge overseeing ComEd's annual formula rate case issued a proposed order; no additional adjustments to the revenue requirements were recommended. We expect to receive a final order from the Illinois Commerce Commission on December 4th of this year. Last Friday, BGE filed a settlement agreement with the Maryland PSC. The settlement provides for an increase to BGE's annual electric and natural gas distribution rate of $25 million and $54 million respectively. We expect a final order by December of 2019. Finally, we received a procedural schedule in Pepco DC multi-year plan, with the final order expected in the fourth quarter of 2020. More details on our rate cases can be found on Slides 21 through 24 of the appendix. Turning to Slide 12, we are continuing on our robust capital deployment at the utilities, investing $1.3 billion of capital during the third quarter. Year-to-date, we have invested $3.9 billion in capital at the utilities, improving our infrastructure and increasing reliability and resiliency for the benefit of our consumers. We expect to deploy more than $5.4 billion this year, $100 million above our original plan. And as a reminder, 63% of our rate base growth is covered under either formula rates or mechanisms like capital tracker. Today, I will talk about two projects that are part of these efforts that will bring improved performance to our customers in Maryland and New Jersey. The first project is the BGE key crossing reliability initiative, which is a $232 million multi-year project to install a double circuit 230kV overhead electric transmission line across the Patapsco River, replacing the existing 2.25-mile underground circuit. The circuits are critical links in the electric system and are exhibiting signs of long-term failure, approaching the end of their useful life. The key crossing will improve grid reliability by reducing the risk of power outages caused by aging infrastructure and will support faster restoration of customer interruptions going forward. The second project is the Lewis Higbee Ontario rebuild project in Atlantic City. The $62 million project includes rebuilding 369kV transmission lines which are about 16.5 line miles long in total and replacing 295 existing wood structures with 225 new galvanized steel structures. This project addresses potential system performance and reliability issues, thereby improving reliability and resiliency for customers in the service area of Absecon Island. On Slide 13, we provide our gross margin update regarding our current hedging strategy at the Generation company. Since the Constellation merger, we have delivered strong results in our wholesale business quarter after quarter, even in an environment of declining power and natural gas prices as well as lower volatility. These market conditions combined with reduced liquidity added challenges on the curve, leading to less opportunity to optimize our wholesale portfolio compared to history. As a result, we are reducing our power new business target by $50 million in 2020 and 2021 and our non-power new business target by $50 million in 2021. These new business target reductions are mostly offset by cost savings, which I will discuss on the next slide. I should stress that these changes reflect our expectation for our wholesale optimization business. Our customer-facing Constellation businesses continue to perform very well with sustained margins and success in delivering new products for our customers. Turning to the gross margin tables, we benefited in the third quarter from higher forward prices which you can see in the open gross margin line. These positives were offset by the lower wholesale business targets that I just discussed, which leaves total gross margin in 2020 and 2021 flat. During the quarter, we hedged more than a ratable amount as prices modestly recovered from their late second quarter lows. Although we are still behind ratable overall ending the quarter 5% to 8% behind ratable in 2020 and 1% to 4% behind ratable in 2021, we are much closer to a ratable hedging amount. We continue to see upside in certain markets but are not expecting a significant rebound in power prices. Turning to Slide 14. Between 2015 and 2018, we announced more than $900 million in cost savings, which does not include the synergies from our merger with PHI. These savings were primarily at Exelon Generation with approximately one-third coming from our corporate services company. In addition to O&M savings, we have continued to find ways to reduce the capital intensity of our generation fleet and improve its cash flows. Since 2015, we have reduced ExGen's total annual capital expenditures from $3.5 billion to a projected $1.5 billion in 2022, while maintaining the safety and reliability of our fleet. Included in these reductions are the elimination of most growth capital at ExGen, except for Constellation's customer-facing solar business, $325 million of base capex savings, and $675 million of savings from nuclear fuel. One of the key components of our value proposition is ExGen's ability to generate free cash flow, and we continue to look for ways to optimize its cash flow. Today, we are announcing additional $100 million in run-rate, pre-tax cash savings in 2022. $75 million is attributed to O&M reductions and $25 million to other P&L items, which mostly offset the reduction in new business targets. I should point out that these savings reflect our current state, and we expect an opportunity for additional savings that will vary in amounts depending on the future state of our challenged Illinois nuclear stations. We can find these savings due to the hard work of all of our employees, who strive every day to run the company more efficiently while adhering to our commitments of safety, reliability, and community stewardship. Finally, moving on to Slide 15, we remain committed to maintaining a strong balance sheet and our investment-grade credit rating. Our consolidated corporate credit metrics remain above our targeted ranges and meaningfully above S&P thresholds. Looking at ExGen, we are well ahead of our debt to EBITDA target of 3.0 times. For 2019, we expect to be at 2.5 times debt to EBITDA and 2 times debt to EBITDA when excluding non-recourse debt. Before turning the call back over to Chris for his closing remarks, I want to set expectations for our fourth quarter disclosures. Given the lack of clarity around the outcome of legislation in Illinois, which will shape the future of Exelon Generation, and the fact that PJM will not have held the capacity auction for the 2022-2023 delivery year before our call in February, we will not be providing some of our usual disclosures, including the roll forward of our hedge disclosures to 2022 and ExGen's updated four-year free cash flow outlook. Thank you, and I'll now turn the call back to Chris for his closing remarks.

Thanks, Joe. Turning to Slide 16, we are accomplishing the commitments we made, including maintaining industry-leading operations, meeting our financial commitments, effectively deploying more than $5 billion in capital across our utilities this year, and advocating for policies that support clean energy. Our strategy remains the right one, and we are committed to our value proposition. We will continue to grow the utilities, targeting a 7.8% rate base growth and a 6% to 8% earnings growth through 2022. We continue to use, as Joe mentioned, the free cash flow from Generation to fund incremental equity needs at the utilities, pay down debt, and fund part of the growing dividend. We will continue to optimize the value of our ExGen business by seeking fair compensation for our zero-emitting generation fleet, closing uneconomic plants like we did with TMI and Oyster Creek, selling assets where it makes sense to accelerate our debt reduction plans, and maximizing value through the Generation to load match strategy at Constellation. We will sustain strong investment-grade metrics. We will grow our dividend annually by 5% through 2020. The strategy underpinning this value proposition is effective. We remain committed to optimizing the value of our businesses and earning your ongoing support of Exelon. Operator, we can now turn it over to questions. Thank you.

Thanks, good morning. Got a couple of questions. First as it pertains to ExGen, you sort of commented at the end regarding plant closures. If you're, for one reason or another, unable to get the state of Illinois to understand the economic necessity of increased compensation for your nuclear fleet. At what point do you go down the path of moving to shutdown the most uneconomic units?

I can't stress how important the spring legislative session will be for the future of the four sites that are not covered under the ZEC program. We will be keeping an eye on the situation, particularly regarding the FERC order and PJM's responses, as these will influence the legislation. The first half of 2020 will be a critical period for decision-making and potential announcements.

And Joe, regarding the details of the guidance, it's somewhat of a two steps forward, one and a half steps back situation for ExGen due to better wholesale prices and cost-cutting, but with lower optimization expectations. Is this related to reduced volatility and overall lower prices making it more challenging for your traders to manage the book effectively? Could you provide a bit more insight on that?

Yes, Greg. You're correct. I believe it's a mix of factors. There's been lower volatility in the market; we had a warm summer and did not see significant volatility or price changes. I want to emphasize that we're focusing on the wholesale aspect of our business, and our retail business remains very strong. Regarding ExGen, we announced cost reductions that mainly counterbalance the decrease in new business targets. As Chris mentioned, depending on the Illinois situation, we will need to evaluate other factors, including how our business model might change and asset disposition. We will also consider other costs and the levers available to us. We will continue to manage capital expenditures and any asset financing. So, there are several factors at play here. Specifically, the decline in new business targets is influenced by the current market environment we're experiencing.

Okay. I have two more questions. One is regarding the regulated side. It seems like ComEd is performing well, but the 30-year is a challenge that will persist into next year until we notice a steepening of the yield curve. In terms of the other areas of the utility business, which contribute 60% to 65% of the earnings beyond ComEd, are you identifying opportunities to mitigate the effects of interest rates, or should we expect that, all else being equal, you're trending lower in the 6% to 8% guidance range compared to before?

Yeah, Greg. Good questions, Joe again. We update once a year on our Q4 call, and we will expect to do that on the call in February. Having said that, we are seeing the impact of the lower ROEs at ComEd. Just for reference, every 50 basis point move up or down is about $0.03 of EPS. So for 2019 for example, the weighted average 30-year is down approximately 50 basis points, and you see that with our revised guidance. The 30-year treasury on the forward curve is down approximately 70 basis points versus 12/31. I would say though that's just one piece of the plan. The capex plan, as we've said, only incorporates identified projects that benefit the consumer and improve the reliability and customer experience. We have seen through time that as we get closer to a given period, we find need for additional investment to continue to improve the reliability in that customer experience and we'll continue to work hard at that as we move forward.

All right. And my last question, Chris, I know it's a difficult topic, the investigation. The second subpoena and the retirement of Anne Pramaggiore, they're all very disconcerting public disclosures. What is it that you can tell us about how you can potentially resolve this investigation? What kind of timeline are we looking at between now and when you can get the other parties and this comfortable with the way that you've acted or comfortable that they've gotten the information they need, so that we can resolve this?

There is a grand jury investigation currently underway, and we can't share many details at this moment. The timeline is determined by the government and the grand jury, and we will continue to cooperate. Any insights we gain from our external attorneys conducting the independent investigation will prompt us to take immediate action to address any issues. It is crucial that we fully cooperate with the government in an open manner. I want to emphasize that we are not making judgments about the legality of past practices involving lobbyists or consultants. These investigations can be lengthy, but I do not anticipate that it will hinder our business operations. Moving forward, we will focus on enhancing our operations and improving reliability while also driving efficiency. The management team remains highly focused amid a lot of speculation in news articles. While there are various conjectures floating around, we will continue the process of cooperation, and when we can discuss the corrective measures we have implemented, we will do so. For now, we are unable to provide further details.

Good morning, team. I wanted to follow up on a few details. Perhaps we can discuss this as part of today’s process. I’ll combine two topics here. First, the Clean Jobs Coalition and the current status of the legislation. I’m keen to understand how we are framing that conversation today given the current realities. Second, I’d like to know how you would approach the discussion regarding the franchise extension at ComEd next year. It seems unrelated, but I want to ensure we at least cover some of the process related to that as well.

Sure, I'll cover the first part, and Joe Dominguez is with us and I’ll let him cover the second part. The conversations, negotiations, and strategy for the legislation is still an active conversation with many stakeholders. And when you talk about the Clean Jobs Coalition, that's not a very structured organization. To speak as a body and as somebody did to one publication, we're still very close in conversation with some of those members of the coalition and we'll continue, but there are a lot of people involved, there are different coalitions, there's the path to 100% clean energy and the Clean Jobs Coalition. There is labor. So things are continuing to evolve in conversations with leadership and the legislature are continuing to take place. So it's not like we're stalled or stopped or don't have parties to deal with. Kathleen is doing a significant part of that for the Generation side. Joe is working to not only support what the Governor wants and what the State wants, but in the meantime, also protecting consumers to make sure what we're doing to get to the path to 100% clean energy by 2030 is done in a most economic fashion. I’ll let Kathleen if she wants to add anything more to the first part and then I’m going to turn it over to Joe.

The only thing that I would add is that the same news story is talking about that question, Julien. I also mentioned that the FRR is the centerpiece of this CJC bill. That's because it's essential to achieving the state's clean energy goals. If we do not address this, the PJM market will send over $1 billion per year to old coal plants rather than investing the money toward the state's clean energy ambition, and the fact that folks are lobbying and rallying in the capital around this is important. The fact that it's an important policy change and that it needs to happen right away is something that should be noted. Now, obviously, there are other elements of the bill from both CJC and path to 100 that there is no agreement about, and that's why it’s going to take all stakeholders together to deliver a piece of legislation that will get the state to its clean energy goals in a way that's affordable. We are committed, as Chris said, to working with all stakeholders to achieve that goal.

Joe?

Great, Julien, good morning. Let me just start off explaining what the franchise agreement is. At its most basic level, it's an agreement that sets forth the procedures for us to use the city right of way for our infrastructure and the fee schedule that we pay in order to use their right of way. What I'm talking about here are kind of granular things that are in the franchise agreement: how many times could you open up a street to interconnect a new business, what the fees are for those operations, that kind of granular detail. We've been in negotiations with the city now for some time. There was a pause in those negotiations while the mayor's race was being sorted out and her new team was put in place. I'm pleased with the progress we're making right now. There are three potential outcomes here. The agreement that is scheduled to come to an end at the end of next calendar year, at the end of 2020. Either party, ComEd or the city, has an option at the end of this year to terminate the agreement or they could continue to negotiate. As I said, the path we're on right now is that we're continuing to negotiate, and if we're successful, we will get a new agreement. If the city elects to terminate at the end of this year, we will continue negotiations, and if we do not reach a resolution, it's not like we stop providing electric service to the city, but our fee schedule and our procedures will drop out of the franchise agreement and will be governed by the municipal code. That'll add a little bit of process to our work, but it doesn't shut down quite obviously our activities. If the city does not issue a notice of termination at the end of the year and we continue to negotiate and can't reach a resolution, then the agreement by its terms just continues year-to-year until we reach a resolution. So that's kind of the outline of it. And Julien, if you don't mind, I'd like to provide some additional context. Chris and Greg talked a little bit about our performance, but I think it bears on the entire discussion this morning. We are on track at ComEd to deliver our best performance in the history of the company. We talk about being in the first quartile. We're actually in the first decile in reliability and arguably best in class. As a result of the good policies, which we've advocated for, 92% of the energy that we deliver to customers comes from zero carbon resources. To put that into context, the next closest large utility is at about 46%. We have a supplier diversity program that is second to none. 41% of our spend this year is with businesses owned by women and people of color as well as veterans. We are on track as a result of all of this to deliver the best customer satisfaction we've ever seen. And we're doing all of it at affordable rates. Today, our rates are 20% lower than the average for large American cities. Four out of nine of our rate cases have been decreases under the smart grid law, including the last two cases. Chris talked about the investigation and certainly, we'll have learnings as a consequence of it. But it's important for all of the shareholders who invest in our platform to understand that we are doing a lot of things right. And with some humility, could lay claim to being one of the best performing utilities in America. I just add that for context in all of the things we’re talking about today.

Thanks, Joe.

Excellent. Guys, I appreciate that.

Good morning. One issue we're facing with these disclosures is understanding any benefits you've received from legislation in recent years. For instance, the formula rates show a really low ROE right now, as Joe pointed out. Additionally, you have acquired the ZECs on Clin and Quad. However, it seems those plants would have been incurring significant losses without those benefits. Could you clarify the actual value at risk from an investor's perspective? It's not clear that you’ve gained much value from any legislation during this time.

The value lies in the consistency of the rate case process. We are linked to the 30-year agreement, which was the result of negotiation. Analyzing the history of rate cases reveals significant improvements in the regulatory process's consistency, which holds considerable value. Receiving 100% or almost all of your requests without prolonged litigation fosters predictability. While we cannot influence the 30-year rate, we can enhance the efficiency and productivity of the system through effective regulatory formats, and that is what we have achieved. Regarding the Clinton and Quad Cities plants, saving them was more than just financial; had we not intervened, those plants would have been shut down swiftly. Their continued operation is vital for the state and community, and it generates profitable cash flow. We are pursuing legislation to secure the other four sites in the state via the FRR process, or we may need to close those plants. Even in a low-interest-rate environment, one might think we haven’t gained anything, but that’s not the historical reality. Moving forward, we will monitor the situation closely if low interest rates persist and will take appropriate actions.

Could you provide some insight into the four nuclear plants? I'm assuming they are not profitable by themselves. If they were to be shut down, what impact would that have?

We do not assess the market response based on the projected impact of shutting the plants down. Instead, we focus on the current financial performance, including free cash flow and earnings, as well as future forecasts. We examine the credit metrics and balance sheet to understand the situation. It has been discussed that the four sites, when looking ahead with the current forward prices and considering how capacity markets are managed by PJM, are struggling to meet the state's requirements for maintaining clean energy sources due to the lack of passed legislation. These plants are performing marginally at best and are currently incurring losses. At this point, we are still evaluating the specific figures, but I can indicate that some situations are more severe than others, and it is crucial to advance the legislation to avoid negative consequences for the state, both environmentally and economically.

Just wanted to go back to the point you mentioned about the special committee at the Board with respect to the Illinois investigation. Are there any targeted deliverables in terms of reports or updates, and will any of that eventually be made public, or is that more for internal purposes?

I'll let Bill answer that.

Steven, it's Bill Von Hoene. The special committee of independent directors will continue to meet periodically as needed. They have their own counsel. There is no particular deliverable that you should anticipate out of that. It's just part of the regular process that's undertaken in circumstances such as this, so no particular deliverable should you foresee.

Understood. And in terms of the scope of the investigation, to your knowledge, is this focused solely on Illinois or are there other states or elements of the business involved?

We're not at liberty to talk about the particulars of the investigation, but you've seen what has been reported about the subject matter, and I refer you to that.

That's a valid point. Lastly, regarding the scope of the investigation, there are four individuals mentioned, and we've seen two announcements from Exelon. As you stated earlier, the policy is to cooperate with investigations. I assume that employees who do not cooperate would not remain with the company, or is there a specific policy regarding how you handle cooperation with investigations?

Yeah, the expectation is for all employees and all executives to participate in whatever manner they're requested to, if that's providing information or having discussions. That's the expectation. Peoples' employment is based on their total record, but our expectation is full cooperation and ethical behavior.

Hi, good morning. So maybe I just wanted to focus on the generation side a little bit. As comparing Q2 and Q3 power prices, it looks like every region power prices go higher. However, given as you talked about your volatility was lower and so margins came in lower, and there is also a little bit of cost cutting now for 2021. So just wanted to understand how we should think about the generation business; it seems like curves themselves aren't enough; volatility is now a new element that we need to consider. How should we think about the stability of the generation business? And also in the context of reserve margins in PJM, if you could just give us a little bit more on how you think about the business that would be really helpful.

Let me have Joe start and Jim McHugh go into more detail.

Good morning, Praful. The core strategy of our generation business remains focused on producing electricity and delivering it to our customer-facing operations, and that approach is ongoing. While there are challenges in the power markets, we have been actively seeking ways to lower costs in both operations and maintenance, as well as capital investments related to our generation assets and our Constellation business. This is a focus we plan to maintain. Additionally, we are concentrating on our industrial strategy. You can observe our investments in utilities and our ongoing management of the balance sheet, all while we provide returns to our shareholders. This effort is supported by the free cash flow generated at Exelon Generation, which we will continue to enhance as we transform the Generation business. Lastly, as mentioned in our earlier remarks, we have initiated a cost-cutting exercise as part of our regular operations. Depending on the outcome of the legislation in Illinois, there are various aspects of our business that may need to adapt under certain scenarios, and we will diligently pursue those adjustments based on future developments.

Hey, Praful, it's Ken Cornew. I'll just add a comment. Our strategy continues to be a premier operator of generation, particularly nuclear and other clean generation, and also be a solutions provider for customers—that has not changed. I wouldn't think about the Generation company any differently than that. And I'd like Jim to comment a little more on the customer side of our business.

It's important to note that we set new business targets in our hedge disclosures. This reflects our expectations for the value we will create from our customer-facing businesses, alongside optimizing our market assets. Our customer-facing businesses are performing very well, and we continue to see good margins from product enhancements and solutions as customers seek more. On the wholesale side, market volatility has decreased, which has caused us to lower our new business targets in that area, ultimately leading to greater stability. Currently, 70% to 75% of our new business's gross margin will come from the stable customer-facing sectors that are still doing well. A smaller part of our overall margins will result from our optimization efforts. We have outlined our expectations in forward disclosures, and we are reducing them based on the current environment. We are experiencing a strong supply stack in markets like PJM, with policies adding more generation and low natural gas price volatility, combined with lower demand growth. Therefore, we are shifting our focus to the more stable customer-facing business. We can adjust our costs to align with this new business model, creating a less risky environment for the Generation company.

Thank you for your insights; they are very helpful. I have a quick follow-up regarding the federal investigation you mentioned earlier. It may take some time, and if your Illinois legislation gets delayed because of this, how will you manage the units? Will you continue running them? Will nuclear refueling proceed, or will you pause operations? What kind of decision-making process do you anticipate regarding timing?

Nothing has been linked to the investigation and the legislation. Currently, to proceed with any legislation, we need to see a FERC order, and it’s likely that we won’t receive the FERC order or PJM's response until sometime in the first quarter. This will allow us to clarify a legislative approach moving forward. If we fail to gain support as a coalition with a broad group of stakeholders for the legislation, the plants will begin to shut down based on current market conditions. That’s the reality if we don’t see progress in the spring. PJM will conduct their auctions, and without legislation or the ability to adjust load and generation from that auction, the expectation for clearing megawatts has decreased. Without capacity revenue for those eight reactors and with market forecasts being low, it’s not financially viable, and we cannot risk damaging the balance sheet or creating an irretrievable situation. The management team is acutely aware of the balance sheet's responsibility, and we will take necessary actions if a clear and cohesive resolution is not achieved. We cannot afford to bleed cash for years, build up debt, and further harm the HoldCo or Genco.

I just want to thank everybody for participating in the call today and the questions. I understand that we can't answer everything right now, but rest assured, we're taking all the actions that are necessary to ensure we can put this behind us. So thank you. With that, I'll close out the call.