Exelon Corp (EXC) — Q4 2019 Earnings Call Transcript

Thank you. Good morning, Tamara. Good morning, everyone and thank you for joining our Fourth 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's senior management team, who'll be available to answer your questions following our prepared remarks. We issued our earnings release this morning along with the presentation, all 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 contains 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 measure. I'll now turn the call over to Chris Crane, Exelon's CEO.

Thank you, Dan, and good morning everyone. Thank you for joining us for our 2019 fourth quarter earnings call. I'm going to start on slide 5. On almost all accounts, we had a very good 2019. Exelon Utilities and Generation remain focused on delivering for our customers and their communities. ComEd had its best performance ever. The nuclear fleet had its best capacity factor, and we delivered financially. As you can read, the full year GAAP earnings were $3.01 per share, and the non-GAAP earnings were $3.22 per share above our revised guidance range and midpoint of our original guidance range. Joe will walk you through the financial details later in the call. I want to address the operational details as we go forward. Last year, Exelon Utilities invested $5.5 billion in capital and $150 million more than originally planned. These investments were primarily in infrastructure and technology to provide a premier customer experience, improve reliability, resiliency, and modernization of our gas system resulting in best-ever customer satisfaction at each of our utilities. We had a productive year on the regulatory front. Pepco D.C. filed its first multiyear rate case, and Maryland's PSC is moving forward with the multiyear rate plans. We received a constructive settlement at BGE and at ACE. PECO's transmission formula was approved by FERC, and ComEd's formula rate provided the third-rate decrease in five years helping to keep the average residential customer bill flat from where it was a decade ago. On the policy front, the United States Supreme Court upheld the Illinois and New York ZEC programs. The New York Supreme Court affirmed the ZEC program and New Jersey implemented their ZEC program in the spring. Governor Wolf in Pennsylvania announced plans for Pennsylvania to join RGGI, and the Pennsylvania State Senate passed legislation setting a goal for electric vehicles and deployment. FERC approved PJM's fast-start reforms. PJM filed its proposal to reform the reserve market and scarcity rules. We made our commitment to grow the dividend by 5% annually through 2020 with the Board raising the annual dividend to $1.53 per share in January. We're good partners also with the communities we serve. Our employees volunteered a record-breaking 251,000 hours in 2019, that’s 11,000 more than in 2018. During National Volunteer Week, we sponsored 452 events in 16 states and 128 cities with 5,400 employees which is another record. In addition, Exelon donated nearly $52 million to charities and organizations throughout our footprint. We are committed to providing a diverse and inclusive environment for our nearly 33,000 employees. We were once again named Best Company for Diversity by Forbes, DiversityInc, and the Human Rights Campaign. Our total diversity supplier spend exceeded $2 billion for the third straight year, accounting for 27% of our overall supplier spend. Exelon companies continue to prioritize partnerships with local-based diverse businesses by offering development programs. We also continue to be recognized for our environmental stewardship and were named to the Dow Jones Sustainability Index for the 14th year in a row. We are focused on operating at world-class levels delivering on our strategy in supporting clean energy policies in their state. The hard work and the commitment of our employees to provide safe, reliable power, and natural gas to our customers led to the greatest performance we had in 2019. We delivered on our commitments to you our shareholders, but also our employees and our customers and our communities. However, last year was not without challenges including subpoenas we received from the U.S. Attorney's Office in Northern Illinois. As we said before, we are limited in what we can share about the investigation. However, I want to reiterate that we are fully cooperating with the U.S. Attorney's Office and taking the situation very seriously. The Board appointed a special committee to provide oversight of the investigation led by outside counsels to determine if any changes are needed to ensure that going forward we operate at the highest possible standards. At the end of our commitments for 2020. Turning to slide 6, we're committed to operating our utilities at the highest levels for our customers. Since 2016, we have deployed nearly $22 billion across the utilities and plan to invest $26 billion over the next four years. These investments enhance reliability, resiliency, and modernize our electric and gas systems. We've been able to make these needed improvements while keeping the bills affordable. The rates in all our major cities, Baltimore, Chicago, Philadelphia, and Washington are 13% to 18% below the average for the largest U.S. cities, and 2% to 7% below the national average. These investments are producing tangible benefits for our customers. Customer satisfaction is the highest level it's ever been at each one of our utilities, reflecting strong system performance that has come from our investments. The frequency of outages has decreased significantly, down nearly 50% at ComEd and 30% at PHI. Outage duration has also decreased by 52% and 38% at ComEd and BGE respectively. 2019 was the best reliability performance for ComEd and the second best for BGE. On the gas side, PECO and BGE have replaced more than 200 miles of cast iron and bare steel mains and nearly 30,000 metallic gas services in 2018. These investments will help our customers' current and future needs while reducing gas leaks and greenhouse gas emissions. Moving to slide 7, our states are focused on ensuring the electric and gas systems are ready to meet the changing customer needs, more reliable and more resilient, and are prepared for renewables in electric vehicles and are ready to meet the challenges of climate change. We are working with each state to get the right mechanisms in place to be able to make these needed investments. Our states are providing support through a range of regulatory tools, including alternate rate making such as formula rates and multiyear rate plans as well as tracker mechanisms for reliability and gas infrastructure programs. Turning to Slide 8, FERC's recent order on PJM capacity. The Governors in Illinois, Maryland, and New Jersey are firmly committed to having their electricity be supplied by 100% clean. These states are leading the way to a clean energy economy and we share that goal, and we'll work with them to achieve it. Unfortunately, there is a clear conflict between clean energy goals of our states and our customers on one side and the resource decisions being made by PJM and FERC on the other. Unless states take action to protect their clean energy programs, FERC's December order on the PJM Minimum Offer Price Rule or MOPR will result in clean resources supported by the states being pushed out of the capacity market only to be replaced by carbon-based generation. This would result in billions of dollars of additional costs for customers and threaten the progress being made in retaining and expanding our clean energy. Our states as well as many others oppose FERC's MOPR decision and are evaluating what actions may be necessary in response. We are working with policymakers and stakeholders to protect the clean energy programs from the negative impact of FERC's MOPR decision and enable the transition to 100% clean. On Slide 9, we show our operating performance for the year. Each utility continues to have outstanding customer operations, all achieved first quartile in performance and service level and abandon rate. And I mentioned, we had our best ever scores on customer satisfaction index with BGE ComEd and PECO achieving top decile and PHI's performance significantly improved in the last three years missing first quartile by 0.01 points. Reliability performance was mixed this year due to a very active minor storm season throughout the Mid-Atlantic. For instance, PHI had 32 minor storms for 2019 compared to eight in 2018. Minor storms are not excluded from these calculations. However, ComEd achieved top quartile in both outage frequency and duration, and BGE achieved top quartile on outage duration. Turning to generation on Slide 10, our generation fleet performed one of its best years ever, very good in 2019 providing a significant portion of the country's clean energy. Exelon generates 12% or one out of every nine clean megawatts in the United States. Our best-in-class nuclear fleet operated very well last year. Our capacity factor was 95.7%, our highest ever. We generated 155 million megawatt-hours, avoiding 81 million metric tons of greenhouse gas emissions in 2019. Our average refueling outage duration was 21 days, matching the record set in 2018 and 14 days better than the industry average. Exelon Power's gas and hydro dispatch matched 97.9% and wind and energy capture at 96.3% were better than planned. Our Constellation business remains the industry leader. A vast majority of our retail businesses is with C&I customers where we have the largest retail platform with 25% market share delivering 154 terawatt-hours of electricity and 67 terawatt-hours more than our nearest competitor. Our retail operating metrics remain strong; 79% customer renewal rates, an average customer duration of more than six years, and power contract terms of 23 months on average. We continue to see stable unit margins with our power customers. Our focus is on cost and helping support operating margins. Constellation's strength lies in its durable relationship with our customers. We work with our customers to provide them solutions to meet their energy needs while also reaching their environmental and sustainability goals. We provide our customers with much more than just a commodity. And now I'll turn the call over to Joe to review the financials.

Thank you, Chris, and good morning, everyone. Today I will cover our 2019 results, annual updates to our financial disclosures, and 2020 guidance. Starting with slide 11, we had another strong year. For the fourth quarter, we earned $0.79 per share on a GAAP basis and $0.83 per share on a non-GAAP basis. For the full year, we earned $3.01 per share on a GAAP basis and $3.22 per share on a non-GAAP basis, which is above our revised full-year guidance of $3.05 to $3.20 per share and $0.07 per share above our original midpoint. Exelon Utilities delivered a combined $1.91 per share net of holding company expenses. Utility earnings were higher relative to original guidance due to favorable O&M, including the lack of major storms, and favorable weather at PECO and BG&E, as well as higher distribution revenues at the PG&E. These were partially offset by the impact of lower treasury rates on ComEd's ROE. ExGen earned $1.31 per share, exceeding its guidance range of $1.20 to $1.30 per share. ExGen's outperformance was primarily due to favorable O&M, including incremental nuclear insurance distributions, and recognition in the fourth quarter of the research and development tax benefit for the years 2010 through 2018 tax years. We expected to record this benefit, but it was more favorable than we had planned. This favorability was offset by the unplanned outages at Salem, Handley Station and a contracted asset during the year. Overall, we delivered well on our financial commitments. Moving to slide 12, the consolidated PHI utilities earned a 9.2% ROE for the trailing 12 months, up 90 basis points from year-end 2018. The improvement is driven by the constructive distribution rate cases across the jurisdictions, as well as incremental transmission revenue and a decrease in O&M, partially offset by an increase in depreciation. Earned ROEs for the legacy Exelon Utilities were above 10%, slightly improving from year-end 2018. Looking at our utility returns on a consolidated basis, we earned a 10% ROE for the trailing 12 months, which compares to last year's 9.6%. As a reminder, we targeted 9% to 10% consolidated ROE at our utilities and expect that we will move around in that band over the course of time. We remain focused on earning fair returns across all of our utilities. On slide 13, we rolled forward our outlook for utility CapEx and rate base, covering 2020 to 2023. This year, we expect to invest nearly $6.5 billion in our utilities and a total of $26 billion over the next four years. These investments are improving our system reliability, service experience for our utility customers, and preparing us for the future. Our capital forecast reflects identified and approved projects. As we move through time, we identify more investment needs across the system that will provide additional benefits to our customers and communities. Since the initial disclosures for the 2018 to 2022 period, we have identified nearly $4.9 billion in additional investments, including an additional $1.9 billion since last year's fourth quarter call. As Chris mentioned, these investments benefit our customers by helping to drive our operational excellence, overall customer satisfaction, and meet state resiliency and environmental priorities. Since the PHI merger in 2016, we have added more than $9 billion in rate base across the utilities. Over the next four years, we will grow our rate base 7.3% annually to $54.2 billion, adding $13 billion to rate base by 2023 or the equivalent of adding a utility between the size of PHI and ComEd, without paying a premium, issuing equity or obtaining merger approvals. As a reminder, 65% of our rate base growth is covered under either formula rates or mechanisms such as capital trackers. These support our ability to efficiently invest in our system while also allowing us to earn a fair and timely return on our capital. Where we do not have these mechanisms, we will continue to work with stakeholders to establish more timely recovery tools. Chris touched on this earlier, but I want to remind you all that we have been able to make these important investments while maintaining lower customer rates compared to other large urban areas. When we look at our projected residential bills, we continue to see bill inflation around or below the rate of inflation even as we make these important investments. In the appendix, we provide a more detailed breakdown of the capital and rate base outlook for each utility starting on slide 23. Turning to slide 14. We continue to forecast strong utility EPS growth of 6% to 8%. When you consider the drop in the 30-year treasury that lowered our EPS outlook for ComEd by roughly a nickel compared to what we showed you last year, we've been more than able to offset that in the back end of our plan through the increased CapEx program across the utilities for the benefit of our customers, which brings us to the durability of our industry-leading earnings growth, which reflects the combination of strong rate base growth to support system needs for a more digital economy and environmental goals, successful cost management and a focus on customer bill affordability. Before discussing our gross margin update on slide 15, I want to remind you that given the lack of clarity around the outcome of legislation in Illinois and the fact that PJM has not yet held a capacity auction for the 2022, 2023 delivery year, we will not be providing any ExGen disclosures beyond 2021. Turning to the table, there is no change in total gross margin in 2020 or 2021 from our last disclosure. Open gross margin declined by $400 million and $100 million in 2020 and 2021, respectively due to declining power prices across most regions offset by our hedges. During the quarter, we executed $50 million of power in new business in 2020. We remain slightly behind our ratable hedging program in all years. We ended the year 6% to 9% behind in 2020 and 3% to 6% behind in 2021. We continue to see some upside in certain markets, but are not expecting a significant rebound in power prices or volatility. Slide 16 shows our O&M and capital outlook at generation for 2020 and 2021. Compared to our previous disclosure on our fourth quarter call, last year our O&M is down in each year. The updated forecast reflects O&M cuts we announced on the last quarter call, pension benefits, and nuclear savings. The return on our pension investments in 2019 significantly exceeded our planned returns, but this favorability was partially offset by the drop in the discount rate. Taking both into account our pension expense is about flat to plan in 2020 and is down by approximately $25 million in 2021. Turning to CapEx, we expect lower cash outlays than we projected last year. We have reduced the growth capital in 2020 and 2021 given the focus of recycling ExGen cash and the increased need for equity investments at the utilities given their growing capital needs. Nuclear fuel costs are also lower in 2020 and higher in 2021 versus last year's disclosure, primarily due to a shift in deliveries. Overall, we continue to see a constructive outlook for the nuclear fuel costs looking out over our planning horizon. We will continue to look for ways to be more efficient in how we work and spend to improve the cash flow profile of ExGen while maintaining the safety and reliability of our fleet. Moving to slide 17. We remain committed to maintaining a strong balance sheet and our investment-grade credit ratings. Our consolidated corporate credit metrics are consisting with our targeted ranges and above S&P thresholds. Looking at ExGen, we are well ahead of our debt-to-EBITDA target for 3.0 times. For 2020, we expect to be at 2.4 times debt to EBITDA and 1.9 times debt to EBITDA when excluding non-recourse debt. This year we will be active in the capital markets as we support our utility rate base growth. At ExGen, we plan to retire $1.5 billion of long-term debt this year, including the $1 billion maturity we paid off in January. As a reminder, this is in addition to the $600 million of long-term debt retired in October of 2019. Finally, I will conclude with our 2020 earnings guidance on Slide 18. We have provided 2020 adjusted earnings guidance of $3 to $3.30 per share. Growth in utility earnings is primarily driven by the continued increase in rate base as we deploy capital for the benefit of our customers as well as carry through from the 2019 rate cases. We will see offsets from lower treasuries on ComEd's earned ROEs, higher depreciation, and some regulatory timing drags between investment and rate cases most notably at PECO. Our consolidated range in 2020 for utilities less HoldCo is $1.80 a share to $2.10 per share. The decline in earned ExGen's earnings is a combination of lower realized energy prices and capacity revenues, more planned nuclear outage days, and the absence of nuclear decommissioning trust gains. These are partially offset by a full year of ZEC revenues in New Jersey and increased ZEC revenues in New York. We expect first-quarter operating earnings to be in the range of $0.85 per share to $0.95 per share. More detail on the year-over-year drivers by operating company can be found in the appendix starting on Slide 55.

Thanks, Joe. Turning to Slide 19, I want to discuss our key focus areas for 2020. We will continue to deliver operational excellence across our businesses, focusing on modernizing the grid and improving the customer experience at our utilities while staying focused on safety and reliability. We will meet or exceed our financial commitments delivering earnings within the range and maintain our investment-grade credit ratings, as Joe mentioned. At the utilities, we will prudently and effectively deploy $6.5 billion of capital to benefit our customers and help meet the needs of our states' energy policy goals and we will work with our regulators to ensure timely recovery on these investments. We will support the enactment of state and federal clean energy policies with major initiatives in-flight in several states. We will partner and ally with the communities we serve. This is key to who we are. Slide 20. I will close on Exelon's value proposition, which highlights our strategy and commitment to shareholders. We will continue our focus on growing our utilities targeting 7.3% rate base growth and 6% to 8% earnings growth through 2023 rolling forward another year at this above-group trajectory. We will use free cash flow from ExGen to support utility growth, pay down debt and support the external dividend. We will continue to optimize the value of our Genco business by seeking fair compensation for our zero-emitting generating fleet, closing uneconomic plants, and monetizing assets as we see value there, while maximizing their value through generation to load matching strategy at Constellation. We will sustain growth investment-grade metrics and we will grow our dividend at 5% through 2020. The strategy underpinning this value proposition is effective in providing tangible benefits to our shareholders. We remain committed to optimizing the value of our business and earning your ongoing support to Exelon. Operator, we can now open the call to questions.

Thanks. Good morning. Congratulations on a great year, and the outlook is encouraging. A couple of questions. The utility growth outlook has obviously improved as we go out through time, despite the headwind from ComEd. The CapEx is up significantly, but the rate base growth numbers look like they're not moving as much in tandem. I skimmed through the whole deck. I understand, you've also moved capital around the different jurisdictions as well, but can you just comment on sort of that modest level of dissonance between CapEx being up and rate base growth looking like it's not up as much?

Yes, Greg. Good morning. It's Joe. Yes. The issue isn't solely that the incremental CapEx that we mentioned of approximately $2 billion isn't falling to rate base. It's about all of the CapEx and what we get into is the timing of when these projects go in service. So, we've updated some assumptions as it relates to the schedule of when the projects are finished and then they go into service. In addition to that, we could have changes in things like depreciation that would also impact that. So, it's really just a movement of when we see project timing and other things.

So AFUDC or CWIP and AFUDC are not included in those calculations then?

No. They're not contemplated in that calculation.

Okay. That explains it. Thanks. In terms of the cash flow profile, I know that you haven't given us an update because we do have obviously significant uncertainty with regard to ExGen and Illinois. But as you look at most scenarios there, whether it's getting some sort of deserved incremental revenue for the clean attribute to your plants or having to use self-help to rectify the earnings issues, under most of those scenarios do you still see the utility being funded by the cash flow of the corporation without needing equity through this forecast period?

Yes. Greg, so the first thing I would say is, based on the current plan, as I mentioned in my prepared remarks, we don't incorporate any equity issuance in the plan. And going forward, we can meet the funding needs and maintain the investment-grade credit metrics under most scenarios that we look at, because we do look at this under a range of different possibilities.

Okay. Two more questions and they're quick. One, since the EEI deck, where you usually give us your update on where you think O&M and capital are driving it at ExGen, things have improved on the margin. Can you comment on how you've pulled forward some of the O&M and CapEx trajectory?

Yes. I think the big thing is when you look at the improvement in ExGen earnings, it's really driven by four variables. As you could see in 2020 and 2021, the gross margin hasn't changed, right? But what has changed is we announced the O&M reductions on the third quarter call, that’s been a benefit. Lower property taxes have been a benefit at ExGen. Lower depreciation is also a benefit. And then, finally, we do have some lower interest expense, when you think about the retirement of debt. So those four variables have driven improvement to the ExGen earnings.

Okay. Final question, Chris. The time flies. It seems like yesterday since you made the commitment to grow the dividend 5% through 2020, and here we are in 2020 and you've made good on that commitment. At what point do you go back to the Board with a recommendation on the dividend policy post 2020?

So I would anticipate the discussions with the Board will be in the fall timeframe, when we have further clarity on what the future looks like. If we are able to enact some of the policies and programs in the states we're working on, and it provides us with certainty that we can provide certainty to the Board that maintaining the health of the balance sheet while creating shareholder value, we should have a better picture at that time. So, I would expect us talking to you around the year-end timeframe about that.

Thank you, Chris. Take care, guys.

Thanks.

Hi. Good morning.

Good morning.

I had a couple of broader policy questions. We've certainly been seeing quite a bit of evidence of, especially in the PJM states, a movement away from fossil fuels. And on the merchant side, I think I understand some of the moving parts there, but on the regulated utility side, what is your sense of the degree to which states are now pushing to move away from fossil fuels? And how do you think broadly about pivoting and sort of reacting to that shift at the utility side of your business?

So as you know Stephen, our utilities do not have any generation and are restricted from having generation in the states that we serve. What you see in our planning years that you're looking at for the utilities, they incorporate what we believe needs to be done to support the states' needs which calls for more robust distribution system investments to allow two way energy flows, which is going to require transmission buildout to take care of importing the wind from the pockets of the service areas that we serve. And that's what's anticipated right now in the capital plan that we have in front of you. We have got to keep up with the state's policies, legislative agendas, or whatever is going to change the system so our customers can benefit from these policies that the states are enacting.

Understood. And then just shifting over to the PJM capacity process, I wanted to just get your latest thinking on next steps procedurally. I'm thinking about sort of the broader process under which PJM would refine their approach and the timing under which they have an auction. I guess I'm thinking also about the possibility of pretty significant litigation around the, whatever comes out of the PJM and the FERC process here. How do you see that unfolding? Just wanted to get your latest thoughts there.

Hi, Stephen, it's Kathleen Barron. I can take that question. I'll start with auction timing. As you know there's a large group of stakeholders including clean energy advocates, consumer advocates, renewable developers and most importantly the states who have asked PJM to take their time in scheduling the next auction. There's just been such a fundamental change in policy here that states need time to evaluate what the impact is on their customers and to design appropriate policies to protect their customers from the significant impact of this new policy on customer bills. So we of course agree with that perspective and are going to continue to urge PJM when they're developing their next filing effort which as you know is in March to propose an auction timing schedule that takes into account the states' needs. And in terms of litigation, you're right that there have been a number of requests for rehearing that have been filed. That would be the next step for FERC before this case could go to litigation. FERC has no timeline in which to act on requests for rehearing, but I think the more important point is they have been developing this policy for years. I mean they laid out in an order in ISO New England three years ago that MOPR is their standard solution and they have carried that through to PJM. I see no future where they change their mind on that policy and I think therefore the states are right in looking at what their alternatives are to continue participation in RPM.

Understood. And just to follow-up there Kathleen, can the auction proceed if there is pretty significant litigation from multiple states sort of questioning the fundamentals of the FERC order?

Well technically, it can. I mean I think from a good governance perspective, of course as I said before PJM should take into account the fact that some of the states need some more information to figure out what the impact is going to be on their citizens. They're going to need to do an internal evaluation. But from a legal perspective, the FERC order is final. And once the compliance filing is submitted and approved then PJM will be allowed to conduct an auction unless there's some sort of judicial stay imposed.

Understood. That's helpful. Thank you very much.

Yes. Hi, good morning.

Good morning.

Can you hear me okay, Chris? Thanks.

Yes, perfect. Yes, we can.

So on the Illinois process, can you provide an update on the legislation? The goal is to establish a long-term framework for the treatment of nuclear and renewable energy. How significant is this likely to be in any legislative efforts in the state?

Exelon has two main focuses regarding the legislation. One is on the ComEd side, where we aim to ensure we have adequate recovery mechanisms for our capital investments while also maintaining customer protections through caps on bill increases. This aspect is very important. Kathleen can provide insights on the Genco parts, as she has been leading that effort in Springfield and throughout the state.

Sure, I can address your point about the longer-term framework, which is the focus of the pending legislation in Illinois. The aim of using the Fixed Resource Requirement provision in the PJM tariff is to provide states with the flexibility to support renewables that may require contracts of varying lengths. This flexibility allows them to align their capacity procurement with their broader clean energy objectives by distinguishing between clean and emitting resources. The ability to design their capacity procurement in accordance with state policies over the long term is a significant advantage of the FRR strategy.

Okay. Is there any indication of when we will receive a more comprehensive bill with additional details so that we can better understand the specifics of a potential bill?

Yes. I think you should expect to see further discussion and public hearings about what the bill should look like. As you know, there are a number of proposals that are alive in the legislature in Springfield and so there needs to be some discussion and public hearings of how the state's policy on all the issues that are pending will come together in a comprehensive approach. So I think over the course of the spring session those details will become more evident. As you know in most legislatures, it usually takes until closer to the end of the session for all the details to be worked out, but I think you'll start to see over the coming weeks and months more detail emerge.

Okay. I have a broader question regarding ESG and nuclear energy. Chris, how do you view your chances of receiving credit in this area? There seems to be a significant emphasis on ESG and renewables, while the advantages of nuclear energy and its role in carbon reduction aren’t getting as much attention. Last year, nuclear accounted for 12% of the megawatt hours produced in the country. How do you think you can gain recognition from both Republicans and Democrats for the benefits of nuclear energy, especially considering the current perspectives from both sides and FERC?

Yes. In the past two to three years, there has been a growing acknowledgment of the advantages of nuclear energy in promoting a cleaner environment and reducing low carbon and other emissions. As we engage with stakeholders to highlight the benefits of electrification sourced from reliable, clean energy like baseload nuclear, we've found considerable support from various environmental organizations and government officials. The ongoing conversation focuses on how to maintain these assets to help states achieve their environmental objectives, which will be crucial moving forward. We've previously shared that shutting down a few nuclear units in a single state could jeopardize investments in renewables and result in increased carbon emissions. It's essential for us, both as a company and as an industry, to address this issue. The Nuclear Energy Institute has effectively communicated the importance of nuclear to a wider audience, and we will continue to advocate for this as we navigate potential legislation and policies in different states. We've observed positive initiatives like the Zero Emission Credit programs in New York and Illinois. However, more work is needed to protect these plants, and discussions around Fixed Resource Requirements are part of that effort. Additionally, the role of nuclear extends beyond environmental concerns; it also plays a critical part in reliability, job creation, and serving as an economic driver for local communities. Losing these assets or replacing them with carbon-based sources would hinder states both financially and environmentally.

Thank you.

Hey, good morning guys.

Good morning.

Just focusing a little bit on the Genco. If we get to sort of the November veto session and find energy legislation gets pushed to 2021 and we assume that there will be a PJM auction in, let's say, December and January and another one roughly six months after that. Can you just walk us through how you'd be thinking about the auction participation and the timing of potential closures? And do you feel that the MOPR order has catalyzed the states to act on CJC?

We're not speculating right now on that. We surely hope for many complicated issues that the states are able to enact and given time to enact the policies that they desire that will allow these plants to still operate. I've said for the last four or five years on almost every earnings call that if we can't see half of financial stability for each one of these assets that we will have to retire them and we're not going to speculate today on which ones or when. But we've shut down Oyster Creek, gone into decommissioning with a decommissioning company. TMI is off. There was no path for financial stability. And as I've said in the past, we must watch the balance sheet and our debt commitments and the negative cash flow assets will only send the fleet backwards and our goals on strong investment-grade will allow us to maintain our commitments to operate plants safely and meet our financial commitments on retiring our debt. So, we'll work hard through this legislative session to convey the importance of it and we're not going to speculate until we have no longer have a path to profitability for the assets.

Got it. And then if let's just say Illinois does FRR, how are you thinking about maybe the potential impacts on sort of the rest of the RTO fleet like in Pennsylvania and Maryland, especially given obviously the IMM has been taken somewhat of a bearish tone on the impact?

Yes, this is Kathleen. I can address that. There are various estimates regarding the effects of multiple states opting for the FRR option. We have not analyzed what this would mean for the overall market, so I won't speculate on the accuracy of those estimates. However, concerning the market monitor's claim that the MOPR will have no effect on capacity clearing prices, I find that a bit troubling, especially since several fossil companies have repeated it. These state programs prompted the multi-litigation initiated by these companies. For example, when the first lawsuit was filed in New York after the adoption of the ZEC program, they argued that ZEC programs were reducing market prices by $15 billion over the program’s duration. The purpose of the MOPR was to increase capacity prices. Commissioner Glick projected an annual increase of $2.4 billion in capacity prices across the market. Other independent analyses support this as well. Therefore, it's simply not believable for them to claim that MOPR will have no impact.

Got it. That’s helpful. And congrats guys, it's a very solid result.

Thank you.

Hi, it’s Julien, can you hear me?

Yes.

Thank you guys for the time. Super quick. Let me come back to some of the numbers that we start with Greg earlier. Just in terms of the guidance I know you mentioned the AFUDC and the reconciliation of the CapEx and rate base. Can we talk about the earnings? Obviously, rate base unchanged; EPS guidance higher. Is that principally due to some of these changes in AFUDC that isn't formally reflected in that rate base and obviously is reflected in that CapEx? Or are there other changes? Obviously the cadence of the trajectory of the earnings in 2020 and 2021 onwards has shifted a little bit as well but just wanted to clarify that. And then also on ExGen, similar dynamic around what's causing the offset versus the open margin. I think you had a little bit of a quick brief commentary about basis potentially. Just want to elaborate quickly on that as well as maybe the tax piece for ExGen year-over-year.

Yes, Julien. Good morning, it's Joe. On your first question remember we're giving you guidance for the combined EU and HoldCo, so there's a couple of variables even though we're investing CapEx and rate bases are rising. When you look at it the interest rate – the interest expense at corporate is projected lower which drives EPS as one variable that's positive to the earnings. We are – when you look at these projects, right you could still see there is additional CapEx growth and then we've had some improvement in ROEs versus our prior plan as well based on some of the regulatory actions and performance. So there's a number of variables outside just the incremental CapEx that would drive the value. Your second question on the offsets at generation it's – when you look at the prices falling use 2021 as an example where we're less than 70% hedged. You see that you would have the open gross margin come down. However that's a price at a common trading point. When you look at the values associated back to where the generator busbars are for example those prices move every day as well and there were some offsets associated with that. So that got us down to flat.

Got it. Excellent. And then just to come back to the broader strategic points here. At what point in time do you need to make decisions here? It sounds like there's latitude through the course of this year. And then related to that are you expecting any kind of FRR developments ahead of these auctions themselves? Or would the outcome of the auction and the outcome of any ultimate resolution of how to run this auction prove to be a decision point for states outside of Illinois? I just want to understand the cadence of events given where we stand today. I know there's a lot of moving pieces and that could be a long question but I'll let you respond to as you peak that.

We are actively addressing the MOPR in our comments to FERC regarding PJM. It's important that states are allowed to implement any policies or legislation they are pursuing before the auctions take place. There is sufficient capacity within the system, so we don't need to rush to secure it while the rules are still uncertain. It would be unfortunate if the auctions occurred before states could take action, potentially delaying any changes until 2024 or 2025, which could result in negative cash flows for many units during that time. We want to collaborate with all stakeholders in the states we serve to assist them in enacting these policies and to clarify the economic implications. If the bill, as drafted late last year, is enacted, it will significantly benefit consumers. Contrary to some communications, this is not an increase in bills; rather, as Kathleen pointed out, it could cost PJM customers up to $2.6 billion. In Illinois alone, this translates to about 15% or just over $400 million annually in additional costs for those customers. Thus, there is a clear consumer benefit. The draft also includes a cap on the increases related to investments supporting renewables and the cost of energy capacity. We need to ensure that states have the necessary time to enact their desired policies, and discussions are ongoing in multiple states for alternative approaches. We hope PJM will acknowledge the needs of the states and grant them the time to implement these policies.

Perfect.

Hi, Joe and Chris.

Hey, Mike.

Could you explain why the hedging program is lagging a bit? You mentioned not anticipating a significant change in power prices going forward. I'm curious about your thoughts on this.

Yes. I'll let Jim McHugh answer that.

Hi, Michael, it's Jim. We have adjusted our market positioning over time. About 18 to 24 months ago, we were focusing on a position behind ratable primarily in the baseload regions based on market trading conditions. Recently, we've redirected some of that positioning to different areas. For instance, in ERCOT, we see opportunities in different seasons, particularly with ORDC pricing looking favorable for the future. We're strategically selecting our spots across various regions, maintaining a smaller overall position while identifying where the opportunities lie. Additionally, to address your question, I want to emphasize that the bulk of our new business will not come from optimization activities, but rather 70% to 75% will be derived from our load sales and customer-facing operations in both retail and wholesale sectors. We have a strong pipeline for those activities, and as Chris mentioned during the call, our win and renewal rates present more opportunities for reaching our new business goals.

Right. It's still fairly balanced. Regarding the capital program, would you say it’s conservative considering the uncertainty surrounding PJM and CJM? Could the capital program potentially be higher next year if we achieve more clarity over those issues?

Michael, what I would say is our capital program reflects what we think is the projects we've identified as I said in my prepared remarks at this point in time. I think that you've seen the uptick in what we put in in 2019 versus what we're putting in in 2020 and we'll continue to challenge ourselves for the benefit of our customers. But right now I would tell you I think what we're showing you is a fair reflection of where we are and what we expect to do.

Michael, this is Calvin. I would also say when you look at 2019 we added $150 million additional capital all around gas main replacement and really adding to the overall customer experience. And as we've built out our plan whether it's transmission or distribution additional capital it's all around meeting those customers' expectations and our stakeholders' in terms of reliability and resiliency. So we feel we have a solid plan and can execute to it.

The only thing, I'd add to that is every quarter we look at the total bill of the customers and we're very sensitive to making sure the investment is prudent. It drives efficiency, reliability, and benefit to the customer and we also watch the affordability.

Got it. One last question. Hey, Calvin. Regarding the PHI multiyear rate plan filing for this year, would it be fair to say that the return on equities could increase from the low 9s to the high 9s if you receive approval later on?

No. We do not currently expect the DC Commission to issue a ruling until the fourth quarter of this year. Along the way, we have adjusted our request regarding those multiyear plans. However, we have a strong understanding of the return on equity figures, so I feel confident about their current status.

Got you. All right. Thank you very much.

Thank you and thank you for participating today. Before we end, I want to thank our employees for staying focused on safety and delivering another good year both operationally and financially. And with that, I'll close out the call. Thank you.