Exelon Corp (EXC) — Q2 2022 Earnings Call Transcript

Thank you, Dillan. Good morning, everyone, and thank you for joining our second quarter 2022 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 will 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 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 other 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. We set about 45 minutes for today’s call. I’ll now turn the call over to Chris Crane, Exelon CEO.

Thanks, Jeanne. Good morning, everyone. Thanks for joining us. Before I get into the quarter, I want to spend a minute talking about the Inflation Reduction Act, a bill that's being considered in Congress. We appreciate those who have been working to position the United States as a leader in a cleaner energy future and combating climate change. The bill extends tax benefits for familiar renewable technologies like solar and wind. It creates new ones for clean energy sources like nuclear and hydrogen. It also focuses on energy efficiencies, electrification, and very importantly, equity. These aspects of the bill will enable us to transform for customers while building a domestic clean energy sector. However, the bill also proposes a corporate minimum tax that could undermine the benefits of those incentives and slow down the investment needed to make this transformation. The lower cost of clean energy technology and efficiency investments will be offset by higher taxes on companies making investments. With this language currently proposed, we and other utilities could face an increase in cash tax. While the bill has yet to pass, specifics could change as currently drafted, we could see an impact of incremental cash tax of approximately $300 million per year starting in 2023. The higher tax would ultimately limit our ability to invest in the infrastructure needed to accommodate the clean energy our customers want in our jurisdictions. However, the situation remains very fluid. We continue to monitor the bill closely as it moves toward a vote in the Senate and beyond. In the meantime, we're working to advocate for language that better aligns incentives to achieve what we all want: a cleaner, resilient, reliable, and affordable grid. Turning now to the quarter, our first one since separating on April 1. We continue to execute on our plan, focusing on operational and financial excellence to serve our customers in our communities while supporting their environmental and social equity needs. We earned $0.47 per share on a GAAP basis and $0.44 per share on a non-GAAP basis. We continue to expect our full-year results in line with the $2.18 to $2.32 range we provided on our Analyst Day. We've updated on previously announced plans to finance a small portion of our $29 million capital investment program with equity, and Joe will provide additional details on our financing plan, along with his commentary on the quarterly results. We're on track to limit the number of rate cases we have this year. In May, Delmarva Power & Light Maryland filed its first multiyear plan covering investments from 2023 to 2025. The filing highlights improvement in Delmarva’s reliability and customer service in Maryland. 2021 marked its second straight year of record-setting outage frequency performance. We look forward to building on the successes of the multiyear plans we have in place and leveraging lessons learned to deliver value for Delmarva Power's Maryland customers. In Illinois, ComEd continues to work on a new rate-setting process, including proposed performance metrics. We expect a final order by the end of the third quarter. Additionally, on July 1st, ComEd filed its first beneficial electrification plan with the Illinois Commerce Commission, as required by the CEGA, proposing to spend approximately $300 million from 2023 to 2025. The plan is designed to reduce barriers to beneficial electrification, including barriers to electric vehicle adoption costs and charging availability. The plan approaches and emphasizes equity and environmental justice as we implement. Our plan will ensure ComEd’s investment strategy delivers on the CEGA’s groundbreaking environmental and social equity goals. As a reminder, ComEd’s first distribution rate case under the new rate case structure will be filed in early 2023 for rates effective in 2024. We continue to support our communities and provide transparency to stakeholders on environmental, social, and governance practices. We recently published our ninth Annual Corporate Sustainability report, our first as a TOD-only utility. It details all the ways in which Exelon is a responsible steward of the energy transition and delivers sustainable value for our jurisdictions. For instance, there are many programs going on, but one example discusses our STEM activities, having hosted approximately 180 young women in urban centers over the past 30 years. I have been joining each of the three academies to talk with the participants. In May, the Exelon Foundation selected nine young women who have graduated from our STEM program academies to receive scholarships totaling $1 million for their college education. It's quite impactful for those young women, and it was powerful to speak to them directly and tell them what they have just achieved. The report also highlights $200 million in climate change investment initiatives, a program that supports startups with potential to have a wide-scale impact on climate change risks. In mid-July, the Exelon Foundation selected nine startups to receive funding in the third round of the program. This is a 10-year program, and these companies’ business models address climate-related products and services like EV charging repair, carbon accounting platforms, and other focus areas. We're very proud of the work that all our employees do every day to support the customers and the communities. You can find all the details in our sustainability report. Switching to slide 5, let me talk about our operational performance for the quarter. We continued to provide safe, reliable service for our customers. From a reliability perspective, we've seen improvement from the first quarter. We are now in the top quartile for outage duration across all jurisdictions, and ComEd and PHI scored in the top decile. ComEd delivered its best CAIDI performance on record despite severe storms in June. We met the restoration targets early, restoring 80% of 125,000 impacted customers in less than a day. ComEd’s distribution automation investments avoided almost 70,000 additional customer interruptions. Our outage frequency performance remains at high levels, with ComEd achieving the top decile. On safety, PHI improved to the top quartile. However, we did have a slip at PECO into the second quartile. We're implementing additional training to address the primary drivers of the underperformance at both PECO and BGE. As always, safety remains our number one priority. BGE, ComEd, and PECO continue to earn top quartile customer satisfaction performance through the second quarter. Lastly, we maintain the top decile performance in odor response across our three gas utilities. PHI continues its streak of perfect execution, responding to all gas odors reported in less than one hour for the first half of 2022. This is crucial for maintaining public confidence in our gas distribution system, ensuring that we can find, fix, and repair any issues that arise.

Thank you, Chris, and good morning, everyone. Today, I will cover our second quarter results, our quarterly financial updates, and highlight several ways in which our utilities impact the economic health and wellbeing of the diverse communities we serve. I'll begin on slide 6, where we show our quarter-over-quarter adjusted operating earnings waterfall. Exelon's continuing operations were at $0.44 a share in Q2 this year versus $0.36 a share in Q2 of last year. As a reminder, the prior year second quarter reflects a $0.09 impact for discontinued operations adjustment for certain corporate overhead costs that were previously allocated to our generation segments that are required by accounting rules to be presented as part of Exelon’s continuing operations. These costs were paid for by generation and are not indicative of our corporate overheads post-operation. Additional information, including the full year impact of the discontinued operations adjustments on 2021 results, can be found in the recast 10-K which we filed on June 30. Excluding the $0.09 impact, quarter-over-quarter, the discontinued operations accounting adjustment for service company allocations, Exelon’s second quarter results were $1.00 lower than the second quarter of 2021. We did benefit from higher distribution rates associated with completed rate cases, including higher Treasury rates impacting Commonwealth Edison's distribution returns. However, this was offset by higher depreciation and amortization, bad debt, timing of other utility costs, and the impact of rising rates on the debt at the holding company. As Chris mentioned, we continue to reaffirm our 2022 EPS guidance range of $2.18 to $2.32 per share. Our year-to-date operating earnings results of $1.08 per share are aligned with the historical percentage of full-year earnings as we outlined at Analyst Day. Growth for the balance of the year will occur primarily in Q4 as we continue to realize the benefits of higher distribution and transmission revenue, including the net impact of higher Treasury's on ComEd. It will also include the absence of unfavorable weather and storms from a previous year and the timing of taxes and O&M spend that impacted us in the first two quarters of this year. Any updates to guidance will be provided on our next call for Q3. Moving on to slide 7, looking at our utility returns on a consolidated basis, we expect to be in our consolidated 9% to 10% target by year-end. As of the second quarter, our trailing 12-month ROE of 8.8% was slightly below our targeted range. As we discussed on our last call, the timing of equity infusion supporting capital investments across all utilities outpaced the higher earnings driven primarily by distribution and transmission rates. We remain focused on delivering stronger returns at the utilities, which the semi-investment we make on behalf of consumers. Turning to slide 8, it was another quiet quarter on the regulatory front, with one notable rate case development. On May 19, Delmarva Power filed its first multiyear plan with the Maryland PSC, the third of its kind in the state preceded only by its sister utilities BGE and PEPCO. The filing outlines the company's plans to invest hundreds of millions of dollars in the local energy grid and for other customer experience improvements during the three-year period from 2023 to 2025. As we've noted before, the multiyear plans approach allows us to align with all stakeholders on where the company is focusing its investments. Among the hundreds of projects, the plan specifically includes investments in the electric distribution system to continue to improve reliability and customer service, advanced technologies to modernize the distribution system, and provide tools to assist customers in managing their usage. We expect an order by the end of the year. We also have three vacated cases that are still in progress. Delmarva, Delaware has a gas case with rates going into effect on August 14, subject to refund, with an expected decision in the first quarter of ‘23. Additionally, we expect a decision on the PECO gas case in the fourth quarter of this year and our ComEd’s final formula rate filings in December. Each case is proceeding in line with our expectations. Overall, we are pleased with the progress in advancing progressive regulatory designs that benefit our customers, ease regulatory burden, and improve visibility for our utilities. As a reminder, we expect nearly 100% of our rate base growth will be covered by alternative mechanisms by the end of our planning periods. More details on the rate cases can be found on slides 18 to 21 in the appendix of our earnings presentation. On slide 9, I want to discuss the work that our utilities do to partner with local, state, and federal agencies, as well as community groups to ensure we are maximizing opportunities for our customers to benefit from the various assistance programs available to them. With the challenges presented in the last couple of years by the pandemic and recent inflationary pressures on customers, there have been increases in the funding available to support our most vulnerable customers. For instance, the LIHEAP program run since 2017 by $400 million to $3.8 billion in total. However, the percentage of households taking advantage of this assistance has remained flat nationwide, implying additional untapped opportunities to support our customers. Our utilities, with their capabilities around billing and customer service, have stepped up to this challenge, looking for innovative ways to support the governmental agencies and ensure more eligible customers are taking advantage of the programs available. I'd like to touch on just a couple of examples. ComEd introduced the Community Energy Assistance Ambassador program, whereby it offered employment to over 100 local residents to serve as trusted partners to educate customers about financial assistance, as well as energy efficiency. With support from these ambassadors, ComEd was able to expand its reach into hard-to-engage communities, distribute more than 11,000 energy efficiency kits, and connect customers to a record $146 million in financial assistance, representing a 95% increase in the number of grants customers received compared to 2020. Of the PHI utilities, ACE, Delmarva, and PEPCO also exploited local outreach strategies, leveraging a data-driven approach to ensure they were targeting the highest opportunity areas. Furthermore, they partnered closely with the relevant governmental agencies to identify and reduce logistical pain points around applications, eligibility verification, and disbursement. These efforts resulted in customers securing $125 million of energy bill assistance, an increase of 70% from 2012. Similar approaches were also employed at our PECO and BGE operating companies, and Exelon efforts across all utilities resulted in over $450 million of funding, making its way to more than 650,000 customers, which lowers arrearages and bills for all consumers. This level of funding represents a 22% increase in the assistance we were able to connect to our customers compared to the prior year. In fact, these efforts were recognized by the EI, who selected Exelon as an Edison Awards finalist in 2022, specifically for the innovative ways we helped our customers obtain this assistance. Connecting customers to financial support is just one of the ways in which Exelon is ensuring its customers are making the transition to a cleaner and more resilient grid in an affordable and equitable manner. If I move on to slide 10, during the second quarter, we continued to invest capital for the benefit of our customers and are on track to meet our $6.9 million commitment in 2022. These investments will improve reliability and resiliency, enhance service for our customers, and personally prepare the grid for a clean energy future. Today, I would like to talk about the impressive effort led by BGE to replace a half-century-old underwater circuit nearing the end of its useful life in the heart of Baltimore Harbor. BGE’s Key Crossing Reliability initiative installed a double circuit 230 KV overhead electric transmission line across the two-mile-wide Patapsco River. Proactive outreach and early engagement of stakeholders significantly reduced permitting durations and allowed BGE to incorporate feedback into the project's design, benefiting both BGE and its customers. To reduce durations, overhead construction began in May 2020 and completed 15 months ahead of schedule. The transmission monopoles were installed, including two of the tallest towers on the continent, which contemplated adequate clearance for cargo and cruise ships entering the Port of Baltimore today and into the future. Reliability improvements stemming from the key crossings initiative were made possible by the estimated 300 to 350 talented women and men who contributed to this project. As we announced in February of 2021, and reaffirmed as recently as last quarter’s call, we plan to issue $1 billion of equity in the holding company by 2025 as part of a balanced funding strategy. We are establishing a $1 billion ATM program, and we plan to issue $500 million of equity in 2022 leveraging either the ATM program or a one-time offering, or some combination of both methods. We will complete the remaining $500 million in 2023 to 2025 and will continue to update you as we make progress on these points. Beyond our equity plans, as we noted in the first quarter, we have completed our long-term debt financings at corporate for the year, and there is no change to our expectation that our consolidated corporate metrics will average 13% to 14% at both S&P and Moody's over the 2022 to 2024 period. With a number of financings completed this quarter at our utilities, we continue to benefit from the robust demand for that debt backed by extremely strong credit ratings. As you've heard from Chris, we are monitoring the Inflation Reduction Act and its potential impact on cash flows and taxes. We will continue to update you on that as we can. Thank you, and I'll turn back the call to Chris for his closing remarks.

Thanks, Joe. Turning to slide 12, I’ll close by reiterating Exelon’s value proposition and its position in the sector. Exelon is a premier TOD-only company in the nation, consistent in delivery and reliable results. There are several key attributes that distinguish us. We have unmatched size and scale, leveraging a common platform across all our utilities. We consistently and reliably offer best-in-class operational performance, which drives a superior customer experience and facilitates positive regulatory engagement in our jurisdictions. Our purpose of powering a clean, brighter future for our customers and communities reflects how important ESG principles are to our company. We maintain a strong balance sheet that drives the investment needed to sustain our success. The net result is our opportunity to invest $29 billion of capital over the next four years for our customers, with an annualized 6% to 8% operating earnings growth through 2025. We expect to pay out 60% of those operating earnings each year to our stakeholders and shareholders. Thank you for your time. Now we'll turn it over to Q&A.

Hey, good morning, guys. Chris, just on the Inflation Reduction Act, just given your comments, any thoughts on prospects for ultimate passage? I think the senators' stance is still unclear, and we may get a vote this week. And Joe, if the 15% AMT passes as it stands, would you be able to update the financing plan accordingly? And just remind us, would the multiyear plans adjust for the tax changes on the fly, or would you require a separate proceeding in most jurisdictions? Thanks.

Yes, I'll take the first half and let Joe take the second half. We have been working with our Head of Federal Regulatory Affairs, Melissa Levinson, who's in the room here. I’ll ask her if she wants to add anything after I speak. We have done a significant amount of outreach, not only as a company but as an industry, to ensure that the message is heard that there is a technical fix and potential other methods. However, we don't know enough now; it's very fluid. As you talk to the senators, they're getting up to speed as we're getting up to speed. So it came quick, it came out of the closet, and we have to continue to dive in with the senators as a company to communicate the unintended consequences of where we're at. Melissa, anything else?

I think it remains very fluid, we know that senators are working to review the bill and understand the impacts. Expectations are that they're going to try to vote on the bill, but things remain fluid.

Did I misspeak on the technical fix?

As we look at the bill, we continue to talk with the senators about potentially unintended consequences of how the tax might be applied and its impact on our ability to continue the robust investments that we're making. We are discussing with them some of the tax policy that has existed over time that enabled us to cost-effectively and affordably invest and examining ways to amend the structure of the minimum tax.

Yes. And I'll pick up the second two questions, Shahriar. Good morning. If the 15% passage is as you mentioned, we wouldn't expect to update our financing plans right away; our normal cadence is that we would do that on the Q4 call after the first of the year. The reason we do that is it gives us time to get through our year-end budgeting. We aim to mark things to that point, whether it’s treasuries, pension, etc. Furthermore, we would be very transparent at that time. As for your last question, regarding whether multiyear plans will adjust for tax changes, it's unclear at this point how these taxes will flow through to our customers. This situation is obviously very fluid, and as it’s currently written, we’ve reached the threshold for the tax at the consolidated level. So we’re working through all this in real time.

Got it. And then just lastly, Joe, there was a bit of confusion this morning around the language regarding equity plans for 2022. Could you explain the pros and cons of executing it via the ATM versus just a pure block? What is your rationale for this strategy? Thanks.

Yes, I think there are a couple of answers to that, Shahriar. If we were having this conversation at the start of the year, we might even have had a different view. Market conditions are changing, so we need to adapt as appropriate; interest rates are the prime example. What we've tried to do is be clear that we're implementing a $1 billion ATM between now and 2025, which is what we indicated our equity needs were. We're planning to complete $500 million of it this year, but it's crucial for us to maintain flexibility. That's why we are signaling that we could execute through one or two avenues previously discussed.

Hi, thank you. Good morning. Just following up on the IRA and minimum tax. Is the right way to think about that you could probably absorb that reduction in cash flows just looking at that 12% trigger versus your guidance range? Or could we consider that as potentially increasing equity needs?

Yes, this is a very fluid situation and we're not ready to commit to either of those. It all ties back to the assumptions from our end-of-year planning process. What I can say is, on Analyst Day, we committed to a 16% earnings CAGR through 2025, and we're still committed to that.

Okay, great. Thank you. You mentioned performance-based rates, and we've observed those in ComEd. Do you embed any kind of benefits from potential positive incentives under the performance-based rates at the CAGR midpoint you mentioned?

Yes, in our plan, we don't embed any incremental benefits from performance.

However, strategically there are tailwinds we are trying to leverage.

As you mentioned, we have been working with stakeholders and filed our performance-based metrics outline and goal, which would add if ComEd is able to achieve reliable electricity provision to customers, as well as assist the state in reaching its goals. The outlined reliability metrics could add 60 basis points.

We provided alternatives to the commission if they wanted to consider adding up to 40 basis points, but all contingent on ComEd meeting the standards outlined in collaboration with stakeholders.

Yes, thanks. Good morning. Chris, could you provide, I’ll calculate later, but if you have handy the $300 million of cash flow potentially impacted by the IRA, what does that translate to in terms of FFO to debt percentage?

Yes, Joe, could you provide that insight?

Steve, whatever it is, I don't think we're prepared to disclose that. We look at it collectively, as we will go through our year-end planning to assess what portion we can offset with other enterprise actions, versus what falls to the impact metrics. This situation is still very fluid.

There will be cost-cutting, adjustments to project schedules, and multiple avenues to prevent any adverse impact on our metrics. Our focus will be on maintaining our capital spending plan, growth for reliability, and affordability while accommodating renewables. There are several factors at play that we need to balance, but we’ll prefer a resolution to the bill instead of these adjustments.

Okay, and then second question concerning your thoughts on equity issuance timing. Why decide to do half of it in the first year rather than spacing it out?

Yes, I think, Steve, there are a couple of reasons for that. This is the first window we've had open post-separation. We executed some short-term debt during the separation, which we're now planning to repay using equity as part of our balanced funding strategy. We evaluated the type of equity issuance, and as I've mentioned earlier, it’s still a fluid situation due to changing market conditions. We want to maintain maximum flexibility, hence we’re implementing an ATM.

Hi, thanks so much for taking my question. Could you speak to your current thoughts on maintaining linearity of annual performance and achieving growth each year through the forecast?

Thanks, David, for the question. Good morning. We're confident in the 16% growth rate we've provided through 2025 in terms of earnings. However, there is variability between the years. This variability is driven by three factors: ComEd’s distribution return through 2023, which remains tied to treasuries that we don't control on a mark-to-market basis; PECO operates on a three-year rate case cadence, where earnings are higher in the introductory years than in those that follow; and finally, we’re transitioning to different ratemaking in Illinois in 2024 and beyond. We've made assumptions regarding that transition as well, and we're comfortable with the ranges contributing to that 16% growth rate.

Okay, got it. Thanks for that clarity. With the tick down slightly in this quarter, could you provide your confidence level regarding ROE rising in the latter half of the year, and any thoughts on when you might be able to achieve something like a 9.5% ROE level?

The decline in ROE early in the year is tied to equity infusion into utilities. We conduct the majority of our debt offerings early in the year for the entire enterprise. To align capital structures, we introduce equity, which takes time for ROEs to adjust. We aim to reach our target range of 9% to 10% for all utilities, and I’m confident we’ll achieve that by the year-end, on average across the utilities.

The critical point is the rate cases, as Joe mentioned. We've experienced downward pressure on that 9.5% to 10%. We need to navigate that, explaining the impact of the higher interest rate environment. It tends to drop quickly when interest rates fall, but it’s a slow climb up when interest rates rise. That’s what we're focusing on.

If I may add, David, it is important to note that ComEd’s earnings are some of the lowest amongst utilities, impacting the overall average ROE. As ComEd transitions beyond the formula rate, this will positively affect the collective utilities’ ROE. Moreover, the multiyear plans we are implementing, in collaboration with stakeholders and commissions, are intended to assure investments are visible and contribute to stable ROEs and our projected growth.

Hey, guys, thank you. I'll keep it quick. Joe, I want to revisit the $300 million per year cash impact from the alternative minimum tax. Given the increase in your cash effective tax rate annually, shouldn't that cash tax impact be actually lower due to the effective tax rate going up naturally in the plan?

I believe there are a lot of variables that contribute to that equation. Given the size of our enterprise and the number of operating companies, a lot shifts annually, really each quarter. This is a fluid situation, as Chris alluded to, and we need to reach the end goal on it. I'm not going to guarantee any specific impact; we are providing you with an indicative view of what we believe that impact will look like over our planning horizon.

Yes, thank you all for joining the call today. We look forward to continuing to execute on a plan. With that, I'll close the call and thank you for your ongoing support.