Exelon Corporation EXC CEO Chris Crane on Q4 2019 Results

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, $150 million more than originally planned. These investments were primarily in infrastructure and technology to provide a premier customer experience, improved reliability, and resiliency. Modernization of our gas system resulted in the best-ever customer satisfaction at each of our utilities. We had a productive year on the regulatory front. Pepco DC filed its first multi-year rate case, and Maryland's PSC is moving forward with a multi-year rate plan. We received a constructive settlement at BGE, and at ACE, PECO's transmission formula was approved by FERC. 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. New York State Supreme Court affirmed the ZEC program, and a new jury in 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, and supporting clean energy policies in our states. 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've 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've 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 counsel, to determine if any changes are needed to ensure that going forward we operate at the highest possible standards and live up to 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 customer bills affordable. The rates in all our major cities—Baltimore, Chicago, Philadelphia, 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 a strong system performance that has come from our investments. Frequency of outages has decreased significantly, down 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 lines 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 changing customer needs, more reliable and more resilient, and are prepared for renewable and 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 makings such as formula rates and multi-year 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 energy. These states are leading the way to a clean energy economy, and we share that goal and will work with them to achieve it. Unfortunately, there is a clear conflict between the 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 energy. 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 unbundled rate. As 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 8 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 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 energy capture at 96.3% were better than planned. Our Constellation business remains the industry leader. A vast majority of our retail business 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 of gas, more than our nearest competitor. Our retail operating metrics remain strong: 79% customer renewal rates, average customer duration of more than six years in power contracts, and 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 relationships 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. I'll turn the call over to Joe to review the financials.

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. Our utilities, while staying focused on safety and reliability, 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 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. Exelon's value proposition 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 strong investment-grade metrics, and we will grow our dividend at 5% through 2020. The strategy underpinning this value proposition is effective and providing tangible benefits to our shareholders. We remain committed to optimizing the value of our business and earning your ongoing support. At this point, operator, we can now open the call.

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 year-end timeframe about that.

So as you noticed, even 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 robust distribution system investments to allow two-way energy flows, which is going to require transmission build-out 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 states' policies, legislative agendas, or whatever is going to change the system so our customers can benefit from these policies that the states are enacting.

Yeah, we can.

Well, it's definitely, you know, there's two focuses that Exelon has in the legislation. One is the ComEd side, ensuring that we have adequate recovery mechanisms for capital investments being made while trying to maintain the customer protections that we need by caps on bill increases. So that part is very critical. Kathleen can address the Genco part. She's been heading that up in Springfield and around the state.

Yeah, I think over the last two to three years, you've seen a greater recognition of the benefit of nuclear as it's contributing to a cleaner environment, low carbon, and also other emitting gases. So, you know, as we work with stakeholders explaining electrification and the benefits of electrification, and that electrification is coming from clean sources that are highly reliable like baseload nuclear, there's been quite a few environmental organizations and government legislative folks that agree with that. The dialogue is going on on how do we keep these assets so the states can make their goals, and that's going to be a critical part going forward. You know, we've shared numbers with you before that if we shut down a couple of nuclear units in a single state, we can totally destroy all the investments that have been made in renewables, and we're just going to go backwards with our carbon emissions. So we have to do our job, not only as a company but in an industry, and we're trying to do that. The Nuclear Energy Institute has done a very good job on their campaign to communicate that to greater and broader masses, and we'll continue to do it ourselves and work through things like the legislation that may be enacted or policies that may be enacted in states. You know, we've seen the ZEC and the recognition in New York, we saw the ZEC and the recognition in Illinois. We're going to have to go a little bit further to be able to save these plants, and that's where we're talking about FRR. And it is also another part of it, it's more than just environmental. The reliability they provide, the jobs they provide, the economic engine for the communities that they serve is very impactful. And to not have these assets or to be replaced with carbon-based assets will just set the states not only financially but environmentally backwards.

You know, 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. You know, I've said for the last four or five years on almost every earnings call that if we can't see a path to 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 you know, we've shut down Three Mile Island, 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 negative cash flow assets will only send the fleet backwards in our goals. And 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 no longer have a path to profitability for the assets.

We are definitely responding to the MOPR in our commentary to FERC and PJM that they need to allow the states to enact whatever policy or legislation they are pursuing prior to running the auctions. There's adequate capacity within the system that we don't need to rush to secure it until the rules are clear. So it would be an unfortunate event if the auctions ran before the states were able to take action, which means, you know, you'd be looking at 2020 for 2025 before you'd be able to enact, and that's a long time with negative cash flows that many of the units would be facing at that point. So we want to work with every stakeholder we can within the states that we serve to help them enact the policies and explain what we can on the economics. You know, if the bill as we've seen it and drafted towards the end of last year is enacted, it actually has a significant benefit to the consumer. It's not a bill increase as being communicated by some or understood by others. It actually, as Kathleen pointed out, could cost as much as $2.6 billion to the PJM customers, and you take just Illinois alone, that's about 15% or a little over $400 million on an annual basis on an increase to those customers. So there's a customer benefit here. As drafted or inputted previously, there's a cap on what can be increased on both sides, the investment to support the renewables or the cost of the energy capacity in the system. So we need to be able to have the time, or the states need to be able to have the time and discussion in multiple states right now that they want to look at something differently. And we hope that PJM respects the states' needs and allows them time to enact the policies that they desire.

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 checkup.

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.