Q3 2019 Earnings Call
It's the operator today's conference call will begin momentarily until that time your lines will again be placed on music old. Thank you for your patience.
Thanks for standing by welcome to the Exelons 2019 third quarter earnings call.
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I would now like to try and hand, the call over to your speaker today.
Dan Eggers Senior Vice President Corporate Finance. Please go ahead Sir.
Thank you the camera good morning, everyone and thank you for joining our third quarter 2019 earnings conference call, leading the call today or Chris Crane, Exelons, President and Chief Executive Officer in Joe Nigro, Exelons, Chief Financial Officer their joined by other members of Exelons Senior management team will be available to answer your questions. Following our prepared remarks, we issued our earnings release this morning along.
The presentation, both of which can be found any investor relations section of Exelons website.
Earnings release, and other matters, which we discussed during today's call will 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 todays material and comments made during this call. Please refer to days AK and excellence other FCC filings for discussions.
The risk factors in factors that may cause results to differ from managements 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 reconciliations between the non-GAAP measures and the new.
Rest equivalent GAAP measures I will turn the call over to Mr., Chris Crane Excellence, Chief Executive Officer.
Thank you Dan Good morning, everyone, we had a good quarter.
During strong earnings excellent customer service across our utilities and our nuclear units ran at high levels of reliability.
I'll turn to our regular reporting over financial performance in a minute.
My first one would address a matter that I know is on all of our minds.
We have then we have publicly reported we have received two grand jury subpoenas, the subjects, which are.
Our lobbying practices in Illinois, and the company's relationship with an Illinois State Senator These subpoenas a in the speculation about what's behind them have dominated the news about excellent uncommitted.
Given that the investigations are ongoing we cannot discuss many details what I'll tell you. This.
When we learned of these investigations, we pledged to complete cooperation with the government.
And that is the path we have taken.
The companys outside lawyers are undertaking an exhaustive investigation of the facts relevant to the subpoenas Special Committee of the board represented by its own outside Counsel has also been informed and is being briefed on the investigation.
Excellent outside lawyers are sharing the results of the investigation with the government on an ongoing basis. Their investigation is enabling us to determine what changes are necessary internally to ensure that going forward. We operate at the highest pops possible standards not weather actions have been legal or not but.
Rather which go beyond the ethical report reproach [laughter].
We are keeping our eye on a ball by staying focused on the operational and strategic path that we that is delivered the success now I'll turn to the regular report and answer any questions about that I can at the end of the coal.
Starting on slide five.
We had a pause we've had positive developments over the quarter first we were named Dow Jones sustainability index for the 14th year in a row with excellent continuing to score in the top 20% of North American companies in all industries.
Second we launched a climate investment initiative to invest $20 million in startups in our service territories that are working on new technologies to reduce greenhouse emission gas emissions and climate change mitigating climate change.
Third Pepco, Maryland was granted a 9.6 allowed our are we in its most recent rate case. This is an improvement in the results continue to through the enhancement in our reliability and customer service for our customers.
Fourth the Merlin P.S.C. issued an order in the alternative ratemaking free proceeding known as PC 51, allowing Merlin utilities to file a multi year rate plan as soon as next year.
With the New York Supreme Court rejected challenges to the New York SEC program, removing the last remaining legal challenge in front of us.
Next the Governor Governor Wolf issued an executive order beginning the process for Pennsylvania to join a Reggie the regional greenhouse gas initiative. This will allow Pennsylvania to meet its climate goals, while helping to preserve the state's remaining zero carbon nuclear plants.
Seven earlier this week, we announced an agreement with Governor Hogan in Maryland that will allow us to continue to operate Kona window, Dan and protect the long term health of the Chesapeake Bay continue production of carbon free energy from the dam is vital to support Governor hogans goal in generating 100% clean electricity.
In Maryland by 2040.
Finally, we're announcing a new round of cost savings at X Gen. Finding additional 100 million savings, we continue to work hard at driving efficiencies and adapting to a current market conditions. These savings will help ex Japan navigate the depressed forwards, but will not be enough to overcome the financial challenges of some of our.
Our Illinois nuclear plants.
I realize there's been some discussion on the potential impact to the investigation on the prospects that are clean energy legislation in Illinois, the need for clean energy legislation is bigger than just one stakeholder or one company [laughter], where we are one part.
But only one part of the ongoing discussion about the urgent need for legislation in Illinois.
With the road blocks with the road.
Excuse me with the rollback of environmental regulations in Washington state's across the country are taking action to require emission reductions. So they can benefit from clean energy economy that will result, this is true in Illinois, where many stakeholders and policymakers want Illinois on a path to 100% clean.
Drive a in drive electrification of transportation to protect our communities. They believe the AG action is urgently needed in Illinois to ensure clean air reliable service and affordable rigs.
Consumers.
Ex excellent nuclear plants are essential to achieving these goals.
The four plants with outs ex avoid 45 million metric tons of carbon dioxide emissions contributed 4.5 billion in state gross domestic product pay 149 million in state taxes, and if they were to retire prematurely, Illinois customers are consumers.
Pay more than 43 or 483 million more in electricity in Italy.
[noise] I should point out that the delays and enacting legislation or are in part linked to FERC slate and issuing an order on PJM market capacity. This is due to the lack of quorum until the end of November when commissioner GLIC. So completes his recruitable veer period and while the.
A FERC delay is very frustrating it does allow Illinois more time to an act and implement the legislation changes in time to protect the clean energy programs from negative treatment in PJM capacity auction the delay in FERC order will push back the 20 to 22 and 23 auction.
Until at least late fall of 2020.
Spring passage of legislation will allow for Illinois clean energy a procurement mechanism to be in place before the 2023 2024 capacity auction and potentially before the 2020 to 2023 auction as well moving our financial results, we haven't had strong quarter.
With the earnings above our guidance our GAAP based.
On a GAAP basis, we earn 79 cents per share versus 76 per share last year on a non-GAAP basis. We earned 92 cents per share versus 88 cents per share last year, Joe will cover these details in his remarks.
Moving on to slide six operational performance at the utilities was mix this quarter each of our utilities performed well on customer operations side with mostly top quartile performance. However, only comment performed in the first quartile an outage frequency and duration metrics. This year the mid Atlantic in the mid Atlantic.
We have seen significantly more storms in Abu normally higher temperatures, which increased vegetation impacts it caused them to reliability related issues for instance, P.H. I had 27 minor storms in 2019 compared to four in 2018. These.
Drove the lower reliability metrics from mid Atlantic utilities generation performed well during the quarter nuclear produced 39.2, terawatt hours of zero emission electricity with a capacity factor of 95.5.
Excellent power exceeded our plan and had a gas and hydro dispatch match of 97.5, and a wind and solar capture of 96.5 that said, we also had some outages in Texas during critical hours.
That were disappointing it caused us to miss out on some of the bigger opportunities in ERCOT.
Now I'll turn it over to Joe and then.
Go to the questions. After thank you.
Thank you, Chris and good morning, everyone. Today, I will cover our third quarter results quarterly financial updates, including trailing 12 month Aro ease at the utility and our hedge disclosures I will also provide an update on our full year 2019 guidance and our cost management program.
First turning to slide seven we earned 79 cents per share on a GAAP basis, and 92 cents per share on a non-GAAP basis, which exceeded our guidance range of 80 to 90 cents per share.
The outperformance was driven by Exelon utilities, which delivered a combined 56 cents per share net of holding company expenses.
Kildee earnings were higher relative to guidance, driven largely by O and m. timing during the quarter and favorable weather in our non decouple jurisdictions, including Pico Atlantic City Electric and Delmarva Delaware.
As a reminder, in total we are approximately 70% decouple across our utilities.
Our next January 36 cents per share, which was a little behind our plans.
Third quarter was impacted by unplanned outages at owned and contracted assets in your car, which unfortunately hit during periods of high prices.
Although we had one of the top 10 hardest summaries in 70 years in PJM in the third hottest September on record, we saw lower prices and volatility, which resulted in less ability to optimize our wholesale portfolio during the quarter.
Turning to slide eight we show our quarter over quarter walk.
The 92 cents per share in the third quarter of this year.
Four cents per share higher than the third quarter of 2018.
Excellent and utilities less Holdco earnings were up one penny per share compared with last year.
The earnings growth was driven primarily by higher distribution rate.
Associated with completed rate cases relative to the third quarter of 2018. This was partially offset by unfavorable weather and load at pickup.
Extends earnings were up three cents per share compared with last year benefiting from fewer planned nuclear outage days at our owned and operated plants and savings associated with our cost management programs.
Higher Zach revenues from the increase in New York SEC pricing and the started in New Jersey program. In April 2019 also contributed to exchange year over year, Oregon Square.
These were partially offset by lower capacity prices primarily in PJM.
Turning to slide nine.
We're narrowing our 2019 EPS guidance range to $3 in five cents to $3 and 20 said to share from $3 to $3 130 cents per share.
As you are aware comments are we tied to the 30 year Treasury rates, which has declined about 70 basis points since the beginning of the year.
Our updated guidance takes into account the slight degradation in Ireland, we are seeking from the decline in treasuries.
We are delivering on our financial commitment and confident we will be within our revised guidance range at year end.
Moving to slide 10.
Looking at our utility returns on a consolidated basis.
We continue to exceed our consolidated 9% to 10% target with a 10.1% trailing 12 months are a week.
Earned our release for the legacy Exelon utilities remained above 10%, but dipped body sleep last quarter, primarily due to a BG any equity infusion to support capital investment as well as declining treasury yield which impacted calm ads are always the decline will treasuries will continue.
Impact comments are we for the remainder of the year going forward, if they do not rebound.
The consolidated PHR utilities are aimed at 9.4% or are we for the trailing 12 months, a 30 basis point increase from last quarter, driven by higher distribution revenue from the constructive distribution rate order at both Pepco, Maryland and settlement at Atlantic City Electrics.
We remain focused on meeting our utility earnings growth target by maintaining the earned our Liza PHR and sustaining strong performance at our other utilities.
Turning to slide 11.
During the quarter there were some important developments on the regulatory front.
Outside of our rate cases.
First as Chris mentioned in August the Maryland, PST in its PC 51, perceiving found that alternative rate plans can be beneficial to both customer Dan utilities by reducing administrative costs caused by the frequent flyer filing of traditional rate cases.
And providing customer rate predictability.
The order supports the implementation of multiyear rate plans of a three year duration and established a working group to develop the rules.
We are actively participating in the group process.
Once the commission issued its final water, Maryland utilities will be able to file a multiyear rate plan on a staggered basis consistent with the Commission's order.
Second the DC Public Service Commission approved Pepsico's DC notice of construction request.
Our phase one of the capital grid project.
It will strengthen the capital area electric system.
Improve reliability and resiliency and helped facilitate the districts climate commitments.
This phase, including rebuilding to substation.
And constructing approximately 10 miles of two 230 kv underground transmission line.
Phase one is scheduled for completion by 2026.
[laughter].
Our current rate cases, Pepco, Maryland received a final load around August well.
The Maryland Commission approved at 10.3 million dollar increase in annual electric distribution revenues.
Importantly, the order increase Pepco is a real allowed or a week by 10 basis points to 9.6% a recognition of strong performance and reliability and customer satisfaction rates went into effect on August 13th.
We also have several rate cases still in progress on October 23rd the administrative law judge providing overtime comedy annual formula rate case.
Issued a proposed order no additional just moves to the revenue requirements we're recommending.
We expect to receive a final order from the Illinois Commerce Commission.
December 4th of this year.
Last Friday, BJ BG filed the settlement agreement with the Maryland PSC.
Settlement provides for an increase to BG needs and all electric and natural gas distribution rate of 25 million at 54 million respectively.
We expect a final water by December of 2019.
Finally, we received a procedural schedule and pepsico's DC multiyear plan with a final water expected in the fourth quarter 2020.
More details on our rate cases can be found on slide 21 through 24 of the appendix.
Turning to slide 12, we are continuing on our robust capital deployment at the utility investing $1.3 billion capital during the third quarter.
Year to date, we've invested $3.9 billion capital at the utilities.
Proving our infrastructure and increasing reliability and resiliency for the benefit of arc consumers.
We expect to deploy more than $5.4 billion this year $100 million above our original plan.
And as a reminder, 63% of our rate base growth is covered under either formula rates or mechanisms like capital trackers.
Today I will talk about two projects that are part of these after Tim will bring improved performance to our customers in Maryland, and New Jersey.
The first project is the BG peak crossing reliability initiative, which is a 232 million dollar multiyear project to install a double circuit 230 kv overhead electric transmission line across the caps go river, replacing the 2.25 mile.
Underground circuit.
The circuits are a critical Lincoln electric system and are exhibiting system symptoms of long term failure and are approaching the end of the useful life.
Key crossing will improve improved grid reliability.
By reducing risk of power outages caused by aging infrastructure and will support faster restoration of customer interruptions going forward.
The second project the Louis he'd be Ontario rebuild project in Atlantic City.
The $62 million projects include rebuilding 369 kv transmission lines.
Whichever about 16.5 line miles long in total and replacing 295 existing would structures with 225, new galvanized steel structures.
This project resolves potential system performance and reliability issues.
Thereby improving reliability in resiliency to customers in the service area of that seek an island.
On slide 13, we provide our gross margin to update incurring current hedging strategy at the generation company.
The constellation merger, we have delivered strong results in our wholesale business quarter after quarter, even in an environment of declining power in natural gas prices as well as lower volatility.
These market conditions combined with reduced liquidity added out on the curve leads to less opportunity to optimize our wholesale portfolio compared to history.
As a result, we are reducing our power new business target.
$50 million in 2020, and 21, and our non power new business target by $50 million in 2021.
These new business target reductions are mostly offset by cost savings, which I will discuss on the next line.
I should also stressed that these changes reflect our expectation for our wholesale optimization business.
Our customer facing constellation businesses continue to perform very well with sustained margin good success in delivering new products for our customers.
Turning to the gross margin tables.
We get benefit in the third quarter from higher forward prices.
Which you can see any open gross margin Marie.
These positives were offset by the lower wholesale business targets that I, just discussed which sleeve total gross margin in 2020 and 21 flat.
During the quarter, we hedged stay more than a reasonable amount as prices modest modestly recovered from their late second quarter lows. Although we are still behind a ratable overall ending the quarter, 5% to 8% behind ratable in 2020.
Have 1% to 4% behind ratable in 21, we are much closer to a road ratable hedging amount.
We continue to see upside in certain markets, but are not expecting a significant rebound in power crisis.
Turning to slide 14.
22015 in 2018, we've announced more than $900 million in cost savings, which does not include December synergies from our merger with PHR.
These savings were primarily at Exelon generation with approximately one third coming from our corporate services company.
In addition, Dolwin M. savings, we have continued you find ways to reduce the capital intensity of our generation fleet and improve its cash flows.
Since 2015, we've reduced next gens total annual capital expenditures from 3.5 billion to a projected 1.5 billion in 2022, while maintaining the safety and reliability of our fleet.
Included in these reductions are the elimination of most most growth capital they executed.
Except for constellations customer facing solar business.
$325 million base Capex savings.
$675 million of savings from Newco nuclear fuel.
One of the key components of our value proposition is X tens ability to generate free cash flow and we continue to look for ways to optimize its cash flow.
Today, we are announcing additional hundred million dollars in run rate pre tax cash savings in 2020 275 million is attributed to an m. reductions and 25 million. These other piano items, which mostly offset the reduction in new business targets.
I should point out that these savings reflect our current state and we expect we expected opportunity for additional savings.
I will vary and them out depending on the future state of are challenged Illinois nuclear station.
We can find these savings do the hard work of all of our employee.
I've everyday to run the company more efficiently, while adhering to our commitment to safety reliability and community stewardship.
Finally, moving on to slide 15.
We remain committed to maintaining a strong balance sheet in our investment grade credit rating.
Consolidated corporate credit metrics remain above our targeted ranges.
And meaningfully above S&P threshold.
Looking at next Gen wheel, we are well ahead of our debt to EBITDA target of 3.0 times.
For 2019, we expect to be at two and half times debt to EBITDA in two times debt to EBITDA when excluding non recourse debt.
Before turning the call back over to Chris for his closing remarks, I want to set expectations for for fourth quarter disclosures.
Given the lack of clarity around the outcome of legislation in Illinois, which will shape the future of Exelon generation and the fact that PJM will not have held the capacity auction for the 2020 to 2023 delivery year before our call in February we will not be providing some of our using as usual.
Disclosures, including the roll forward of our hedge disclosures to 2022 and DEXTENZA updated for your free cash flow outlook.
Thank you and I'll now turn the call back to Chris for his closing remarks. Thank.
Thanks, Joe turning to slide 16, we are accomplishing things, we committed to do including maintaining industry, leading operations meeting our financial commitments effectively deploying more than 5 billion and capital across or utilities, this year and advocating for policies to support clean energy are.
Strategy remains the right one and we are committed to our value proposition.
We will continue to grow the utilities targeting targeting a 7.8% rate base growth in a 6% to 8% earnings growth through 2022, we continue to use as Joe mentioned, the free cash flow from Genco to fund incremental equity needs at the utilities paid.
On debt and fun part of the growing dividends, we will continue to optimize the value of our X jet business by seeking fair compensation for zero admitting generation fleet.
Closing on economic plants like we did with Tim My and Oyster Creek, selling assets, where it makes sense to accelerate our debt reduction plans and maximizing value through the generation to load match strategy at constellation.
We will sustain strong investment grade metrics will grow our direct dividend annually like 5% through 2020.
Strategy underpinning this value proposition is effective we remain committed to optimizing the value of our businesses and earn your ongoing support of excellent operator, we can now turn it over a two questions. Thank you.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Please stand by where we compound acuity roster.
Your first responses from Greg Gordon of Evercore. Please go ahead.
Thanks, Good morning.
Good morning, Greg It's got a couple of questions first as it pertains to Jan.
You said you commented at the end with regard to plant.
Closures you know if your.
For one reason or another unable to.
Get that the state of Illinois, I understand the economic necessity of.
You know increased compensation for your nuclear fleet at what point do you go down a path of of moving to shutdown of the most on economic units.
You know I can't stress how important this spring legislative session will be for the future of the four sites that are not.
Covered under the SEC program. So we'll be watching those couple of variables here, we'll be watching what happens with the FERC order and what pgms responses to the FERC order driving the legislation, but the first half of 2020 will be.
A real critical point in decision, making and potential announcements one way or the other.
Okay, and Joe as it pertains to the detailed guidance, it's sort of a two steps forward one of the half steps back on the.
Outlook for next Gen better wholesale prices, but.
And the cost cutting but lower optimization expectations is that.
That's a function of I'm, just lower volatility and lower overall prices, making it less.
You know less.
Yes.
That volatility lessening the opportunity for your traders to manage the book effectively can you give us a little more color on that.
Yeah, Hey, Greg you're you're spot on I think it's a combination of factors, it's the lower volatility in the marketplace. I mean, we had a warm summer here and we didn't see much volatility we didn't see prices respond I do want to stress that we're talking about the wholesale side of our business our retail business remains very solid and.
As it relates to next Gen.
We announce these cost cuts, which mostly offset on the reduction in new business targets as Chris mentioned, depending on the outcome of Illinois, Theres still other things that we would have to evaluate on however, our business model changes and disposition of assets. There's other costs that we would look at.
Some of the levers we have at hand, we'll continue to address Capex, obviously and any other asset financing. So theres a combination of factors here, but specifically to the drop in the new business targets. It is the market environment that we're seeing.
Okay, and then on the two more questions one on regulated side.
The.
You know combat sounds like its.
Operating very well, but you know the [noise].
The 30 year as a headwind then it'll continue to be a headwind into next year and until the we see a steeping of yield curve. So like as you're looking at the outcomes in the other areas of the utility business.
The other 60% 65% of the earnings contribution from outside combat are you seeing opportunities to offset.
The impact of interest rates or should we assume that all things equal you're trending lower in that 60% guidance range than you were before.
Yes, Greg Good question, Joe again, you know we update once a year on our Q4 call and we and as it relates to tax on utilities, and we will expect to do that on the call in February .
Having said that we are seeing the impact of the lower are always at comment just for reference every 50 basis point move up or down is about three cents of S. So for 2019 for example, near the weighted average 30 years down approximately 50 basis points and you see that with our revised guidance.
The 30 year Treasury on the forward curve is down approximately 70 basis points versus 12, 31, I would say, though that's one piece of the plan.
Capex plan as we said only incorporates identified projects that benefit the consumer and improve the liability in the customer experience. We have seen through time that as we get closer do given period, we find need for in additional investment to continue to improve reliability and that customer experience and well.
Continue to work hard at that is going forward.
Right.
Last question, Chris I know, it's a difficult topic.
The the investigation the stuff that the second subpoena and the retirement of and premium jewelry, they're all very disconcerting.
You know public disclosures.
No what does it that you can tell us about how you can potentially resolve this this investigation.
What what kinda timeline or are we looking at.
Between now and when do you can get the.
The you know the other parties in this in this comfortable with the way that Youve acted are comfortable that they've gotten the information they need so that we can resolve this.
[noise] there there there is a grand jury investigation going on.
There's not a lot of details that we can provide at this point.
The timeline is not set by US it's set by the government.
In the Grand jury and we'll continue to cooperate anything we learn from our outside attorneys doing the independent investigation will immediately take action on an incorrect, but our cooperation with with the government full cooperation.
And very open cooperation is the imperative here and like I said, we're not passing judgment on is anything legal or illegal and some of our past practices with contract lobbyists or.
Consultants so.
You know these things can take a while.
I don't expect it will impede our business at all going forward is keeping the eye on the ball improving the operations driving the reliability, while driving efficiency at the same time. The management team is very focused there's a lot of speculation in new.
News articles.
There's theres things out there that people are speculating on that you know.
They're guessing.
So to say that the best so we'll just have to.
Continue the process continue to cooperate continue to keep our eye on the ball and when it comes time that we were able to speak.
You know will will we can provide a little bit more color on any corrective actions, we've taken but for now.
We can't go there.
I appreciate that Chris Thank you.
Thank you your next.
A question is from the line of Julien Dumoulin Smith from Bank of America.
Hey, good morning, Tim Good morning.
Hey, just wanted to follow up on a few details perhaps we can talk to you as a function of the process today.
That all include the to them together here.
First the clean jobs coalition and just some of the headlines around where the legislative staff legislation stands today I know whether it happens this year or more importantly next year. Just wondering just in how we're framing that conversation today, given the realities and then separately and somewhat related I'd be curious how.
Would you position the conversation.
Franchise extension that comment next year, it seems that it related but I just want to make sure. We at least talk through some of the process on that well sure I'll cover the first part and Joe Dominguez with Us and I'll, let him cover the second part.
The conversations negotiations strategy.
For the legislation is still an active conversation with many stakeholders and when you talk about the clean job coalition just the you know that's not a very structured organization.
And to speak as a body as somebody did to one publication.
We're still very close and in conversation with some of those members of the coalition.
And we'll continue but theres theres a lot of people involved there's different coalitions, there's the path to 100 that clean job coalition there's the.
The labor. So so things are continuing to evolve in conversations with leadership in the in the legislature are continuing to two.
Take place so it's not like were stalled or stopped or don't have parties to deal with.
Kathleen is doing.
For the generation side I'm doing a some nick significant part of that and Joe is working to not only support what the governor wants and what the state wants but in the meantime, also protecting the consumers to make sure what we're doing to get to the path to a 100%.
Clean by 2030 is done in the most economic fashion less kathleen's, she wants to add anything more to the first part and then we'll turn it over to Joe.
The only thing that I'd add is at the same new story is talking about that question. Julien also mentioned that the f. our ours the centerpiece of the C.J.C. Dell and that's because it's essential to achieving the state's clean energy goals.
If we do not addresses the PJM market will send over $1 billion, a year or two older coal plants, rather than investing the money towards the state's clean energy.
Ambition and that's not that folks are are lobbying and rally in the capital around this the fact that it's an important policy change and that it needs to happen right away.
<unk> is a is something that should be a noted now obviously there are other elements of the bill both from the C.J.C. The path of 100, others that there is not agreement about and that's why it's gonna take all stakeholders together.
To deliver a piece of legislation that will get the states to its clean energy goals and away that's in Florida Affordable and we are committed as Chris said to working with all stakeholders to achieve that goal.
Joe Great Julie and good morning.
Let me just start off explaining what the franchise agreement as it at its most basic level.
It's an agreement that sets for the procedures for us to use city right right of ways for our infrastructure and the fee schedule that we pay in order to use their right away. So what I'm talking about here, they're kinda granular things that are in the franchise agreement is how many times could you open up a street to interconnect and new business.
Yes, what the fees are.
For those operations.
That kind of granular detail.
We've been in negotiations with the city now for some time.
There was a pause in those negotiations while the mayors race was being sorted out in her new team was put in place I'm pleased with the progress we're making right now.
There are three potential outcomes here. The agreement is scheduled to come to an end at the end of next calendar year at the end of 2020.
Either party combat or the city have an option at the end of this year to terminate the agreement.
Sure. They continue to negotiate the as I said the path. We're on right now is that we're continuing to negotiate if we're successful we'll get a new agreement.
If the city elects to terminate at the end of this year, we will continue negotiations and if we do not reach a resolution it's not like we stopped providing electric service to the city, but our fee schedule and our procedures will drop out of the franchise agreement and will be governed by the municipal code that will add a little bit.
Process to our work, but it doesnt shut down quite obviously our activities.
If the city does not issue a notice of termination at the end of the year and we continue to negotiate and can't reach resolution then the agreement by its terms just continues year to year until we reach resolution.
So that's that's kind of the outline of it and Julie and if you don't mind I'd like to provide some additional context.
Chris and Greg talked a little bit about our performance, but I think it bears on the entire discussion this morning.
We are on track at combat to deliver our best performance in the history of the company, we talked about being first quartile were actually first asylum reliability and arguably best in class.
As a result of the good policies, which we have advocated for 92% of the energy that we deliver to customers comps comes from zero carbon resources to put that into context. The next closest large utility is at about 46%.
We have a supplier diversity program that is second to none 41% of our spend this year is with businesses owned by women and people of color as well as veterans.
We are on track as a result of all of this to deliver the best customer satisfaction, we've ever seen.
And we're doing all of that at affordable rates today, our rates are 20% lower than the average for large American studies for out of nine of our rate cases have been decreases under the smart grid law, including that last two cases, Chris talked about the investigation and certainly.
We'll have learnings as a consequence of it.
But it's important for all of the shareholders, who invest in our platform to understand that we're doing a lot of things right.
And with some humility could weigh claim to being one of the best performing utilities in America, and I'd, just add that for context, and all things we're talking about today.
Thanks to.
Excellent guys I appreciate that.
Thanks.
Your next question is from the line ups, Steve Fleishman from Wolfe Research.
Yeah, Hi, good morning, its Steve Hey, So I guess one of the things that we struggle with these disclosures it's just been.
You know really what.
Benefit if any you've gotten from.
Legislation or the last few years and.
For example.
On the.
On the Formula rates. They are are we right now is actually really low in August and as Joe mentioned that that then also I guess, you've gotten the zacks on Clinton and Quad. So just.
I think those plants would have been.
And losing a lot of money if you didnt get them. So I guess, maybe you could just give some color or kind of.
What.
What value really is at risk from this from an investor standpoint.
Was it just not clear that you've gotten a lot of value out of any legislation over this period.
Well, we you know the value is.
The consistency in the process of the the rate cases.
We are tied to the 30 year and that was a negotiation that was done if you look at the history of the rate cases in Howard has improved the regulatory process I'm in the consistency of the regulatory process I think theres a lot of value in that I'm you know when you get a 100 per.
Ciena vascular 99.6% of ask and you're not litigating something over an extended period. It creates predictability, we can't control the 30 year, but we can control.
The efficiency and the productivity of the system with the right regulatory format and that's what we've done as for.
Clinton and Quad cities.
It did save the plants in this more than just saving.
Losing cash we would have shut them down and that issue would have been resolved very quickly.
It's meaningful to the state in the community.
But it also is providing.
Profitable cash flow from those units.
We're working on legislation that would either secure.
The other four sites in the state through the F., our process or will shut those plants down so.
An appointment time with a low interest rate you could point to that say, we haven't got anything but that has not.
Then the historical case and I'm going forward, we'll we'll we'll watch what we can do if interest rates persist to stay low.
What would action, we should take but.
I would have to tell you that I understand the sentiment for your view or your car a question, but there's been a great deal of consistency that's happened in a great deal of ability to invest capital is more than just the aro right.
We have been able to through legislative terms been able to consistently invest needed capital for reliability and efficiency and be able to earn a return they may be a little bit lower returns, but we're able to predictably invest the money.
In predictably get a return on the money. So that's huge if you go back historically to what's happened in some of our jurisdictions investing money at risk and then getting the disallowances in the regulatory process was much more damning then.
Having a low 30 or rate and having a low aro we.
But but still an ROI, we that's above our cost of capital.
Yep.
And then just one other question with respect to the the nuclear plants just may be premature, but just could you give us a sense I am assuming.
Their money, losing on their own before nuclear plants that you're referring to right is there any way to kind of.
Get a sense of.
You know the if you ended up having to shot on what it would do.
[laughter].
We don't we don't evaluate the market.
Response projected market response from shutting the plants down.
So what we do evaluate is the current financial performance the free cash flow and earnings and then afford projected based off of the forward curves and look at <unk>.
The credit metrics and the balance sheet to see what's happening and so.
We have discussed openly that.
There are the four sites.
Our in in the future.
Yeah.
At the current forwards with the current capacity market being managed the way it is by PJM.
Versus the needs that the state wants to maintain the clean energy sources you know.
With with lack of being able to get legislation to change and be able to pull ourselves out of a very inefficient.
By what the state once auction process at PJM.
And go into how far are.
There there a marginal at best too.
Looking forward to losing cash and earning so.
That's a situation now I don't think we're announcing the amounts yet. We're you know we're continuing to evaluate these numbers, but I can tell you that some are more dire than others at this point and we need to move forward with the legislation to prevent the loss for the state.
From an environmental perspective and from.
Economic perspective.
Thank you.
Thank you your next responses from Stephen Byrd from Morgan Stanley . Please go ahead.
Hi, good morning.
Morning.
Just wanted to go back to the point you mentioned about the special Committee of the board with respect to the Illinois investigation are there any targeted deliverables in terms of reports or updates and will any of that.
Eventually be made public or is that more for internal purposes.
I'll, let bill answer that.
Steven It's still got Haiti, the yet the special Committee.
[noise] independent directors will continue to meet periodically.
As needed they have their own counseled, there's no particular deliverable that you should anticipate out of that it's just part of the regular process.
Undertaking in circumstances such of this as this so no particular deliverable should you foresee.
Understood and in terms of the scope of the investigation.
To your knowledge is focused solely on Illinois are there other states or or elements of the business involved.
We're not at Liberty to talk about the particulars of the investigation, but you've seen what has been reported about the subject matter in the subject matter that has been reported.
By us in our case and I'd refer you to that yes, no. That's fair and then just lastly, just in terms of.
The scope of the investigation I think there were four individuals mentioned and I think we've seen.
The two announcements from excellent I assume just at a high level. The you had mentioned because to be hitting the policy is to cooperate with investigations I presume that [noise] employees, who do not cooperate would not be employed at the firm or is there sort of policy. We should think about in terms of.
How you approach Guy cooperation with the investigations.
Expectation is for all employees.
And all executives to participate.
In whatever.
Manner their requested to that's providing information or having discussions.
That's the expectation People's employment is based off of their total record, but our expectation is full cooperation and ethical behavior.
Understood. Thank you very much right.
Thank you. Your next response from profitable May tell from C.
Thanks, So much high guys.
Hey.
Morning.
Morning, So maybe just wanted to focus on the generation side a little bit.
I was comparing Q2 in Q3 follow prices and looks like every region. The bond prices were higher however, given as you talked about you know your volatility was lower and so margins came in lower and there's also a little bit of cost cutting now.
2021, so just wanted to understand how we should think about the generation business. It seems like curved itself on to now from one that pillar. He is now a new element that we need to consider how should we think about the stability of the generation business and also in the context off you know reserve margins in PJM. If you could just give us a little bit.
More and how do you think about the business that'd be really helpful. Let me have Joe start and then Jim MCU a go into more detail.
Problem. Good morning, what I think if you think about what the intrinsic strategy of our generation businesses, it's been producing electric generation delivered to our customer facing HM businesses and that's still continues obviously the the power markets have some channel.
Does it mean you see what we've got we've done with our new business. We continue to work hard to find ways to reduce the cost structure, both from an OEM and capital investment perspective of our generation assets as well as our constellation business and I think that see what you'll see us continue to do I think the second piece to that gets into the industry.
Atrial strategy of what we're trying to accomplish as a company you see how we're investing in our utilities you see how we continue to manage our balance sheet and we continue to return value to the shareholders.
That is being done on the back of cash flows that are being generated free cash flow that's being generated at Exelon generation and we will continue to work hard to do that as we continue to transform the generation business. The last pieces, obviously as we've talked about in our prepared remarks and some of the questions.
We announced this cost cutting exercising a business as usual state.
Depending on the outcome of the legislation in Illinois, clearly, there's other elements to our business that would need to evolve under certain scenarios. So we'll continue to work hard at that.
And that will be dictated by other outcome and profitable 10 core new I'll just I'll just add a common weaken our strategy continues to be via premier operator of generation.
Particularly nuclear and other clean generation and also be a solutions provider for customers that has not changed I wouldn't I wouldn't think about the generating company any differently than that.
And it I'd like Jim to comment a little more on the customer side of our business. Yes, I think it's important to note that that the new business generation, we put new business targets in our hedge disclosures, that's an expectation of the value we're going to create both from our customer facing businesses as well as the optimization of the assets in.
The markets.
The customer facing businesses are performing very strongly and the stable the stable value. There has been there for a while we still see good margins and really product enhancements and product solutions for customers, who are demanding more what's happening on our wholesale business side is the lower volatility in the markets, which actually you know where.
We've reduced our new business targets around around that end of the business, which actually in my view point leads to more stability, we have an environment, where 70% to 75% of the gross margin in our new business will come from the stable customer facing.
Businesses that we run that are still performing strongly so a smaller portion of our overall.
Gross margins would come from this optimization activity.
We happened to have an expectation of those numbers in our forward disclosures and that's the number that we're lowering based on this environment, where we just see the supply stack being strong in markets like PJM and policy, adding more generations of the stack low natural gas price volatility and low demand growth.
In markets like PJM, So I think we're able to shift our business focus here.
To this customer facing business, that's more stable, we can reduce our costs have matched that new business model and really provide an environment that I think in is a less risk environment for the generation company.
Okay, that's super thoughtful and helpful color. So appreciate that I guess, just a quick follow up in terms of the federal investigation.
As you mentioned earlier on the call it could take a long time or it could take some time. So if it does take time and Youre, Illinois legislation for some reason is delayed linked to that how do you decide on what happens when would the units you still run them do you still nuclear refueling is still continued or do you kind of eight.
What kind of decision, making you kind of expected on that from a timing perspective.
Well nothing has been linked to the investigation and the legislation.
Right now there is.
The run any legislation, we've got to see a FERC order and we probably won't see the FERC order or Pgms response.
Both of those tied together till sometime in the first quarter, which will enable us to refine a legislative path going forward.
If for some reason, we don't garners support as a coalition in a large group of stakeholders to go forward with the legislation.
By what we see in the market forwards today.
Plants will start to shutdown.
That's that's the reality if something doesn't happen in the spring because PJM will run their auctions and if there's lack of legislation or our ability to withhold the load and the generation from that auction.
The expectation of clearing megawatts, you've seen the trend.
So with without being able to get capacity revenue for those eight reactors in the market forwards being as low as they are right now its uneconomic and the one thing we're not going to do is sit around and damage the balance sheet.
And create a situation that's a unrecoverable.
The responsibility of the balance sheet is very felt very strong by the management team and the actions that we will take if a lack of.
A cohesive and and complete resolution path forward.
We can't sit here for years, and bleed cash and build up debt.
In damage the Holdco and further damage the genco.
Understood. That's very helpful. Thank you so much.
Thank you Alan I turn the call back over Q, Chris Crane, President and CEO for closing remarks.
I just wanted to thank everybody for participating in the call today in the questions and I understand that we can't answer everything right now, but rest assured we're taking all the actions that are necessary to ensure we can put this behind us. So thank you with that I'll close out the call.
Thank you for joining us today.
Concludes today's conference call you may now disconnect.
Oh.
[noise].