Q2 2020 Exelon Corp Earnings Call
[music].
Hello, and welcome to excellence second quarter earnings call. My you floor itll be okay. That's definitely today.
Much of its place commute to prevent any background noise.
Please note that today's webcast is being recorded during the presentation. We will help us. That's my first question you can ask let's just say pressing star one on the telephone keypad she'd like to view the person teaching the full screen view picked up all screen bought in by hovering your computer Mel first for over the Powerpoint Squeak breast escapee on you.
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It is now my pleasure to factor they spoke them over to Dan Eggers Senior Vice President corporate finance, Sir the floor is yours.
Thanks, Good morning, everyone and thanks for joining our second quarter 2020 earnings conference call, leading the call today, Chris Crane, Exelons, President and Chief Executive Officer in June I grew 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 with the presentation, both of which can be found any investor relations section of Exelons Web site the earnings release and other matters, which we discussed during today's call contain forward looking statements in estimates that are subject to various risks and uncertainties actual results could differ from our forward looking statements based on factors and assumptions disguise.
In today's material and comments made during this call. Please refer to date 8-K and excellent other FCC filings for discussions or risk factors and other factors, including uncertainties surrounding the impacts the cobot 19 pandemic that may cause results to differ from managements projections forecasts and expectations today's president.
Patient 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 nearest equivalent GAAP measures.
I'll now turn the call over to Chris Crane Exelons CEO.
Thanks, Jim.
And I appreciate everybody joining the call this morning, and spending time with this.
I'm starting off.
You see from or releases. This morning, the GAAP basis, when we get bases were 53 cents per share on a non-GAAP.
Basis, we earned 55 cents for sure.
I agree a quarter outperforming or guidance range 35 45 cents.
For sure due to a achieving cost savings earlier than planned.
Joe will get into it.
Our loot assumptions chemo or how are we expected.
But we've had excellent operations, but also the confronted some serious challenges.
Quarter first comment reached an agreement with U.S. Attorney's office.
That concludes.
Includes a three year deferred prosecution agreement.
Payment of $200 million, which ends the investigations into commented and excellent.
I have taken robust actions to identify and address deficiencies, including enhancing enhancing our compliance governance to prevent this type of conduct.
We apologize for the past conduct that did not live up to our values.
These new policies and oversight will ensure won't happen again.
Extremely disappointed serious this over the past misconduct and we know many stakeholders understandably feel the same disappoint.
We have you have our commitment that we will take.
Every possible step to earn back to comp.
[noise] lost with others.
This will not happen overnight.
And there will be a formidable task, but we were solve together there.
[noise] second countries addressing.
The important issues operational and equity and social Justice and we're doing so it was well.
Our employees and communities are customers are diverse and we have a critical leadership role in pursuing equity in fairness for all those facing ingrained injustice discrimination.
He is living our values, both within and outside the walls of our company [noise].
[noise] sponsoring job programs and underserved communities is a big focus of ours developing a larger base of diverse suppliers.
In our footprint.
According through philanthropic and volunteers them a wide variety of organizations pursuing equity in economic development, making it clear what our values are through action in speaking up when we see in justice.
[noise] focus [noise].
Focus on our values of respect diversity and inclusion cannot waiver and we know black lives matter all love diverse communities manner, and we're standing to protect them and help serve them weve doubled down on our work to support our diverse and underserved customers and communities.
As we all [noise].
Impacted by continued in equity and we must do more.
[noise] [noise] switching to the Covance issue Coburn 19 continues to impact our communities. We remain focused on safety of our employees running or operations at the best in class levels and supporting or.
Customers and communities.
Corporate pandemic related policies into our management model that keep our employees in our contractors.
Implementing responsible reentry plants that predict are predicting on key milestones that will ensure employee safety and confidence that they can come back workplace.
Created contingency plans to monitor.
System configuration, and allow us for rapid emergency response, and storm or normal operations.
And providing a deferred payment arrangement for residential in low income customers that are affected by the high rate of unemployment that we're dealing with in the communities we serve.
On the operational highlights operations.
Our strong with the pin debit conditions in extreme storms across territory.
Early June Pico faces, a larger storm in history, which for sustained winds of over 40 miles per hour.
More than 60 miles per hour.
400 customers were within an hour of the storm, beginning and but we're able to restore 80% of those customers with widespread damage in 36 hours.
We had already prepared Andrew new procedures for spar response during the pandemic.
8% or back office storm rules are performed now remotely within 48 hours.
3700, 50 contractors and mutual assistance personnel for safely on site and the Pico region to restore customers in onboard they were onboarded electronically.
In which we continued to develop the techniques for that.
Despite the pandemic in the active storm season, all utilities are in top cortile for outage duration and outage frequency.
Nuclear as best second quarter capacity factor in more than a decade, 95.4%.
Safety, we safely competed in this quarter by refueling outages theres been a year.
Most ahead of schedule, while protecting our employees and contractors.
Power dispatch match.
Was 97.4%.
Renewable capture rate was 92.7% [noise].
So overall very very strong operational performance.
We also continue to focus on or environmental stewardship in July we released our.
Our 2019 corporate sustainability report that shows the accomplishments made.
Then marketing Air emissions report once again Foamix lawn has the lowest carbon emission rate of the top 20 vessels owned power producers nearly five times less than a number two producer in the larger printed largest producer carbon free generation.
In 2019 utility energy efficiency programs help customers save 22.3 million megawatt hours and avoid 8.7 million metric tons.
Excellent utility set a goal to electrified.
30% of the vehicle fleet by 2025, and 50% by 2030, avoiding more than 65000 metric tons of carbon from 20 to 20 to 20, Threerd, we're committed to deliver affordable zero emissions power and helping our cut.
Tumors in our community reduced the harmful emissions.
Exist in their communities. These efforts are important to transition to a clean energy economy.
But they are not enough to address the climate crisis, we continued to advocate for policies state and federal levels that will address the challenges when I'm going to turn the call over to Joe for the financial update.
Thank you, Chris and good morning, everyone.
Today, I will cover our second quarter results, our quarterly financial updates, including trailing 12 month, our OE that Ellen.
Our hedge disclosures.
Turning to slide nine we earned 53 cents per share on a GAAP basis, and 55 cents per share on a non-GAAP basis, which exceeded our guidance range of 35 to 45 cents per share.
Excellent utilities delivered a combined 29 cents per share net of holding company expenses.
Utility earnings were modestly higher relative to expectations, driven largely by comment formula rate timing.
I know in M. timing, which was partially offset by the record setting storming the Philadelphia area, which cost 40 cents per share to pickup.
X Ken outperformed expectations for the second quarter, earning 26 cents per share.
The upside was largely driven by lower I went and where we started saw a targeted savings for 2020 coming sooner than we originally budgeted. These savings were realized by lower outage cost lower labor costs travel and entertainment and training costs being lower as well.
On the last call, we introduced we announced 250 million of savings across the organization.
To help offset the impact of Koby 19, which we expect it would be more weighted to the back half from this year.
The organization, it's been hard at work is and is on track to achieve these savings in 2020.
With some coming earlier than anticipated as you can see in our second quarter results.
During the quarter load at the at the utility and constellation was inline with our expectations.
For the third quarter, we expect earnings of 80 cents to 90 pounds per share and we are affirming our full year guidance of $2 in 80 cents to $3 from 10 cents per share.
On slide 10, we show our quarter over quarter earnings block.
55 cents per share in the second quarter of this year was five cents per share lower than the second quarter.
Hello.
Excellent utilities less Holdco earnings were down 10 cents per share compared with last year.
The decrease was driven primarily by storm costs at Pico commented formula rate timing.
And higher bad debt expense, partially offset by favorable weather at Pico.
Xtend earnings were up five cents per share compared with last year benefiting from lower ROE and Amazon income taxes.
This was partially offset by lower capacity revenue, primarily in PJM and the impact of coping 19 on load and bad debt expense.
Turning to slide 11.
Looking at our utility returns on a consolidated basis, we remain in our consolidated 9% to 10% target range with a 9.1% trailing 12 month or are we as of the second quarter.
Earned our OE is for the utilities remained above 9%, but dipped from last quarter by 60 basis points could decline was primarily driven by lower earnings at Pico as a result disposal gains Dan.
Higher bad debt at Pico, and PHR and declining treasury yields contain patted comments are only.
As a reminder, this calculation is backward workload. So as we think about the next couple of quarters, you should expect to see some pressure on our always as we roll off the better pre Cobank 19 earnings quarters and carry the burdens picos poor first quarter weather and second quarter stores as well as the impact of lower.
Treasuries on comment.
These headwinds are captured in our full year guidance. So you should have the financial impact already assumed.
Looking further into the future we remain focused on delivering stronger earned returns at utilities and supporting our growth targets.
Turning to slide 12.
Since the last call there were some important developments on the regulatory.
First regulators in all our jurisdictions have approved Kogan 19 recovery mechanisms.
Second PGT was the first utility in Maryland to file our multiyear plan after getting the Green light on this approach from the Maryland PSC in February.
The filing will support planned capital investments from 2000 22023.
As well as investments made in late 2009 flew to maintain an increase reliability and benefit customer service for our electric and gas distribution system.
The critical infrastructure sector will be a key component to marilyn's economic recovery and BG is designed a multiyear energy infrastructure investment and customer relief plan to assist with the economic recovery.
BG, we'll invest more than $5 billion to funding announcements to the safety reliability security resiliency and environmental attributes in the grades and improved customer experience.
Bgs expected to support more than 26000 jobs and have at least $15 billion of economic impact over the three year period.
Which is critical as communities manage through the pandemic recovery.
In conjunction with the filing fee Genie will provide from customer release in assisting in 2020 to 2023 for limited income customers and small businesses.
We expect in order this December.
Third in June.
Pepco filed their multiyear plan enhance proposal in DC with the PSD addressing the impacts of the coding 19 pandemic and current economic challenges.
The enhanced plan would expand and establish a series of customer programs targeting those that have been hardest hit including small businesses non profit in our residential customers.
The flexibility of the multiyear plans structure provides pepco the ability to offer these innovative adjustment in response to the pandemic, we expect in order by year end.
Fourth comment annual Formula rate update filing is expected to be decided in December of this year.
As filing request a reduction in delivery rates for the third year in a row and decreasing 10 years.
Since the Formula rate has been in place comments investments in modernizing the grid reliability resiliency in clean energy growth have improved reliability by 70%, while keeping bills lower than they were nearly a decade ago.
And finally last month Delmarva narrowing received a final water for its distribution rate case.
The Maryland Commission approved the proposed order by the public utility law judge.
That recommended an $11.7 million increase in annual electric distribution revenues.
Importantly, the order increase Delmarva has allowed our we by 10 basis points to 9.6%.
We believe that is recognition of strong performance and reliability and customer satisfaction.
More detailed on the rate cases can be found on slide 24th we 30 of the pending.
Turning to slide 13.
We are continuing our robust capital deployment program at the utility.
Investing $1.5 billion during the second quarter year to date, we've invested 2.9 billion of capital into our utilities, improving our infrastructure and increasing reliability and resiliency for the benefit of all of our customers.
The bike despite some early challenges from the pandemic, we're on track for the year.
Today I will discuss two projects that are part of these efforts and we'll bring improved performance to our customers in New Jersey in Pennsylvania.
The first project is Atlantic City Electric Moss Mills Moss farm transmission line rebuild which is $69 million project to rebuild 15 miles and 69 kv transmission lines and Poles.
This project upgrades a critical transmission line that runs through the tired north eastern portion of the Atlantic City territory in New Jersey spanning three different county.
Additionally, the chestnut next substation will be retired and replaced with a modernized mobile ready substation, allowing for incremental flexibility.
The second project is peak goes up when substation project in Philadelphia.
The $68 million project concludes replacement of existing 75 year old substation.
With a new modernized substation and extension of 230 kv transmission lines, and new 13 kv theaters into West Philadelphia.
This project improves infrastructure that serves 10000 customers any over broken bhalla areas, including hospitals in universities.
It will also enable customers to implement solar energy solutions.
Pico engaged local diverse companies to participate project implementation in construction, which provided approximately 250000 construction now.
On slide 14, we provide our gross margin update incurring hedging strategy at the generation company.
Turning to the table carries no change in total gross margin in 2020 or 2021 since the last quarter.
We executed new business consistent with our plan.
In 2020 opened gross margin is flat to the first quarter, and we executed a $100 million and power new business and $50 million of non power new business.
In 2020, then open gross margin increased by $200 million due to increasing power crises across most regions.
This was offset by our hedges and lower capacity revenues in New York and Unpledged capacity from PJM incremental auctions.
In 2021, we executed $50 million and power, new business and $50 million non powered.
We remain slightly behind our ratable hedging program in 2021 by 47% linked considering cross commodity hedges.
On slide 15, I'll give a brief update on constellations business and what we've seen to date on performance during the second quarter commercial industrial come a customer load was in line with our expectations.
Load was within our down 9% to 15% projected range, although inherited from week to week.
Our load forecast for the remainder of the year is unchanged.
As we get more information, we're getting a better handle on the impacts from coping 19, which is helping us to monitor how specific regions customers and industries are behaving with respect to cope with 19 impacts as they continue to evolve.
Additionally, we are working with our large customers to better understand their load impactful and outlook.
Even as we evolve to an ever changing landscape, our focus remains on being strategic partners with our customers and providing clean energy products, we work with our customers by providing proactive analytics and insights on their current loans tools to manage and optimizing real time and navigate emerging.
Trends such as electrification impacts to their businesses, while also reaching their environmental on sustainability goals.
This partnership is key to our success and provides the most stability for our business be a high retention rate some consistent margins.
Moving on to slide 16, we're committed to maintaining a strong balance sheet and investment grade credit ratings, our consolidated FFO to debt is projected to be 18% for 2020 consistent with last quarter. This reflects the pressures from Kobin 19 as discussed in detail last quarter.
Looking at X 10, we are ahead of our debt to EBITDA target of 3.0 times for 2020, we expect to be at 2.5 times at 2.0 times, when excluding non recourse debt.
On the rating from in July Fitch affirmed our ratings and S&P took action to downgrade comments issuer credit rating.
However, S&P reaffirmed the senior secured in short term ratings at Cod med, therefore, not impacting our anticipated cost of borrowing.
Furthermore, S&P chains, the ratings outlook for Exxon corporate Pico Pepco Holdings commented and nexgen to negative from stable. While we were disappointed in these actions we remain committed to maintaining a strong balance sheet and investment grade credit ratings.
We have successfully executed all of our planned long term debt financings for the year. The 2020 financing plan was significantly accelerated to take advantage of attractive market conditions, and providing ample short term liquidity, leaving us well positioned for the balance of the year.
The issues in the issuances in the second quarter were all meaningfully oversubscribed, and we secured record setting low interest rates at the utility.
Thank you I'll now turn the call back to Chris for his closing remarks, thanks, Sue and thanks for a comprehensive report note finally, turning to slide 17.
I will close on Exelons value proposition, which is unchanged.
We were focused on growing our utilities targeting 7.3% rate base growth due to 6% to 8%.
EPS growth through 2023.
We will use the free cash flow as we have done.
From the Gen code to support utility growth Paydown genco debt and support some of the external dividend.
We continue to optimize the value of the Gen business by seeking fair compensation for our zero admitting generation fleet.
Closing on economic lands, and monetizing assets and maximizing their value through the concert constellation Avenue.
We will sustain strong investment grade credit metrics.
Main committed to that and will not waiver.
And we'll grow our dividend at this point right now.
Annually at 5% through 20, Tony.
The strategic underpinning this value proposition is.
Our effective and providing tangible benefits for our stakeholders.
Operator, we can now.
Turning the call over for questions. Thank you.
Ladies and gentlemen, if he would like to ask the question seems the press Star then the number one telephone keypad.
I would like to read my question.
The parent.
Your first question comes from the line ups are Pourreza Guggenheim partners.
Your line is informed.
Hey, good morning, guys.
Good morning quoting.
I was just two questions here.
On on financing as we sort of think about some of the moving pieces.
Obviously, the sizable organic growth for utilities minimal headroom from a credit perspective the seeding.
The C and D buyout potentially maybe higher Uncollectibles, Joe do you sort of currently vision can you kind of potential scenarios maybe in the next 12 months that would require you to have to issue equity.
Yes sure. Thank you for the question as you know we've received this question many times over the last few months.
As I said in my prepared remarks, we're committed to a strong investment grade rating at central 10 into our business and what has been quite frankly, we're very long time.
We go through a very rigorous planning process and we disclosed the result to that process each year on our fourth quarter call.
Under that most recent plan there is no equity issuance in the plant.
Last month, we kicked off that process for our next plan that will take us through the end of this year and as you can imagine shari, there's many variables that go into that process.
Market prices for power, obviously treasury rate, our load forecast, our OEM projections, what our capital plans are a funding strategy. When you think about debt and obviously, we still have the.
CFR are out there and that will be taken into account.
What I would say is we don't take any one of those variables in isolation. They obviously all work together to create the basis for our apartment.
We think successful in with our strong balance sheet and growing our utilities and we've been harvesting the cash flow Opex can now do that we also look at the levers we have very we've been pretty successful with our cost cuttings over the last five years, obviously, we've sold some assets we look at alternative.
Segment and the last thing on that risk listed equity, but in our current plan. There is no need for equity and as we move through the planning process.
And that takes us through the end of the year will delay can communicate the outcome of that on our fourth quarter call.
Great. Thanks, and then Chris.
Question for you on strategy.
The past with felt like you weren't confidence if you ask Jim business.
With that I'd rating sufficient scale.
With what we're seeing with Itps eventually going to GE, which would certainly alleviate liquidity requirements are there is looking at the loan merchant fossil fleet as a de risk can you give us any refresh thoughts on the genco is a strategic fit within the portfolio over the long term I guess do you don't have some incremental confidence.
That the Genco business could eventually stand on its own without the support from core corporate transaction would obviously alleviate balance sheet concerns in the valuation disconnect. When we Bob is a few players looking to simplify kind of their own structures. So whether we're talking about the entire fleet or simply the fossil fuel.
Yes.
How's your strategic thinking kind of changed over the past, let's say 12 months.
So.
It is something that we look on a regular basis, we do a deep dive strategic review.
Of the benefits of keeping the two companies bolted.
Mines bolted together versus what are the alternatives.
We have enjoyed a period of time.
Free cash flow from the Genco that has allowed us to have a significant investment into the utilities for the better part of the customers.
Over a period of time since our last review.
You can imagine is something that we always look at and I understand the basis of the question with the recent announcements from two other companies.
On were they have decided to go.
But right now.
There's work to be done through creates the certainty in the value.
Of the cash flows that would be maintained to allow the company to either stand on its own or continue to support the growth.
Side of business.
And so we're in the middle of.
Trying to work through legislative strategy.
In the.
Illinois.
We're on from ground in New York.
No there is work going on in New Jersey.
We have to look at.
The value of the assets and what's going on in Maryland, and what can be done their legislatively to compensate the assets for their low carbon output.
So it's.
It's something we look at and it's something that we think.
We have been very clear on from the beginning in its good to see other.
PPS coming along and understanding the value of being investment grade.
And not having stressed balance sheets with commodity cyclicality like we see.
But we think we can improve the value further in the strength further to be able to serve the states and the communities that we serve with could well paying jobs.
Strong balance sheet, and then we will continue to assess too.
To the assets save bolted together.
Through corporate holding company structure or is it better for all stakeholders involved to have some type of separation of.
Of the entities one thing I can tell you is there is an annual review.
All the.
Non nuclear assets to see if they.
Propose more value to others and we have.
Projected for ourselves.
At annual review will continue and as we see assets that.
Could perform better in somebody else's.
Folio.
And we could.
Monetize those assets, we'll do that theres assets that will shut down the.
On carrying their own weight, there are assets in new England the.
Have a finite period of time under the Isos regulation and so.
There is there is a constant flux or non nuclear business that will continue to evaluate with our focus on.
Strong balance sheet debt reduction and optimizing what we have on the balance sheet.
Terrific. Thanks, Joe increased congrats on good result, tough year hit it.
Thanks.
Your next question comes from the line, Steve policemen up Wolfe Research Your line is open.
Yes, hi, thanks.
So just hey, Chris.
The.
The Illinois.
I guess.
Hi, Matt.
Preferred agreement and fine.
Did you just maybe give kind of.
Views on implications that you're seeing for.
Uh huh.
Addressing the clean energy law.
And if any and then also.
On future of.
The rate, making trucker.
Yes sure there.
Let Joe Dominguez, CHMP and on the second half of the question.
Is here with us in the room.
First half of the question does it affect the excellent generations drive for legislation on change in the capacity market.
Hi, there theres an obvious issue the trust has been eroded.
Although it's isolated to commented it as effect on.
All the entities and so.
Theres been a lot of press reporting and there's been some disappointed stakeholders in his rightfully so and so our job.
It is to rebuild the trust of those.
On the reserve.
And make sure that.
We can show with that.
We have done a fantastic job and Joe will cover some of this and the investments that have been made at commented in that and what.
[music].
Rate structure is down for us it has been totally super beneficial to the consumer.
But.
There is.
There is a period of time, we're we're just going to have to continue outreach conversation and show our commitment to.
Fickle behavior that doesn't compromise, our integrity or the trustworthiness us going forward.
So.
We're still.
Working.
To engage with stakeholders.
On the capacity market redesign is very critical for us to get it done.
As you know PJM is going to run an auction.
And there's a strong sense from our analytic folks that the.
Some of the nuclear units are not going to.
The picked up in that auction.
Summer on economic at this point right now and some more may become.
On economic in our commitment to you is always been if we can't find a way our path to profitability will have to shut them down which is a said.
[noise] turn of events that will affect.
Say schools and carbon reduction it will show severely affected communities around the plants.
In the very high paying a critical jobs that those communities.
The benefit from so.
But.
You know, it's an unfortunate thing we apologize for what went on we had a code of conduct that clearly.
The finds the behaviors, but it wasn't enough and so.
We've put controls in place to ensure we will never happen again, and we have to work with stakeholders.
Really.
Legislative and elected folks, but our customers and.
Our other stakeholders in the communities that we serve to rebuild trust.
One thing I can tell you is companies committed.
Doing the right thing for the communities that we serve not only through philanthropic activities, but also volunteerism.
Thanks.
You can look at us and all the communities, we serve and we're probably the strongest corporate partner.
Ill.
And we're going to continue that and we know that we're only as good as a company as the communities that we serve so.
That's that's what we've got to get back to this is.
The most unfortunate thing to happen not just because of time, it's because of trust and it's because of.
A small amount of individuals making decisions that should not have been done and shouldn't have gone on detected.
But with that said, we still remain confident the consumers have been protected served and as you heard.
Yes.
We have lower rates and higher reliability than we did 10 years ago and so that's that's because we have a strong regulations regulatory body. That's focused on the same thing that we're focused on is reliable affordable clean.
In energy with that I'll, let Joe talk of.
What what his thoughts are on rates, making and regulatory process. Thanks, Chris I think I think Steve. Good morning went way I think Chris covered a lot of it just to level set for the folks on the call a formula rate continues through the end of 2022, so well.
We have some additional time to see what the future looks like.
Whether it's a continuation of the formula with additional transparency or return to a traditional re banking.
As both Chris and Joe talked about we think the Formula has provided enormous benefits to our customers. If you take a look at page seven on the deck you see the key metrics and you see all green for combat, but in a certain sense.
That.
Almost understates the performance that kinda that.
We are not only top cortile and all those dimensions, we are actually top decile at all of those dimensions and last year at Con Ed We had the best performing year ever in the history of the company.
Over 110 years best performing here and as I look at the metrics at the close of July we are tracking 20% better than last year in safety.
11% better in Katy So we've we've still got a number of months to go but very very proud of the team at comment and the operational performance customer satisfaction is highest it's ever been we were JD powers number one Midwest utility at the end of 2019, we had never achieved bad objective. So I spoke.
Just on that because.
For two reasons one the transformation that's occurred at commented and it's been recognized here and second we always tell you that from an excellent perspective, and Chris says this virtually every call that we think of good regulatory and political outcomes as being driven by good on.
Operational performance and I think.
At combat, we could lay claim to perhaps that in the best operational performance in the country. So we'll see what that looks like going forward from comments from the Governor's office that we've recently, saying, it's clear that at least from his perspective, the formula was tied to the.
Question, that's occurred the investments and smart meters and other devices and to the extent that there's a renewal or.
A new methodology thats installed its going to have to be related to a new policy objective and that's tied up in a lot of the clean energy goals, but I guess that from my perspective, Steve.
Whether we continue with the formula or whether we returned to traditional rate, making I think.
The entire team at comment believes it's got to be constructive and one reason we're confident in that is that there has been an evolution in Illinois as we've been in the Formula, Illinois policy for Ratemaking has evolved on the state now uses forward looking test years.
And the gas utilities have used that that's been constructive where de coupled as a state we have bad debt and other rider mechanisms.
That are.
That are strong and transparent and better than we weren't.
In 2011, when we first went to the formula, but I guess the biggest difference that I would point to as they the operational performance between 2011 and now is so much better.
If you take the thesis that operational performance drives regulatory result spend in a certain sense. The outcomes. We were seeing in 2011 were driven by poor operational performance at comment and today, that's a different story.
And so the final point I'd make is we've had an eight year history of making the investments and underground cables, and poles and including smart devices across our system.
Not only the commission has seen that now for eight years, what we'd be continuing whether it's at a formula rate or traditional rate, making is those programs that have been wildly successful in terms of improving reliability integrating clean energy, making the system more resilient in the face of climate change.
And do on all of that stuff and Ki bin customer bills low as Chris said.
Our average built today I think Joe said this is lower than it was 10 years ago and in part that's a story about wholesale power prices, but in big measure, it's about energy efficiency, a comment and the overall efficiency of the organization. So.
The punch line for me as this Dave regardless of whether we're in formula or not I think we've got good alignment in terms of the investments we're making in the system. We're going to continue to make those prudent investments going forward and I think the results are going to bid constructive.
Great great. Thank you very much.
[noise]. Your next question comes from till the end Dublin Smith of Bank of America. Your line is open.
Hey, good morning team takes the time.
Hey, good morning, Thanks for joining.
Thank you.
Listen I, perhaps just a pick up where we left off on the last question. If I can can you speak specifically to the utility and bending the relationship in terms the franchise there isn't a baby that the Joe question event, but.
You can you read some context in that process the back and forth obviously the public.
And then at the same time.
Clarify the last question the last with bonds. It includes.
In the event, which the formula rates are not extended.
It would be conceivable you go back to reproduce the way, making contact in which you would benefit or at least you would.
Have available.
Those mechanisms just alluded to you always want to make sure we're excited about that as well.
That's right.
Chris is okay. If I go yes, yes, sure. So Julien let me answer the short question that you asked last first yes, if we return to traditional made rate, making we would intend to follow rate case, using a forward looking test year.
And that that rate case would likely be filed in the first quarter of 2023.
So that that's number one in terms of the franchise agreement.
Weve.
Been through a process, what the city, where we've been meeting.
Periodically just about every week, although that got interrupted a bit with covance, we're making good progress I thought on the franchise agreement then we had the DTA.
And we had a hearing last week with city Council and also some input from the Mayor's office. The Mayor's office indicated that from her perspective, two things need to happen.
Before we could continue the conversation around the franchise Graham if one is we have to.
Deal with the ethics reforms and the compliance mechanisms and from my perspective that is assuring the city that the measures we've taken our the appropriate ones and then having reporting requirements and other things with the city. So that they understand that we're implementing those and that we're moving from.
It appropriately the mayor has a big ethics agenda. So we're going to embrace that FX agenda here, the hiring of Dave blocker, which we've talked about before is quite an important piece, Dave as comes to us with an impeccable reputation.
As many of you know he came out of the U.S. Attorney's office, serving as chief of the criminal Division about office for 11 years, but most importantly, and for folks outside of Northern Illinois, you don't see those.
But Dave has an unbelievable reputation within the community.
And for folks like the mayor who have served in the U.S. Attorney's office as a colleague of daves.
That's that's quite an important point.
But we need to work through.
Ensuring that we have a transparent mechanism of providing a regular updates to the city in terms of the adherence to the new protocols that we have adopted that's one piece of it.
The mayor is also indicated that we.
We need to be committed to the goals of sustainability to the goals of equitable.
Affordable energy for all customers in the city in that that's kind of the sweet spot of our strategy around electrification around clean energy energy efficiency. The many jobs programs. We sponsors. So we look forward to good conversation on that there's a tangential issue relating to the franchise agreement that being the issue.
You have the city's takeover or municipal innovation of the of the grid here in Chicago, we've spoken about that previously on this call.
Commissioner Reynolds, who is waiting for the city the negotiations with kind of bad testified out the hearing last week and indicated that the city will have a feasibility study out shortly on the.
Possibility of municipal expansion at least he indicated in his testimony that that word.
That the that the view would be that that would not be feasible and theres a few big reasons for that one is it's a five to 6 billion dollar system and then the separation costs would be another $5 billion. So I.
I think will will tie together a few of these issues here, we need to assure the city of the reforms I've talked about well have a conversation about the programs around clean energy electrification jobs programs benefits to customers affordability.
And then I imagine will continue to add this backdrop of municipal position, but if the feasibility study comes out as Commissioner Reynolds indicated I don't think Thats got to necessarily be a pathway, but we have our work to do with the city I'm confident we will get there.
It may take a year or more to hash out.
Thats something commissioner rentals indicated as well, but the way our franchise agreement works and I've talked about this previously on this call is that if it is not continued its simply rolls over a year to year on its own terms. It seems like a lease in that sense, where just automatically renews a year to year. So that's.
It's probably more than you wanted to hear Julian but thats the whole story on the.
On the franchise agreement.
Absolutely guys. Thank you alluded there.
Hello.
Your next question comes from Stephen Byrd of Morgan Stanley. Your line is open.
Hi, good morning.
Hey student I do good good congrats on a good quarter.
A follow up on Sharon's question, just as you think about your credit outlook. So you gave a very thorough response I was just thinking through I guess your prior plan, which did not include equity had you hitting that the credit stats and you mentioned in response to last question just a variety of things that could impact those credit stats.
Just wondering at a high level as you think about the kind of the major puts and takes it as you see it that can.
Can impact your credit sets I was thinking about for example, constellation on on one end in terms of the temporarily.
Demand, but what are kind of the bigger puts and takes that you're just thinking through as you think about your credit stats since the last time you had the full planning process.
Yes, I think there's a number of elements associated with that right. I mean, obviously treasuries have an impact that comment they have an impact on.
In our pension and other things right you think about market prices and you mentioned load does that clearly played into it. We we expect most pleased to see recovery by the time, we get into 21. There is some minor impacts that we talked about the last quarter.
No we control things like cost stray will continue to challenge ourselves in that regard there's other variables to right. We just talked about the Illinois legislation. What is the outcome of that that will have a obviously gave buying area impact how much capital or we putting into our utilities and what that looks like and all of those things go into that to the decision.
Making Chris talked about on economic assets and actions around those we've clearly sold assets, where we thought the market had higher values on them. We've looked at alternative financings and have used project financing we did the securitization in the receivables at constellation So theres a lot of elements to its Steven some.
Our kind of decisions, we control others, where again, we were part of or working on and they build upon themselves and ultimately you know were our dividend we have to make a recommendation to the board at the end of this year and we'll do that and determine how much capital, we're putting any across our footprint and then from there.
We'll see what the funding plan looks like.
The one thing that.
With that is the uneconomic.
We will not running plants.
And lose free cash flow, earning.
Asses that are not supporting themselves. It is very unfortunate for the communities that we serve the employees, but we will not let the balance sheet get further deteriorated by non profitable assets and we will take.
The action.
Two.
Resolve.
Dive in cash flow and our earnings.
So.
We're doing everything possible to prevent that.
But it is.
It's reality, we've shut two units down in the recent years, we could not see a path to.
Sustainability of those assets in the portfolio.
I'm.
Not the greatest decisions, we're ready to make.
And we understand the impact the has on the communities that we serve.
The environmental goals of the states and the economic impact.
So the states but.
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Maintaining investment grade that can support the remaining facilities is our main focus.
That's very clear separately, just thinking about your cost control you all have had good success in cost savings.
And just thinking about potential benefits beyond the near term of those those cost savings is there any potential for example for that to create better customer rate headroom that could result in a more capex at the utilities. How do you think about sort of sustainability of cost savings and if you're able to sustain some of those savings sort of.
What other knock on benefits you could see.
Well as you know on the third quarter call each year.
We announce the next round of cost savings I can tell you, there's a significant effort and contingency planning going on within the generating company and the be a c. the business services company now on.
If we maintain the fleet as we have it however, we can do have more economically.
How are we using technology been significant amount of work in the financial organization HR legal other organizations to look at the world differently and we will announce our next round probably.
Third quarter.
The fourth quarter I'm looking at then make sure managed service disease responsible for.
These waves and that Lisa.
The fourth quarter call.
But but.
And we'll have a better picture of.
The future life of the nuclear fleet by that point.
And.
If we are in the mode of Unfortunately retiring plants you can imagine there will have a significant reduction in a b C overheads.
Could go back to the benefit of the customers on a modified Massachusetts formula.
Weve necessarily say gives them more headroom to spend capital we spend capital that is needed capital for reliability and customer service, but it should if the.
It should benefit the customers take some of the overhead burden off of the utilities as we continue to refine.
How are we can do worksheet group.
Faster be very efficient, while serving communities that customers. There's one thing we've learned during this pandemic.
Our real estate footprint.
May not have to be as big as it is right now we are very efficiently working with the most 17000 people working remotely.
And there's a theres a group right now this assessing not only a safe reentry around the first of the year.
For some portion of the workforce it's not.
On the line and maintaining the system on the plants are backing those individuals.
But.
We will take a very strong look at all expenses around and footprint around facilities, we've closed the books.
With the controllers organization only having a few people come in for a couple days and.
Audit is maintained its schedule.
And it's.
In depth audit.
Programs, So we're doing a lot.
And we're learning a lot and I think that's going to translate into.
More savings as we go forward, but.
Looking at Dan again, I guess I'm not going to be commendable from the time.
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They are all squirming Romero.
Hello.
We will be back to you.
The year, though.
That's great. Thank you so much appreciate it.
Thank you I would now like it's hard to call back over to squeeze grain. Please go ahead Sir.
Yes, not thank you all again for joining the call I want to thank you.
For the time I really want to thank our employees for their commitment and dedication.
You can imagine.
Onboarding 1200 contractors onto a nuclear site with all the site employees on Dec going through testing in screening and answering the questions.
The.
At World Class performance and efficiency, our utilities, maintaining the highest levels reliability and right now we've got 200.
Folks at 100 commented employees and a 100 contractors driving across the country too.
Support.
Our eastern utilities for outages, so I think they arrive today.
And so.
The willingness and the dedication is fantastic.
I hope that you and your families are safe and healthy and with that I'll close the call.
Thanks to all participants for joining US today. This concludes our presentation. You may now disconnect have a people.
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