Q3 2020 Exelon Corp Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience again, ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
Hello, and welcome to the Exelons third quarter earnings call. My name is changing and I'll be your event specialist today all lines have been placed on mute to prevent any background noise. Please note that today's webcast is being recorded.
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It is now my pleasure to turn today's program over to Dan Eggers Senior Vice President of corporate finance the floor is yours.
Thank you good morning, everyone and thank you for joining our third quarter 2020 earnings conference call, leading the call today are Chris Crane, Exelons, President and Chief Executive Officer, and Joe Nigro, Exelons, Chief Financial Officer, they're joined by other members of Exelons Senior management team will be available to answer your questions. Following our prepared remarks, we use.
Our earnings release this morning, along with the presentation, both of which can be found at the Investor Relations section of Exelons website. The.
The earnings release, and other matters, which we discuss during today's call contain forward looking statements and estimates that are subject to various risks and uncertainties actual results could differ from our forward looking statements based on factors and assumptions discussed in today's material and comments made during this call. Please refer todays 8-K and Exelons other S.
Filings for discussions of risk factors and other factors, including uncertainties surrounding the impact of the COVID-19 pandemic that may cause results to differ from management's projections forecasts and expectations. Today's presentation. Also includes references to adjusted operating earnings and other non-GAAP measures. Please refer to the information contained.
And in the appendix of our presentation and our earnings release for 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, Dan.
Appreciate it and.
As you can see from our release, we've had strong earnings and operational performance well continue to focus on their health and safety of our employees and the communities. Our GAAP basis earned 51 cents per share a non-GAAP basis earned a dollar and four cents per share.
We did outperform our guidance that we had originally given that 80 or 90 or 89 cents per share due to some favorable weather and.
In more cost savings coming through sooner than we anticipated.
You too.
For that I want to highlight.
<unk> August we had the tropical storm that bad or the east coast with rain in strong winds significant impacts age still Marvin Pico.
So it was piccolos 10th largest storm on record following the eighth largest store in June.
Then Oh hurricane like direct show a tour through the quantum edge service territory spawning 13 tornadoes.
Between the two storms, we had more than 1.5 customers lost power, we had more than 500 employees and contractors that we're helping their sister utilities, moving back and forth between east and west to try to respond to the needs of the customers.
And despite the intensity, we were able to restore power to our customers in record time.
Due to the power of spark Exelons utilities platform. Our employees quick response and collaboration made a difference for our customers. So what really want to thank our employees for their great work restoring service to customers during not just the pandemic, but a very active storm season.
Has since we've seen.
As I mentioned on the last call excellent is committed to our.
Values of diversity.
Quality inclusion part of this commitment calls on our business as part and our partners to recognize these values and include women and people of color in key roles on our couch for 10 years, we recognize partners who have excelled in this area.
This year, we've included 30 companies and banking insurance legal investment professional anite to services to our 2020 diversity and inclusion on a roll.
We also are committed to delivering clean energy.
In a clean energy future excellent Foundation, and Exelons selected 10 startups as part of the first round of 20 million in climate change investment initiatives beyond the financial support excellent mentor, the startups on accessing capital structuring the business capital Alex.
Patients and meeting the regulatory requirements through.
Through this program the foundation one best early stage startups working on climate change mitigating.
Adapting and resilience in our service territory, 50%, a minority or women own 60% of the projects focus on greenhouse gas mitigation and the others on resiliency and adapting to the changing climate.
Argument that we're living in.
These investments will bring us a step closer a clean energy future by helping.
Entrepreneurs translate their ideas for reversing climate change into practical solutions. Finally, we made the difficult decision to retire some on economic generation stations Mystic ER generation gas fired station in Boston will return 2024 when that.
Cost of service agreement expires.
And very disappointingly, we announced a lot of Dresden Byron dress and nuclear stations will retire in 2021. These plants produced 30% of the carbon free electricity in Illinois They pay.
Provide over.
A thousand 500, good paying full time jobs in.
And they support a 2000 supplemental workers during refueling outages most from local union calls paying.
Paying $63 million in taxes annually to support local schools fire departments and other services in their community.
Despite being among the most efficient reliable units in the U.S. nuclear fleet they face revenue shortfalls.
Declining energy prices lack of capacity revenue end market rules that allow fossil plants to under bid clean energy resources in opinion PJM market auction.
Given these large losses, we have made a tough decision to shut these units down.
And give our employees in the hosts coming is time to manage through the personal and economic challenges ahead.
Without these plants and others that risk customers will pay $483 million, an increase annual energy costs under the PJM auction structure that is about to incur.
The electric sector emissions will increase by 70%.
And instead of growing zero carbon energy in Illinois to reach the state school clean energy will fail debt fault decades behind we continue to work with interested parties on the best way to achieve these state goals, but urgent action is needed we have to protect.
Our consumers from higher bills are state from dirty or here in our communities from the loss of these irreplaceable power plants and the jobs that they create.
Turning to operations, even with the pandemic conditions extreme storms in record heat across our territories, all higher utilities and achieve first quartile operating performance outage duration and frequency customer service remains a top quartile across all utilities.
With BG commented in Pico delivering service and top decile.
Power dispatch match of 98.9% in renewable energy capture at 91.9%.
Constellations also had a very strong quarter of execution as a result was able to increase the new business targets for the year that we talked about looking at trouble in the first quarter. The nuclear performance was excellent the plants ran at 96% for the quarter.
They led the nation in zero carbon electricity production, producing almost 38 terawatt hours of admission free generation like all of our plants tourism buyer and.
Ran at nearly full power to the hottest summer on record employs a tourism Byron are entirely focused on ensuring the reliability safety. These plans through their retirement dates the plants Uh huh.
For some time is simply hard to deal with and it's a shame.
I'll now turn the call over to Joe for a financial update.
Thank you, Chris and good morning, everyone.
Today, I will cover our third quarter results quarterly financial updates in our hedge disclosures.
I will also provide an update on our full year 2020 guidance turn.
Turning to slide seven we earned 51 cents per share on a GAAP basis, and one dollar and four cents per share on a non-GAAP basis, which exceeded our guidance range of 80 to 90 cents per share.
A key driver in our quarterly EPS performance for both the second and third quarters has been success in managing costs.
As you ramp may recall on our first quarter call, we announced $250 million of savings across the organization.
Help offset the impacts of Cobiz.
At that time, we expected our offices would reopen in late summer since.
Since then we have pushed phase one of our reopening for remote enabled workers until January of next year at the earliest.
This change in expectations, along with the hard work of the organization led to higher savings than originally anticipated.
For the quarter Exelon utilities delivered a combined 57 cents per share net of holding company expenses.
Really earnings were modestly higher relative to expectations, driven primarily by favorable nm and taxes earlier recognition of bad debt regulatory assets.
Favorable summer weather in our non decouple jurisdictions based.
This was partially offset by cost related to tropical storm, Isaac which hit the east coast in August.
X Gen outperformed expectations for the third quarter.
Turning 47 cents per share.
The upside was largely driven by lower OEM, we're targeted savings exceeded our original expectations and were achieved sooner than planned. Additionally, favorable weather and lower cost to serve benefited our gross margin.
On slide eight we show our quarter over quarter earnings walk.
The dollar four per share in the third quarter of this year was 12 cents per share higher than the third quarter 2019.
Exline utilities less Holdco earnings were up a penny per share compared to last year.
The earnings growth was driven primarily by higher distribution and transmission rate associated with completed rate cases relative to the third quarter of 2019 as.
As well as favorable weather at Pico.
This was partially offset by storm costs at PHH I in Pico.
Extends earnings were up 11 cents per share compared with last year benefiting from lower OEM and higher capacity revenues.
Turning to slide nine we are raising our 2020 EPS guidance range to $3 to $3 from 20 cents per share.
From $2 and 80 to $3.10 per share and are now comfortably within our original 2020 guidance range of $3 to $3.30 per share.
When we revised guidance on the first quarter call. There was a great deal of uncertainty about the severity in the length of the impacts of co bid on our business.
Our updated guidance considers the strong action performance to date, our successful cost management as well as the favorable weather we saw in the third quarter.
We are delivering on our financial commitments and we are 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 have dipped slightly below our consolidated 9% to 10% target range with an 8.9% trailing 12 month are we as of the third quarter. The 20 basis point decline from last quarter was primarily due to equity infusion debt.
BG any income Ed to support capital investment.
This calculation is backward looking so you should continue to see some pressure on our lease over the next couple of quarters. This is simply due to the roll off of better pre COVID-19 quarters.
The burden of poor first quarter weather summer storms, and the continued impact of lower treasury.
Im comment.
Looking further into the future we remain focused on delivering stronger returns at the utility and supporting our growth targets.
Turning to slide 11.
Since the last call we had two major developments on the regulatory front.
Pepco filed its first multi year plan in Maryland, and Pico filed its first gas distribution case in 10 years.
Pepco with the second utility in Maryland to file a multiyear plan with BG filing the first plan in May.
The filing will support capital investments in the electric distribution system made during 2019 and 20 and planned investments through March of 2024.
Kepcos planned investments will continue to improve reliability and customer service.
Advanced technologies and investments to modernize the distribution system.
Support state environmental goals and provide tools to assist customers in managing their energy use.
The filing considers the current health emergency and economic challenges in Maryland, well.
While allowing for timely recovery of our investments that benefit our customers.
A few highlights from the filing include flat distribution rates for the first two years of the plan parts.
Partially offsetting year three.
Residential electric bills are projected to be lower in 2024 than they were in 2011.
Recovery of electric vehicle program costs, and COVID-19 costs.
And inclusion of tracking performance incentive mechanisms focused on system reliability customer service and the environment.
We expect an order in may of 2021.
On September Thirtyth Pico file the gas distribution case with the Pennsylvania Public Utility Commission Pico is seeking a revenue increase of $69 million for continued investment in its gas distribution system to.
To maintain an increase safety reliability and customer service.
We expect an order in June of 21.
We also have several rate case is still in progress two of which expect orders on the two which we expect orders on this year.
In October evidentiary hearings were conducted as part of BG any pending multiyear rate case.
As a reminder, the filing supports planned capital investments from 2020 to 23.
As well as investments late in made in late 2019 to maintain and increase reliability and benami benefit customer service for our electric and gas distribution systems.
We expect an order in December.
Additionally comments annual Formula rate update filing is expected to be decided in December of this year.
October 14th Draft proposal orders were filed by commented the ITC staff and intervenors as part of the case.
Filing request a reduction in delivery rates for the third year in a row.
And fifth decrease in 10 years.
Since the Formula rate has been in place Conmeds investment in grid modernization.
And enabling clean energy.
Gross have improved reliability by 70%.
While keeping bills lower than they were nearly a decade ago.
More details on the rate cases can be found on slides 23 27 of the appendix.
Turning to slide 12.
The utilities continue to deploy capital largely as planned for the year investing $1.6 billion during the third quarter and year to date, we have spent $4.5 billion of capital aired at our utilities, improving our infrastructure and increasing reliability and resiliency for the benefit of our.
Customers.
Despite some early challenges from the pandemic our capital plan is on track for the year.
Today, I will talk about two projects that advance exline utility strategy.
Element of that strategy is involving our capabilities.
Anticipate and meet changing customer needs and expectations of the system.
The first project is Pepco Street light modernization project in Maryland. This project includes conversion of approximately 66000 existing Street light to Smart Ltd, and integration with a central management system.
The New Street lights will send automatic notifications to the central management system, improving outage response time maintenance efficiency and customer billing accuracy.
Additionally, lcds improve light quality.
And benefit public safety and security.
This project is included in the Pepco, Maryland multiyear plan filing.
I discussed earlier.
The second project is the Exelon utilities customer information system upgrade.
Which was completed on time, even though weve done almost fully remotely. This is a $130 million project to upgrade BG in east customer care and billing system and.
And implemented oracle's customer experience service cloud at BG any comment and Pico this.
This new system will provide operational efficiencies as well as improve customer satisfaction.
It's simply one piece of an ongoing project across the utility to transform the customer information system.
These improvements will support a platform to enable future customer benefits improve.
Improvements will include a more personalized customer experience, allowing for more efficient issue resolution and a streamlined and simplified implementation of billing for new customer offerings, such as community solar where energy is produced at different locations in the customer's residue.
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Additionally, it will allow for faster implementation of new rates structures, bringing pricing for new services, such as TV charging and storage storage pricing to market faster.
Transitioning to slide 13.
We provide our gross margin update and current hedging position next gen.
Our disclosures now reflect the impacts of the planned retirement, the Bahrain in Dresden nuclear plants in September and November of 2021, respectively.
For 2020 total gross margin is up $50 million.
Open gross margin decreased $100 million, primarily due to lower spark spreads in your car.
Partially offset by higher prices at NIE hub in West Tom.
Our mark to market of hedges were up $250 million due to our hedge position, which offset the decrease in open gross margin, including the execution of $150 million of power new business.
We also executed $50 million in non power new business during the quarter.
Based on the higher load volumes associated with favorable third quarter weather and lower cost to serve across the portfolio.
We are raising our 2020, new business targets by $50 million.
For 2021 total gross margin is down $150 million driven by the retirements of by remained dressed in nuclear plants, which is flowing through the open gross margin line.
However, open gross margin is flat due to higher prices at west hub, NY hub and New York's M&A.
Mark to market of hedges was down $100 million due to our hedge position being down $150 million offset by the execution of $50 million of power new business inside the quarter.
As a reminder, the vibrant in Dresden retirements are expected to be earnings and cash flow accretive.
However, they are essentially flat from 2021.
Due to the timing of the retirement the $150 million decrease in gross margin is offset by lower ROE and m. coty in depreciation and amortization totaling $150 million.
Additionally, we remain slightly behind our ratable hedging program in 2021 by 2%.
5%, when considering cross commodity hedges our.
Our hedge percentages reflect the removal of Byron Dresden in the fall of 2021.
Moving on to slide 14.
Our consolidated FFO to debt is projected to be 18% for 2020 consistent with last quarter looking at next Gen. We are ahead of our debt to EBITDA target of 3.0 times for 2020, we expect it to be at 2.3 times debt to EBITDA and 1.9 times when ICSC.
Alluding non recourse debt.
On the rating ratings from Moody's affirmed its existing ratings for Exelon Corporation and comment in the third quarter.
We remain committed to maintaining a strong balance sheet and investment grade credit ratings.
Thank you and ill now turn the call back to Chris for his closing remarks.
Thanks, Joe.
Finally, turning to slide uptick.
I want to close as we do each one of these calls with our value proposition.
We are focused on growing our utilities and now we're targeting a 7.3% rate base growth of 68%.
EPS growth through 2023.
We will use the free cash flow from the genco to support the utility growth Paydown Genco debt.
And support the.
External dividend we.
We continue to optimize the value of Exelon generation business by seeking pure compensation for zero emitting generation and I have to say that many edit.
Editorials others call, what we're asking for is a bailout its not a bailout worthy nuclear fleet busy only zero.
It admitting fleet that does not get compensation towards value. So this is now they allow bailout its leveling the.
The playing field.
It comes across nice and political venues are editorial vendors, but the last thing it is a bailout its leveling the.
The competitive field.
We'll continue closing on economic plants, like we announced the retirement of Dresden, Byron or Mystic monitor.
Monetizing these assets and maximizing the value through constellation.
Retail and wholesale.
We will continue to sustain.
Investment grade credit metrics.
We maintain a strong.
Balance sheet well.
And have grown our dividend annually, 5% through 2020.
Before turning to Q and I want to comment on some recent news reports that Exxon is considered separating the excellent generation from the utilities.
As discussed recently on our last earnings call, we regularly evaluate whether our corporate structure best serves the interest of our communities customers and our employees and also our investors.
We would consider modifying that structure when we can create value recognize those enters the.
The natural or the nature of our business and the landscape there and he has been evolving over the years in.
In addition, you've seen a number of competitive and they're good companies in our sector that has shrunk considerably.
Given those circumstances, a review of our corporate structure is underway.
Started earlier this year and we have the help of outside advisors. As we continue this review we focus on creating value take.
Taking into account as I've mentioned all of our stakeholders the investors employees the customers and the communities we serve so I want to.
Emphasize the separation of the companies.
Would involve addressing some complex operational financial and regulatory issues no decision has been made.
But we continue to do the work to determine the best outcome for our stakeholders and we will provide you an update on our progress on the next earnings call. So with that operator, we can now open it up to questions.
If you would like to ask a question simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press the pound.
Our first question comes from the line of Stephen Byrd from Morgan Stanley. Your line is now open.
Hi, good morning.
Hey, Steve.
Just wanted to first talk about the strategic review and I respect that you're you're at I guess fairly early stage of.
Thinking through your options, but I was just trying to think about the strategy here and I guess, maybe I wanted to start with.
What sort of attributes or risk profile would you want to achieve for your merchant fleet for ex Japan to be consistent with your strategy versus sort of what risk profile would be not consistent with with your strategy I know overall, you're trying to de risk the business and and provide greater stability. How do you how do you at a high level think about that.
Yes, I would.
I wouldn't say, we're at the early stages I.
I would say we are in an in depth review of.
The evaluation and some of the things we look at.
Our cost of capital.
Things like that the degradation of constellation business with collateral costs.
There's there's many aspects to it.
Our under review right now but.
What we want to make sure is that.
We have.
Two healthy companies.
The utility business, if we if we and the board determined. This is the right thing to do to healthy businesses that can stand on their own and provide.
You know the support needed for the balance sheets with customers.
The employees.
Rose shareholders as we go forward so.
Lots to be taken in there.
But I don't think we live in.
[noise] pointed or risk profile yet.
That all I can say, we haven't pinpointed or risk profile, yet that I've agreed with and the board has a pretty good.
Understood is it fair to say it is that objective to try to reduce the volatility and also just to improve the viability I guess of that business going forward right that that seems clear that that that's part of the strategy here.
Yes, so Chris it's a free cash flow machine and how do we optimize that to Kurt to be the best in the can and produce the most.
On valuation side and shareholder returns.
So that's kind of a focus.
That makes sense and maybe just one last one from me more on the tactical side thinking about your your nuclear plants, you've obviously made some shutdowns decisions already but I guess, we calculate that some of your remaining nuclear plants are are currently are or will be negative cash flow.
Would you agree with that assessment and I guess over what timeframe are you thinking about making decisions for some of the plants that look like they're negative cash flow.
You know you've looked at our disclosures, we've we've outlined the plants.
That are sliding into that space.
A lot depends on.
What we do with the capacity market or the Ferrari.
And how we treat the claims is comparable with others zero carbon emitting plants.
Which they're not being treated equally right now.
So.
You know what timeframe, we have to watch the auction.
We have to watch legislation.
We don't.
The capacity redesign and the auctions are on.
You could you could anticipate there would be.
Some issues coming up in the future.
Understood. Thanks, so much appreciate it.
Thank you. Our next question comes from the line of Steve Fleishman from Wolfe Research. Your line is now open.
Hi, Good morning can you hear me Okay. Good morning, Yes, I can hear you fine Hey, Chris Great. So.
I guess first.
Arguably for the last year, so you've been.
Getting little.
Little value if you can maybe negative value.
For execution in the excellent stock price so.
The value case seems obvious, but but obviously there's probably.
Risks and obstacles to just to just get through.
Could you maybe just talk to what some of those.
Our in making this decision.
Yeah, I mean, you can imagine this is a complex.
Combination of a competitive integrated and wouldn't get on a pack away each one of those.
But I will tell you that when.
When you start to look at corporate center splitting out the IP splitting out the financial support.
Corporate organization has a lot of design, we have to make sure we're not creating.
This is synergies and we do that properly there's other considerations that we have to make.
For the employees for the regulatory bodies.
To do that.
In its.
It's not an easy one.
Many of the competitive in agreements.
Hello.
Switch in split.
We have not had the complex level of integration for the size the scale that we have.
And if you look at our.
The movie premiere.
Retail and wholesale trading organization, nobody that is split or anything like that so there's value being created but theres expense there too. So we have to watch how we do it make sure we do it properly.
There is a lot to be said about.
What we do for the consumer and the zero carbon market.
You haven't seen anybody that has.
A zero carbon fleet like ours split off Youve seen coal plants, you've seen gas plants you see.
Yes.
Infrastructure splitting off.
We have to make sure that when.
Or you redo it that we have a rate compensation.
The assets that are being spun off.
And that's not something that's been recognized by the regulators or the legislators and administrations thus far.
They recognize when they recognize solar but they have not recognize nuclear and if.
If you look at just the state of Illinois, right now 60% of the generation is carbon free 90% of its nuclear.
Nuclear is the only one that's not compensated for its low carbon or zero carbon.
Oh, so there's a lot of different.
Avenues, we have to go down to.
To get this.
Right.
But as I said in the last call.
The the.
The market is changing.
And we have to figure out how we change with it.
Great just based on the the comments you just made Chris is it fair to say that.
You need to get some type of decision on Illinois.
Illinois law, they're supporting nukes or not before making this.
Kind of business structure decision.
I'll, let bill jump in here, but I would not say that that is going to be a gating function Bill I don't know if you want to add anything to that yes, no Chris I agree with what you said, but Steve.
Steve you have you have identified a big point insensitivity here as Chris alluded to we have to take into account and considering whether to do this or not a variety of stakeholders, including the communities. We serve our customers employees and the like so all of that goes into the equation.
Not only the substance of it but the timing of this there's lots of ground to plough before we get to the exact decision on time.
Before we decide whether we're doing internet number one the board has not decided that and number two if so what the timing would be and obviously the ferrari relevant to that but its hard I would put it as a as a gating function. Its a function that is relevant to our consideration of what's the optimal timing if we decide to do this.
The only thing I would add to that is if the plants are not profitable.
Don't cover their cash needs for the earning requirements will shut them down.
And.
With or without a car so.
It's it's a business decision.
Some people have called it a threat.
It's not a threat, it's just a reality when businesses don't make money on assets they shut them down and so.
We have to look at the timing of all these decisions and make sure we're doing the right thing, but but.
The legislation.
It is important for the value.
We have to make decisions.
Based off of current economic.
Conditions.
Great.
Thanks, and just build great to hear your voice thanks for.
Thanks for the answers.
Thank you and thank you for your your nice notes to me I really appreciate it. Thank you very much.
Thank you. Our next question comes from the line of James Thalacker from BMO capital markets. Your line is now open.
Thanks for the time guys and good morning.
Good morning, I was trying to get off mute.
Yes, okay.
Just two real quick questions. One is I know you previously stated you conduct reviews on a regular basis, but.
In your prior evaluation of the corporate structure has this process included the retention of outside advisors to help you kind of work through the process works is this kind of the the next level of review this time around.
Now I think I think we were very public in 2017 reduced outside advisors and we.
We did have very very thorough evaluation.
And we looked at the free cash flow coming up for Genco.
And.
At that point, it was accretive to be able to reduce debt.
Be able to.
Put X.
Equity into the utilities and also support.
A reasonable dividend policy.
So.
We've we've kept close by.
Visors that as we look through this in the past not only on business structure, but assets also its.
It's nothing that's been in slur to the company, it's always been with advice from outside.
Okay, Great I appreciate that and just one last question I guess.
Just thinking I guess about cost allocation.
You want to go the review of the potential separation.
Is there any initial guidance I guess, you could give us on how you're thinking about the magnitude of shared services overall across the company and how potentially that falls into the regulated and X Gen buckets.
And yeah thoughts on how you sort of mitigate that as if you were to move forward I guess.
I.
Early to go there.
I will tell you that we have to be very sensitive to.
What falls back on the utilities and what the Genco Ken.
Manage and so some of the cost savings that you've seen in this quarterly update.
His us accelerating.
That type of focus.
Not going too far but but.
No the Gencos done a lot for the business services organization is accelerating some stuff on technology contracts and other things that would mitigate.
Those costs.
One split.
One thing about competitive integrated you get too.
Use in Massachusetts modified model to spread the costs around revenue generated.
One moment.
We know it.
Or when we do a split.
That goes away and so we have to figure out how do we keep the financials right keep them.
Employee.
Benefits programs in all the databases I mean, you can go through that list them all the complex needs that we have to do.
But we do understand.
That the regulators are not going to want to see an increase in costs, because we split the company.
And the owners of the Genco.
We are going to want to make sure that there.
The shareholders, an agenda or want to make sure that we are the most efficient. So we're working through that now, but we don't have a number yet.
Okay I appreciate that and just on slide 36, you talked about roughly about.
200 million of the 250 million on the cost savings sort of this year were coming up the next gen level should we think about that as being a decent run rate going forward or how much of that do you think you can retain as we move into 2000.
[music].
I'll, let Joe jump in on that.
Travel there's some other smaller things that were not doing right now, but Joe you want to take that yes. Thank you Chris and.
Good morning, Jim.
This year, we had a goal of $250 million of own MC.
Cost savings across the enterprise and we're going to over achieve that.
By about $100 million to $125 million is our expectation we're working through that right now to your question about how much of that is repeatable in the future. We we're in the throes of analyzing that Chris is point, we've learned a lot here in the last set by almost eight months where.
We've been working remotely we've had savings on travel and entertainment, we've had consulting dollar savings training savings.
We've we've looked at almost everything and I think there will be things that fall to the bottom line and we're going through that now we would expect to provide you an update on that on our fourth quarter call, but there will be things that bleed through we just not ready to commit to how much of that is.
Run rate in the future.
Okay, Great I appreciate that thanks for the time.
Thank you.
Our next question comes from the line of Jeremy Tonet from JP Morgan. Your line is now open.
Hi, good morning.
I just wanted to.
Speak more on the strategic review.
And could you speak more to the financial considerations here and namely with next Gen require a bunch of equity to separate from the business. If that's something you could share any details there and how should we think about the funding needs growth prospects at Exelons utilities under an independent scenario without the support from X Chen cash flows.
Well, there's still a lot of work going on right now.
I don't think we have.
In anticipation.
Of that we're still trying to figure out.
What level of the ratings that we keep but Dan you want to take it.
Yes, Thanks, Chris I mean, I think it's a good question you're right now is probably a little early to start making calls around balance sheet and capital allocation decisions you could imagine amongst all the factors were considering.
With this review looking at the credit metrics working with the agencies thinking through that is going to be an aspect thinking about.
Our next Gen would use the free cash flow this been finding the utilities to be part of that thinking about how to utilities can fund their growth both with their internally generated and retain cash flows but also what other sources of funding will all go into decision, but those are a number of factors will go into our analysis over over the coming months.
That's very helpful. Thanks, and just wondering if you're in a position to share any feedback that you received in Illinois with response to the retirement announcement that you put out recently.
No there is still some disappointment as you can imagine from the communities.
There is disappointment.
Employees.
These are natural source nuclear plants, we came to shake down.
Some would say that.
We will make enough money already we shoot marching down, but that's just not the way businesses work.
And so you have to work through the reaction and the two major constituents there.
And in that field looking here.
Along with US. In addition, this down because we're losing so much money on.
The employees.
In the coming years, if you look at the taxes.
What we provide in the community is fares employment.
And commerce.
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It's not easy and so you can imagine most communities there.
Turning to figure out what they can do this in court.
Two.
Keeping those communities located.
I haven't heard a lot from the legislative side.
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And.
Yes.
Bill jump in on that side.
Yeah, Chris I can jump in I mean, as you know the legislature's not in session. So.
There has been continued work on potential clean energy legislation for the Governor's working group and similar efforts on both the Senate side and how.
How side, but until the legislature is back in session, we won't have a sense of.
Where that's going but I agree with you that the impact both on the employees and the communities around the plans as real as well as the sort of broader communities in Illinois.
Oh boy are watching this because to the extent these planned shutdown what will happen is a fossil.
Fossil plants will ramp up and that will affect communities around the state that already or a struggling with air pollution and the effects of covance. So.
A lot of folks are watching it for sure.
Got it understood and if I could just ask one last one here.
How do you see proposed multiyear plans impacting your return to 9% to 10% are we target and the sustainability of maintaining that range.
Yeah, I'll, let Kelvin answer that one.
We've had a couple crunches.
They've got this year that brought us back down with stones, and some other things, but Kelvin you want to cover that.
Absolutely, Chris and good morning, what I would say is that.
Our whole process and working with our regulators and our jurisdictions around multi year plans was geared to really create a foundation for long term growth and also giving transparency and accountability to our customers on how this was going so it is our but it is our commitment that we are going through.
Remain in that 9% to 10%, but it's going to be done in a way, where it's transparent to our customers and were able to invest in our system for just thinking to that operate a safe and reliable system. So that is the commitment that is what we are discussing and we are on.
Course to meet that obligation as you've heard in Maryland, and now in DC.
With both our utilities in Maryland, and MPC, and we already have very constructive environment and our other jurisdictions. So were moving forward with that.
Got it that's great. Thanks, that's it for me.
Thank you. Our next question comes from the line of Julien Dumoulin Smith from Bank of America. Your line is now open.
Hey, good morning team. Thank you.
So if I can pick up where Jeremy left off a little bit can you talk about the balance, especially under any.
Prospects of the spin here just want to hear clearly from you all how you're thinking about it the rating agencies have talk to diesel broadly about action being investment grade entity.
If I can ask it this way how committed are you to I G. Metrix under a spin I know that you've kind of alluded to this earlier in the call, but actually the extra clear about that and then subsequently it seems that in past periods. One of the calculations here has been the implications to the retail business can you talk about that side of the equation.
Or any strategic shift.
Joe Joe and Jim you want to take to Melanie.
Yes, I think Chris the answer to Julians question around.
How committed we are to investment grade, we take our strong balance sheet and our strong investment grade ratings that we have today, obviously very seriously.
As you mentioned, where we're still in the process of evaluating.
What the spin would look like in all the ramifications of that and that includes impacts teeth to all the stakeholders you mentioned the rating agencies being one of those and how it would impact the rating.
Genco that stand alone, but at this point, it's it's too early to commit to anything along those lines and with that I'll turn it over to Jim to talk about the retail business.
Yes, sure. Thanks, gentlemen, enjoying I guess you know.
Likewise, where were working through that over the over the next you know.
Period of time over the next few months, we were going to work with the finance team to understand and how we can continue to optimize our business our customer serving businesses is really the large portion of our overall earnings capability for that we bring to the genco in cash flow capability that we bring to the genco we're committed to that.
We want to keep that going a mall well work through the structures and the product structures that we need to maintain and to continue to serve those customers and then optimize the management and all the way through the spot market of managing the load and the generation output. So I think.
We'll we'll we'll make sure the impacts are such a way that we can maintain that focus on the customer and keep our our our product selling and the growth that we see in that business.
Oh, sorry for that kind of clarification, if it does.
Chris Chris on carbon and subject of how that might ultimately translate back to your sales portfolio here, how do you think the election could impact that.
Clearly recognizing states right in a lot of these programs ultimately end up.
What state regulators to implement one way or another.
Given that context, how do you think about carbon today.
As potentially look like with melanoma.
Eventually so.
What we're trying to do is work at the state level.
We have had little traction at the federal level and spur very polarizing as you know.
Doesn't matter, who gets elected it's still going to be a polarizing.
The issue so.
Working it through the states and then through the markets because you've got the cross state Leakages.
Is where we've been focused.
We'll have to see what happens tomorrow and.
What happens.
You know in the house and Senate Legislative body, where they want to go.
We hope they do it as.
A technology new crew neutral.
Approach versus what.
Some sides of the house and Senate have gone that technologies versus outcomes.
But but we'll have to see.
We're still going to fight at the state level and the market level.
To to make sure that we get the right.
Valuation for assets.
We are the largest non carbon producing.
Entity with no.
Renewed emanations for those assets.
Assets.
So.
Like I said earlier.
It's nice for editorial or an editor or a politician to say, we're looking for a bailout.
We're looking to be able to compete.
The other non carbon that.
People have decided to pro.
Provide.
A payment.
You know a valuation for that.
Carbon.
Output, but.
But when you look at the largest non carbon emitting sources in the country.
And the largest non carbon emitting company in the country and they're competing against other resources that are getting compensated for the value of that.
It's just frustrating so but.
You pick up the paper Tomorrow, and somebody will right the exomes looking for a bailout.
We don't care about a bailout, we just want to compete if we don't compete with shut the units now.
Understood quite clear thanks, Thanks, Chris and team.
Thanks.
Thank you. Our next question comes from the line of Durgesh Chopra from Evercore. Your line is now open.
Hey, guys. Thanks for including me and maybe just one quick one on the quarter and then I.
I want to go back to the strategic review just on the quarter you showed us projected cash flows slide with the 2020 balance.
The balance is significantly lower like 400 million lower versus versus the Q2 call and your guidance is up so just wondering what drives that.
Yeah, Chris I do want to take that Joe Yes, yes. So.
Good morning, Durgesh that Theres, a couple of things going on our free cash flow from our operations.
Across the enterprise were up for the quarter, but we did see we because of that number one we had an assumption of kind of left.
Requirement for working capital needs and then more importantly, we had some movement in cash flow and other activity related tax one generation and there were just a number of small factors that type.
Type normal type quarter activity that move the the cash flow for the quarter.
Even though the earnings were up pretty materially versus purchase.
Versus the range, we'd given last quarter.
Okay. That's helpful understood and just really quickly Chris.
You mentioned, if there are not a gating factor maybe just did the did you extend that you can could you proceed usually talk about the next steps here and if there is a timeline.
That internally you guys are working on to get this strategic review over.
Yeah, I can I can tell you that.
Although the.
If our in the legislation is critical for the communities and employees, we have to make our business decisions.
I think we're going through.
The review right now and trying to evaluate the complications of or the potential.
Separation.
But we wouldn't use that as the gating factor. So once we get through the very complicated review, we'd like to provide.
A whole lot more color.
On the fourth quarter call.
Not guaranteeing were done or saying we'd be done by then but.
That will be the that will be the view of.
Where we think we are heading.
Dan I don't launching on a same thing Dan or if you want to say anything else.
No Chris I think you covered.
All right.
Okay, guys. Thanks, so much great quarter.
Thanks.
Thank you at this time I'm showing no further questions I would like to turn the call back over to Chris Crane for closing remarks.
Yeah, I just want to thank everybody for joining the call. It's a busy day elections going on all kinds are concerned about stability in the country and and so for us to be able to share your turn.
It's appreciated I really want to thank the employees for their commitment and dedication.
We've had a lot of stuff going on this year not only the coated the storms.
And the things that they've had to work through and I hope that you and your families are safe and healthy.
And with that ill close the call.
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