Q4 2020 Exelon Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Exelon fourth quarter 2020 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session you'll need of press star one on your telephone please be advised the today's conference maybe recorded.
If you require any further assistance. Please press star zero I would now like to hand, the conference up for the one of your speakers today, Dan Eggers Senior Vice President Corporate Finance, Sir. Please go ahead.
Thank you Michelle and good morning, everyone and thank you for joining our fourth quarter 2020 earnings conference call, leading the call today are Chris Crane, Exelon, the President and Chief Executive Officer, and Joe Nigro, Exelon, Chief Financial Officer, they're joined by other members of Exelon Senior management team will be available to answer your questions. Following our prepared remarks, we issued our earnings.
The release of separation announcement released this morning, the wrong with the presentation all of which can be found in the Investor Relations section of the <unk> website the already.
The separation announcement released in the other matters, which we discussed during today's call contain forward looking statements in the estimates that are subject to the various risks and uncertainties.
Actual results could differ from our forward looking statements based on factors and assumptions discussed on today's material income.
It's made during this call. Please refer to today's 8-K and Exelon to other SEC filings for discussions of risk factors and the other factors, including the uncertainties surrounding the planned separation and may cause results to differ from management's projections forecast and expectations of today's presentation. Also includes references to adjusted operating earnings.
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 of the nearest equivalent GAAP measures I will now turn the call over to Chris Crane Exelon CEO.
Thanks, Dan and good morning, everybody, we have lots of talk about this morning, some showing on can try to go through it.
And allow adequate time for questions. Some of the stuff we have to talk about as bad on the recent events in Texas, you put some light on that but we have some great.
The other subject to talk about our strong performance in 2020, the results there and on the future path for our business.
I'll start with Texas.
On the experienced unprecedented sustained cold temperatures.
As we know impact of the energy system in the state along with the severely impacting the people who live there as noted in last weeks 8-K, we had operational issues with our plants due to the extreme weather the.
Only periodically we're available when the prices.
Were maintained at the administrative cap of $9000.
Our preliminary estimate.
And this is preliminary.
Of the impact of this event across our portfolio of 752 $915 million pre tax.
For $560 million to $710 million post tax.
At this point the range is wide.
It includes our best estimate for the load obligations.
Hillary charges and debt that it will take some time to refine this estimate the data we normally comes to us.
As on a lag from ERCOT.
With the recently PUC key actions the data has been further delayed and continued uncertainty around any future actions of the PUC.
Or others May take we expect it to provide a better update no later than the first quarter earnings call.
Yes.
This losses unacceptable to us we are mitigating and through business.
Including the first quarterly free.
<unk> ability.
Mostly one time cost reductions and deferral of non essential maintenance, which Joe will cover in further detail.
We have today, the pound updates and offsets that.
Expect it to reduce our net impact.
The 20 per share at the midpoint of our loss estimates, which is reflected in our earnings guidance.
These mitigating efforts are expected to reduce the cash impact to $200 million.
As you know last week's events have raised many questions about the Texas market design and the associated risks and this has not been on new conversation. It's been one that's been around for a while and we hope that through this.
The that the proper actions can be taken on the design.
As a result, we are evaluating all of our options with respect to our ERCOT business.
Moving on to good news, our 2020 operational and financial performance was strong our utilities maintained the excellent operations not only in the face of the pandemic, but at the extremely punishing storm year duration Hurricanes and one day, we had 13 tornadoes.
On the comments service territory.
The power of our utility platform paid off for us this year the mutual assistance across the fleet helped achieve record restoration of speech for both common and Pico.
Each utility delivered excellent reliability top decile outage frequency and top quartile outage duration. This performance was reflected on our customer satisfaction scores with all the utilities receiving their best on record scores in the first quartile customer satisfaction.
Strong operations led to constructive regulatory results as we saw in the outcome of three rate cases across our jurisdictions in 2020 and.
In December of the Maryland, PSC approved the Ge's first ever multiyear plan, enabling investment and reliability, we're expecting orders for multiyear plans at both Pepco D C and Pepco, Maryland.
This is allowing for timely recovery wash supporting jobs and the economy in D C in Maryland.
Turning to slide seven.
Nuclear had another very good year generating 150, terawatt hours of zero emitting power, avoiding 80 of 78 million metric tons of carbon dioxide the <unk>.
Past the factor was $95 for second only to last year's performance in the fleet history.
The nuclear group completed 12 refueling outages and fewer days planned despite the regulus rigorous pandemic protections on our relationships with our retail customers continues to remain strong with 79% customer renewal rates average customer duration.
Of more than six years and power contracts of 21 months on average.
Slide eight the financial results excellent operations and robust cost.
Led to our strong financial results as you see on the slide the pandemic reduced our demand for electricity, particularly of constellation, which created financial of headwinds for us.
We reduced the earnings guidance on the first quarter call based on what we knew at the time and we kept looking for ways to improve our earnings outlet throughout the year, we delivered on 400 million.
A million dollars of savings of $150 million more than announced which brought us well within our original earnings guidance range, and then gains from the constellation technology ventures portfolio portfolio of products above the mid point of our range guidance.
$2 <unk> on the GAAP basis, and $3 22, <unk> on a non-GAAP basis.
Turning to slide 10, this morning's announcements.
<unk> is really a very good strategic move for us with our board, we've completed or concluded the separation of our regulated businesses, our regulated utilities and the competitive businesses is the best inch.
The interest of all stakeholders and are moving forward with that decision.
So separation.
<unk> establishes two best in class.
Standalone companies of high growth high quality of 100% regulated utility and America's leading clean energy company producing the most clean energy paired with the best and largest customer facing business in the country.
It better positions each business within its peer set and it will support business strategies tailored to the distinct business investment.
The profiles and meeting the unique customer needs. The same on operational expertise customer focus and financial discipline that you expect from this management team will continue to underpin the value proposition of each company.
On slide 11, the <unk>.
Separation of the spin out of the <unk>.
Generation business to our existing Exelon shareholders, the regulatory business, which is being termed the remain co shares the traits of of high quality best in class utility strong above earnings growth rate of 6% to 8% diversified rate base.
Across seven constructive jurisdictions with almost 100% of our rate base growth covered by alternative rate recovery mechanisms.
Best in class operations, and an attractive Es G attributes provide platforms to enable the transition to of clean energy economy without owning the generation.
The spin co genco being title of the spin co for this will be Americas clean energy leader, we will continue to produce electricity that is over 90% carbon free provided 11% of the clean energy in the country.
And with no coal fire generation and emissions profile Signet, our emissions profiles are significantly below the one five degrees C targets the.
Delivering solutions for our large customer facing platform in the country and we anticipate having an investment grade rating on that balance sheet.
The transition going to slide 12, Joe will give you more details around the strategy and the specifics of these two great companies, but let me hit on some of the key transaction considerations.
The spin is designed to be of tax free distribution of the spin co shares to the existing shareholders of Exelon, we will work hard to close by the end of the year, which provides execution benefits around our clean calendar year transition for the split but regulatory approvals could potentially take longer we have.
Several required approvals with long lead time items being the NRC. The New York Public Service Commission, we have good plans for each of these approvals and we will be making the necessary files to in the very near term.
We maintain on an open dialogue with the three credit agencies and anticipate both businesses remaining investment grade under various scenarios.
Our preliminary work on the dis synergies gives us confidence that we'll be able to at least offset them at both companies.
Turning to the dividend the board has approved the dividend at $1 50 free for 2021, which is holding it flat to last year.
<unk> co expects the target of 60% payout in line with best in class high growth peers and will grow its dividend consistent with earnings.
Of the spin co will focus on the combination of debt pay down.
To support our credit metrics and return capital to our shareholders and continue to invest in clean energy solutions.
Resolution of the Illinois, the legislative session capacity auction results in June along with the number of other factors will have a bearing on the allocation of this strategy.
From a funding perspective, we estimate the remain co we'll need around the $1 billion of new equity capital through 2020 for investment horizon.
This could change.
Depending on.
Variations of factors that we expect to play out over the course of the year. The EPS spans the Joe will show you for the remain co already incorporate the potential future equity needs I'm now going to turn the call over to Joe to talk more about the two business strategies and the outlook for 2021.
Thank you, Chris and good morning, everyone I will try to build on Christie's remarks by providing more detail about the two standalone businesses and then we will discuss our 2021 guidance.
I'll start with remain co on slide 14.
Our utilities will continue to be of premium business within the sector and share of the characteristics of other high quality of utilities the.
Operating constructive regulatory jurisdictions with nearly 100% of of rate base growth recovery through alternative of recovery mechanisms.
We will continue to meet our commitments to our customers through bill of affordability and best in class operations we.
We will maintain a keen focus on our ESG initiatives, including clean energy and diversity equity and inclusion.
And we will continue to pursue a balance and disciplined financial policy underpinned by a strong balance sheet.
All of this will allow us to deliver on an industry leading rate based on an earnings growth built on strong returns on equity growing the remain co business model well into the future.
If you turn to slide 15, we show remained codes growth outlook.
We have a robust investment plan across our utilities to continue to improve reliability and resiliency.
Hence the service experience for our customers.
And prepare for of clean energy future.
In 2021, we plan to invest nearly $6 $6 billion and a total of $27 billion over the next for years.
Since our last capital investment disclosure, we have identified more than $500 million in additional investment needs across our system.
That will provide further benefits for our customers and communities.
We are planning to grow our rate base by seven 6% annually.
The five to $58 8 billion, adding nearly $15 billion to rate base by 2024.
Our rate base growth has improved by 30 basis points since last year.
And as a reminder, our capital forecast reflects only identified projects that we expect to recover through our normal rate filings in other recovery mechanisms.
I'll also point out that the largest project in our plan is less than 1% of our capital spend from 2021 2020 for avoiding concentration risk with any particular projects.
Our earnings per share outlook remained strong at 6% to 8% growth.
Compared to last year's update this growth reflects updates to our rate base forecast and our assumptions around funding remained coast growth with debt and the $1 billion actively equity issuance through 2020 for that Chris mentioned.
We are confident this growth extend beyond 2024 and would note that 2025, we will further benefit from rate case timing as you think about the long term model.
We deliver on the strong growth, while maintaining a focus on affordability, which is paramount to successful utility.
We will continue to manage our costs in support of energy efficiency programs to key.
The bill inflation on check.
Even as we make these investments that benefit our customers.
Now turning to slide 16.
The main co as of 100 per 100% fully regulated transmission and distribution utility with no generation.
It is diversified across seven regulatory jurisdictions.
No one jurisdiction.
Resenting the majority of the rate base.
We have worked for stakeholders many of our jurisdictions to establish recovery mechanisms that allow us to prudently and efficiently invest in critical infrastructure for the benefit of our customers, while generating an appropriate return on capital.
Nearly 100% of our rate base growth will be covered by alternative mechanisms by the end of our planning period.
These mechanisms include multiyear plans in Maryland, and DC formula rates for both transmission and distribution capital and other trackers as well as forward looking test years.
We see the combination of being a fully regulated T&D utility.
Geographic diversity and constructive regulatory designed as a clear differentiator among our utility peers.
Turning to slide seven include Chris.
Chris covered our 2020 operations earlier.
But I wanted to highlight of our operations over time, which consistently outperformed the sector average, bringing tangible benefits to our customers.
Moving to slide 18, environmental social and governance or ESG values have been at the core of our business since exelon founding.
<unk> been committed to doing what is right for all our stakeholders and that will not change.
Specifically, we remain committed to working within our state regulators and communities to make investments that help them achieve their environmental on clean energy goals.
Continuing to support our diverse employees customers and communities and create a workforce that reflects our community.
And operate responsibly and transparently, maintaining the highest standards of the corporate governance.
<unk> will continue to be an integral part of remain coast strategy as a stand alone company.
Moving to spin co on slide 20.
Stinker of B, the largest supplier of clean energy and sustainable solutions to its customers.
It produces 12%.
One out of every nine megawatt hours of carbon free electricity in the United States.
Stinker of as an essential partner the businesses and federal state and local governments that are setting carbon reduction goals and seeking long term solutions to the climate crisis.
Stinker of clean generation fleet is paired with one of the largest customer facing platforms with the leading share in the C&I market, where we continue to have very high customer renewal and retention rates.
It is also the best operator of nuclear power plants in the country.
As Chris mentioned, we are in ongoing conversations with rating agencies and anticipate that spin co will remain investment grade it.
It will continue to have a disciplined financial policy focused on optimizing cash flows to support the balance sheet investing clean energy solutions and returned value to shareholders.
On Slide 21, you can see how stinker of clean generation fleet stacks up against others spin co is and will be the leading clean energy producer in the United States. It does not own coal fired generation and 90% of its output is emissions free.
As a result spin co produces nearly double the clean energy of the next leading provider and more than 8% to seven <unk> times, the clean energy of its IPP peers.
It also has the level of emissions intensity nearly fivefold less intensive than the next generator and more than 13 to 15 times less carbon intensive and the other IPP.
These attributes of our clear advantage interest income as the by the administration commits to 100% zero carbon electricity sector by 2035 to address the climate crisis.
Turning to slide 'twenty kidding, each of Stinko states have or are looking to set ambitious emission reductions for clean energy goals spin coast generation is essential to helping states meet their goals and in the affordable manner.
Pink of provides a significant amount of the clean energy in the states where it operates.
Illinois, and Maryland. It provides nearly all of the clean electricity in the state.
The losing any of these assets would be a significant step step backward for each day in meeting its goals, while also creating higher cost for customers and significant economic hardship for our host communities.
The company will continue to be of leading advocate for clean energy policies aimed at preserving and growing clean energy to combat the declining prices.
Stinker of clean energy leadership extends beyond the power generation fleet.
As you can see on slide 23, our constellation.
<unk> business has also been a leader of the developing and providing clean energy and sustainability solutions for our customers.
The desire of our customers to positively impact the environment is real and the constellation business leads the charge through new products and strategic investments to help our customers.
Not only of the efforts being economically beneficial with solid margins, Dave also yielded strong customer retention rates and opening up additional revenue opportunities.
One example of this is our core product.
Installation serves as an intermediary between the renewable developer in the customer.
Filling a niche where multiple off takes are needed for 150 to 250 megawatt sized projects and customers may have varying demands for term and deal structure.
It allows constellation to provide a customized solution for our customers.
Moving to slide 24, it shows the operational performance of.
Generation over time compared to the games Jed.
Generation remains the best operator of nuclear power plants in the United States with industry, leading capacity factors of approximately 94% or better and industry, leading refueling outage days at least 10 days better than the industry average every year.
Turning to our customer facing business on slide 25, Constellation's retail business is strong it is.
Steady repeatable and with stable margins customer retention rates have averaged 77% over the last five years with that the average contract terms of 25 months on customer duration of more than six years.
Constellation is successful at acquiring new customers.
With the win rate of 29%.
We have the largest C&I customer base and that remains key to our strategy for C&I customers have higher load factors compared to residential customers and are less exposed to seasonal fluctuations.
C&I customers allow us to achieve scale and cannot be done with residential customers and finally on.
The gross margins may be higher on residential customers. These margins do not account for the cost to acquire these customers, which are higher than the C&I loans.
Turning to slide 26.
Our uncertainties that will impact sting cause future such as legislation in Illinois the.
The next PJM auction and potential federal carbon legislation, regardless of those outcomes stinker will continue to focus on its strong investment grade rated balance sheet.
Supported by stable free cash flows, which we've seen the different scenarios. We are currently considering.
Excellent generation has a strong record of cost management with the announced savings of more than $1 $1 billion since 2015, and net cost discipline will not change.
We will continue to seek fair compensation for the zero carbon attributes, while maintaining the discipline to retire on economic assets and opportunistically monetize the others.
We will provide a more detailed capex capital allocation strategy, including debt reduction return of capital to shareholders and growth later this year when we have more clarity on these policy and auction outcomes.
That said, we are confident that our disciplined approach will keep stinko, an investment grade rated business regardless of those outcomes.
Finally, I'll conclude with our 2021 earnings guidance on slide 28.
We are providing 2021 adjusted operating earnings guidance of $2 60.
To the $3 per share, which incorporates the mid point of the range for the severe weather impacts offset by the opportunities that Chris discussed our.
Our disclosures, including the O&M Capex on gross margin reflect the mitigation opportunities, we have identified and factored into this guidance.
Thank you and now I'll turn the call back for Chris used for closing remarks.
Thanks, Joe turning to slide 29, I wanted to discuss our key focus areas for 2021, obviously, we will be working on preparations to separate the businesses.
The regulatory approvals that we are confident we will obtain.
That is the work of relatively a small group of our team members. Most of the company will continue to focus on delivering operational excellence.
Cross our businesses.
The operating operating of the grid reliably and safely supporting our customers and our communities during the pandemic and every day, providing zero carbon energy, we will meet or exceed our financial commitments delivering earnings within our guidance range and maintain a strong balance sheet will continue.
Our work to mitigate the impact of ERCOT losses, and maximize the earnings and cash flow.
The utilities, who are prudently and effectively deploy $6 6 billion of capital to benefit the customers and meet the state's energy policy goals, we will work with our regulators to ensure timely recovery on these investments we will continue to advocate for clean energy climate policy.
With the New administration Congress and the states to put our country on a path of meeting the carbon reduction goals.
And Illinois stakeholders continue the.
A discussion on clean energy legislation the governors call for passing in energy build assertion that protects their nuclear fleet gross renewable energy and supports customers in job creation.
We expect the legislation legislative process to ramp up in the coming weeks and months, we will continue to work with all interest parties on legislation that will achieve the state's clean energy goals and the power system dependability, while protecting our customers from a higher bills dirtier air and our communities.
From the loss of the economic engines that our nuclear plants are.
It will be of partner and allied to our communities, we serve including following through on our work we have underway on the social Justice racial equity and restoring the civil.
Discourse, Thank you and I will open the call up for questions.
Thank you ladies and gentlemen, thank you have a question at this time. Please press Star then one on your telephone.
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Our first question comes from the line of Stephen Byrd with Morgan Stanley. Your line is open. Please go ahead.
Hey, good morning.
<unk>.
Thanks for the thorough update on the a lot of topics.
Wanted to talk about your constellation technology venture.
Investment portfolio to keep you laid that out well on slide 45.
Yes, I've noticed there are quite a few of these entities are public entities now is as you know with fairly significant.
The market cap it is challenging to determine kind of the the aggregate value that you all of US have generated you hear often share counts are not available and I know you cant disclose that on an individual company basis, but I wondered if you could maybe first just talk at a high level what is the approximate magnitude of the value of those.
Those public entity Stakes that you have and then over time could this be a potential offset to the equity needs that you have.
Sure Stephen Good morning, it's Joe.
Can't tell you that.
Are those entities contributed 14 cents to earnings in 2020.
We have included an expectation of value in our 'twenty one forecast.
And along those assumptions, we have assumptions of what the IPO schedules would look like obviously for competitive reasons I can't say a lot more than that and as you know these will move around day to day until they get to.
To IPO and also till we get to a point if we consider liquidation, but we have included some valuing of our 'twenty one forecast.
Understood and is it possible overtime, you know I know you don't want to commit to the.
The sell in any particular company, but you know it looks like the magnitude could be significant.
Compared to the $1 billion of equity you need is it is it a potential offset on the future or have you ruled that out how do you think about kind of the longer term path here. Yeah. Those are two very distinct things. When you look at the $1 billion of the $1 billion of equity needed out of our remain co and it matches the growth plans for the capital allocation plan.
And our target metrics, we're shooting for.
We'll see where these investments move through time, and we will make the necessary decisions on what we wanted to do with liquidation.
As we see value, but at this point, they're not linked.
Okay understood and then maybe just last one for me just as you think about ex Gen.
And sort of the leverage levels I think you've laid this out clearly, but I just wanted to maybe explore a little bit further how do you think about sort of target ratios youre thinking about there.
And then also you did provide a discussion of capital allocation I was just wondering if you could just add a little bit as you think about sort of ranking the different.
Uses of capital. The next Gen. If you could just expand on that a little bit.
Yeah, Stephen we as you know we have a long history of investment grade at Exelon generation.
We have had preliminary conversations with the agencies and we've shared data with them, it's been very productive.
You've heard both Chris and I say in our prepared remarks that we have of continued commitment to investment grade with the spin co.
And the first use of the free cash flow will be to manage the balance sheet and pay down debt.
We believe the investment grade has has value to the business and also to completing the transaction and given the strength of the balance sheet, we expected warrants to be investment grade on even even with the spine.
Very good thanks, I'll pass it over the others. Thank you.
Thank you and our next question comes from the line of Steve Fleishman with Wolfe Research. Your line is open. Please go ahead.
Hey, good morning.
Good morning.
Thanks, So just a couple of clarifications.
Is it fair to say that the financing plan the equity plan you've laid out incorporates the impacts of.
The Texas events that occurred in the cash flow it for me.
That with no change on that.
Yes, it does.
David Good morning, guys.
And then just one other clarification there I think Chris at the end of your comments.
The $1 billion and the plan to 'twenty four.
The change some of it.
The pending could you just.
Give a little more color on on that day.
I'll, let Don.
Given the color, but you know we did the link some of this to Texas.
And it's early on in our actions.
We wanted to make sure that we're giving a picture of what it potentially could be but.
We'll be working on it yes, I think there Steve just examples of the things that could change it would be we.
We talked about $500 million of incremental capital investment at our utilities year over year in the four year horizon that would obviously have an impact.
Comed currently it's under a formula rate the tightest of treasuries treasuries move around.
Regulatory settlements.
Could change from assumption. So there are factors that would move it but when we look at our plan is laid out and we look at the metrics and in all of our <unk>.
Right now, we see of the $1 billion of the equity need.
The rates of okay. So it's more just the normal course stocks, but any normal course business activity has yeah. Okay.
And then the.
Just on the on the dividend.
If you take that payout.
Times, the utility guidance here.
Lately lower dividends and the current one but the.
It doesn't take much dividend from Nextgen too.
Make it.
Even.
So just I don't know how important that is in the scheme of your decision, making but just.
Maybe any comment on that.
It's real early on that one as we go through the planning process understand.
What will be prioritizing at the genco for debt reduction or other.
Alternate investments.
We will we'll have to see on debt and to talk about the remain co is definitely.
Early in the planning process, we have to look at all sources and uses of cash and do that throughout the year before we give a suggestion to the board.
On on.
Long term.
Okay.
And then my last question is just maybe for Chris on a high level.
Between the.
So by the administration there's on the.
On the nuclear future between low <unk>.
Happen in Texas.
By the administration coming here in the comments on the Governor of Illinois.
So far just how are you overall feeling about the ability to get some credit for nuclear.
Stay open then maybe six months ago.
We have had of cloud in the Illinois.
And that has slowed the process of the discussion as some look at Comed.
And the nuclear plants being one.
And working to separate debt, but also explaining not only of the environmental benefits, but the community and the economic benefits that they serve along with the reliability.
And all of our jurisdictions that we have nuclear plants I think that recognition is strong are becoming stronger.
The preliminary conversations of Kathleen and her team are.
Moving with the administration and Congress are positive.
Yeah.
To say that you can see of carbon tax in the future.
The near future.
Still of lot of ground of plow, there, but continuing to work on some other mechanisms that her team has been engaged with on the legislative side and briefing on the administrative side.
I do feel of.
From a year ago to now we're making progress.
Okay.
Great. Thank you very much.
Thank you on our next question comes from the line of Julien Dumoulin Smith with Bank of America. Your line is open. Please go ahead.
Hey, good morning team thanks for the time.
Just wanted to follow up here on the confidence in executing this transaction clearly.
New York.
The prior approvals with with Entergy and the previous attempts are obviously drove.
Some challenges in the past I'll leave it open ended I'm curious what are the preliminary conversations in New York and the NRC looking like I recognize that you're directly addressing some of those early concerns of investment grade balance sheet here, but if you can speak to that more broadly would appreciate whatever context, you can provide some of it seems if I can read between the lines that you're already talking about providing a.
On capital allocation update here, so certainly seems like that's the that's a positive indication.
Julian This is bill.
Thank you for the question, we have had conversations with New York and we intend to file R. R.
<unk> request immediately after the announcement.
This is a very very different situation from the entergy.
Tuition, where they went in with a spin out debt would be non investment grade we have.
Given New York, a good idea and a good understanding of how we think the financial stability of the spin would be on its a very very different situation. We've also had.
Alarm and relatively strong relationship with New York since the ex for past. So we are confident that we will get through New York, it's going to be of process, obviously and there'll be some negotiations, but the initial signs are good and while there is no timeline on New York as you know, we would expect to be able to complete this in New York.
Within a year and we think the conversations are productive and won't continue excuse me to be that way.
Excellent just a couple of clarification EDF put that's reflected I presume in this outlook and approval process and then separately.
But the minimum episode of debt targets that you're talking about here can you elaborate at all I know it's early on on on both sides of the equation.
The answer your first question is we've made an assumption of the EDF put in this analysis.
The second one we have had preliminary conversations with the agencies. It's you know it's true.
Too soon for us to begin commenting on what targets of metrics and all would look like but we are confident.
That both entities will be strong investment grade rated companies.
Got it Okay fair enough that's the block.
Thanks.
Thank you and our next question comes from the line of sharp.
With Guggenheim Partners. Your line is open. Please go ahead.
Hey, good morning, guys.
Sure.
So just focusing on on the credit side.
Do you sort of expect there to be sort of any parental guarantees between the remain co and the spin co upon separation and curious how do you sort of get the agencies comfortable with the business risk profile, despite sort of having metrics. I mean, this has been a little bit of an uphill climb with some of your I P. P. P.
<unk>.
Yes, so I think short to the question of.
Parental guarantees we don't expect any parental guarantees being held at remain co for the benefit of.
Of spin co.
Tier agency question.
There's a number of ways to think about that Ray we continue to look at ways to shore up the cash flows in the business you look at the the Zack payments for capacity payments the strength of our constellation business. The strength of our nuclear operations were strong investment grade rating now I think.
We continually honor that commitment and we think there's value in it our value return policy and our capital allocation, it's being co first and foremost we'll start with debt debt reduction with the use of free cash flow. So I think all of those things go into a.
Into the dialogue with the agencies to ensure that.
<unk> is an investment grade entity.
Got it and then and then sort of I know you. Obviously the key is that you on your mitigating or offsetting some of the dis synergies are all of the synergies from the transaction debt that's announced today.
Can you just maybe elaborate how you expect to mitigate the.
The dis synergies and how do we sort of thinking about the $7 4 billion of Holdco debt.
Gonna be allocated between the two.
Based on.
The GAAP will remain at the.
The holdco debt will remain with the parent with remain counts when you when you talk about.
Dis synergies there are opportunities to reduce cost when you look at the governance models.
Good.
The use of technology and some of the other external things we spend money on we're going to challenge ourselves like we do each year to determine how we can continue to reduce debt, but we are confident when you go through those pockets that we can offset any dis synergies.
Okay, Perfect and then just lastly.
Chris you highlighted sort of reevaluating the ERCOT fleet like Colorado Bend in the Wolf Hollow do you sort of expect.
The transaction or strategy there prior to the spin or so how do we sort of think about the taxi fleet in light of the ex Gen. Smith.
The first step is.
Working with the other stakeholders on what happened and what's the future design of the Texas market do they leaned towards the reliability standard that takes into consideration capacity testing for them, which has not been the V.
<unk> of the market design in Texas.
There's been a lot written on this over the years that we were heading in this direction is of very unfortunate event.
But we have to know first the market design. The second thing is we have to look at the design and the root cause on our specific units and the issues that we had.
Anywhere from metallurgical issues.
Two pressure issues to instrument issues.
Had taken some action.
After the superbowl event of couple of years ago.
But you don't get compensated to do what we've done in other jurisdictions with hardening the plants that have.
Not only that.
And on Ts, but capacity payments that allow you to make those investments. So we have to look at it we wanna be of reliable provider.
Want to participate in a market.
That's designed.
To not only protect the consumers.
The cost Ellen.
Element the reliability of element.
But allow us to make the investments and operate our plants safely and reliably.
Terrific.
Hey, guys congrats today.
Thank you.
Thank you and our next question comes from the line of the cash Chopra with Evercore ISI. Your line is open. Please go ahead.
Hey, good morning team. Thanks for taking my question.
Joe just a.
Just quick I want to be clear on dividends just in terms of when we're thinking about pro forma.
The dividend to shareholders.
So we've been modeling them lower were low.
Or are you, suggesting that there could be a.
A dividend at the.
The spin co.
We've said it.
Go ahead sorry.
That's it.
Oh, Okay. Yeah. What we've said is you know we've aligned the utility payout in 60% of EPS EPS and it will grow in line with our earnings groups and we believe that compares to other high growth and high quality utilities, we haven't made a determination on the capital allocation plan it.
Pink co for some of the reasons that we've talked about in our prepared remarks, and the first and foremost we're going to continue to pay down debt there to maintain the strength of the balance sheet, because we think that an investment grade rating is important and then beyond that we'll determine how we return capital to the shareholders and we.
We expect to have those decisions made through time here, we're just not ready to commit to that at this point given some of the uncertainty.
Understood. Okay. Okay. So cash from from Genco basically goes to pay down debt and then the balance.
You may begin instate, a dividend or buyback of shares or do other.
The other ways of giving it back to shareholders.
Wouldn't stay at that debt black and White I would say we have to make a determination on what our capital allocation policies and we will do that through time as some of these other things of resolved, but theres been no final determination.
Understood. Okay. Thanks, and then just maybe can I quickly get your thoughts on you mentioned the federal of carbon legislation. So what sort of are you expecting darrin perhaps of the timeline.
Okay, I'll, let kathleen.
Opine on that.
Yes. Thanks for the question I mean, obviously, we're heartened to see the administration set the carbon free power sector of all by 2035.
And we know that there are a number of steps that arch account, including as you mentioned.
The potential for our climate legislation.
I would kind of keep my eye on the.
The administration needs to set a.
And N D C for the U S. A nationally determined contribution to match up to the to the new commitments of the Paris target, we do expect that to be more aggressive than.
And then in the past.
And that will sort of set the tone for what Congress takes up but I think the nearest term thing to look to is the push for an infrastructure package. There are a number of business and labor and other <unk>.
Triste, pushing the administration to move forward on a piece of legislation that itself could make progress on climate. So separate from that from a pure of climate Bill an infrastructure Bill that included tax incentives for clean energy development of electric vehicles the storage climb.
Climate resilient infrastructure, it's sort of of the first thing to look out for and then I think once that gets done we'll see the discussions ramp up around what the future sort of national Planet policy is going to look like as you know the administration has has already expressed support for a national clean energy standard.
The accounts nuclear as clean on.
And so that clearly will be on the table, but they will also be discussions about a carbon tax the dividend approach and.
And with the growing public support for National action.
We as Chris said are working with folks in Washington to make sure of that the proper design.
He is included.
In the in the sense that we need something that is going to be.
Cognizant of the customer impact, but also aggressive enough to address the challenge of the kind of crisis for the last thing I'd say I guess is that while those are all extremely positive developments they do take time.
The legislation in Washington will take some time to enact and then it will take time to implement so that's why our focus does remain at the state level on.
On a on moving forward with a legislation that will support the states Clinical's air pollution reduction.
The electrification of the economy and job creation in equity so that we can make progress now while the federal discussion.
Many of them.
Understood. Thanks for the color. Thanks for the time guys I appreciate it.
Thank you and our next question comes from the line of Michael the pits with Goldman.
Goldman Sachs. Your line is open. Please go ahead.
Hey, guys. Thank you for taking my question and congrats on today's announcement of lots of interesting stuff going on real quick just curious how you're thinking about.
Really the broader risk around the retail business, not just Texas, but anywhere you do it and how we should think about the potential for power price volatility, especially given the significant amount of retired base load generation over the last five to 10 years, how that could impact you in other regions, where you are.
The much bigger than you are in Texas in retail trying to think about you know it's not the first time, we've had price spikes. We had them in January of 2014 on January 2018 in New England.
There have been other retailers just curious about how you protect yourself from the risk of a Texas like events happening in one of your bigger markets.
The one thing is.
You have to differentiate between the market designs, Texas is far different than PJM.
On the interconnect ability.
On the real ability of power through the eastern interconnect.
Is strong.
We have taken on steps and in other markets to ensure that we have adequate capacity that can weather such event.
Events weather events.
But the.
You take an isolated market, where you do not have the ability to import to cover your load.
You have of price cap.
Significantly high.
And you essentially lose your sites.
It is not something you can hedge for at this time in ERCOT and Thats, what we have to work on but our hedging strategy and our ability to have our customer facing products in our retail C&I and residential business.
As many risks.
Our focus is on that and we continue to work as of the markets evolve. So we're not.
We're not.
Looking at it like this is the.
Event everywhere across the country as long as we keep focusing on sound market designs understanding of the capacity requirements and the investments required by the generators to prevent such volatility on.
For our hedging strategy is the key to that.
Got it okay.
And then I'll follow up on on spin co. How should we think about I mean, you've got an RPM auction coming up this may.
How should we think about the.
Potential changes in RPM outcomes relative to the to the last auction, which was almost two years ago.
And what it means for the financial structure of the capital structure.
For for kind of ex Gen as a new entity separate from a consolidated that's the launch.
So that's a pretty broad question on Theres, a bunch of questions in there.
I think I'll, let Joe start with it and see where we go for the rest of it with Kathleen Michael to credit elsewhere on the ticket.
The one thing I would say is when we made this comment in our prepared remarks, we looked at the spin co business under a range of different scenarios and no scenarios ultimately take into account changes in cash flow assumptions and how we would manage the business accordingly.
Thank you you've seen us through time.
We'd be very prudent and financially with a lot of discipline right.
The alternative tools like project financing, we've retired assets when they were on economic and we couldn't get paid for them. We've sold assets that the market has put a higher premium on than ours, but we don't look at just one point estimate or we have to make sure we understand how shocks would impact our you know the.
The balance sheet and the free cash flow of the company and we continue to look at that.
Your example of capacity outcomes would tie into that.
Got it. Thank you guys much appreciate it.
Thank you and our next question comes from the line of Jonathan Arnold with vertical Research. Your line is open. Please go ahead hi, good morning, guys and thank you for taking my question.
Hey, Jonathan Hi.
I wanted to clarify one thing on the corporate segment drag that you have say until 'twenty one guidance. It looks as though that is mostly the allocated to remain coast. The since when we think about transitioning for the is that correct.
For the piece of that sort of you know.
Well the piece of that go away with with the spin.
Yeah, you are correct, it's mostly allocated to remain true.
Okay.
That was the one thing and then.
So as I look of the remain codes.
Trajectory.
I mean, obviously, you're reiterating the six to eight but a good bit of that seems that the the step up in 'twenty one for them.
From 2020, so none of it.
It's kind of flatter.
Further out.
You have the equity on that but it doesn't look like that's huge so just curious what's the kind of.
Tempering that the.
Flow further out when you thought you actually raise the capex et cetera, yes.
Yeah sure Jonathan six to eight percentage of long term target for us as you can imagine given the size and scale of our business, there's going to be some oscillation in of giving periods of time.
When you think about the rate case timing and then.
Would be one net changes it. So if you were to carry this 3% to 25, you would see strong growth just given some of the timing of our rate cases, I would also shape. The work we're doing at the utilities under Calvin Butler leadership is to make sure that we're reducing lag right, where we're investing for the benefit of our.
Consumers and improving reliability and the customer experience, but we're also trying to make sure that we reduce the regulatory lag and we've seen that with things like the multiyear rate plan in Maryland and D. C. For example, but but there are going to be some years, where it moves around just given timing of rate cases and other.
Okay, good enough and just maybe one other thing on the.
On timing.
Obviously, you talked about these offset for the.
Hum.
Yeah.
How should we think about the in terms of probably show up through the year.
The Q1 going to be.
You can take the obviously the negative in Q1, but does it sort of take most of the year to get back to the negative 20 net.
Where does it come quicker than that.
No.
It will take time to flush through the year and we're looking at these and a number of buckets, we have the ability to deferred non essential maintenance. There are some one time cost savings, which will monetize throughout the year and then there are some revenue enhancement opportunities, which also will happen throughout the year.
But but theres a number of different levers that we're using the.
The third.
Theres, a very focused team that is.
Overseeing this working with the individual businesses on making sure that they can commit to what we believe that these goals are on that.
Come up with the savings range and we will continue to challenge.
From the corporate financial organization.
Other areas.
On where we can.
Effect.
Some dampening of the of the affects of of ERCOT.
Great. Thank you Chris.
Thank you and this does conclude today's question and answer session and I would like to turn the conference back over to Mr. Chris Crane for any further remarks.
I'd just like to thank everybody for joining today.
We had a lot to go through today.
As we were planning for this with the board we did not anticipate.
The the ERCOT of event to the extent of it.
It played through.
Creates a little bit of a complication, but but it's nothing that the team is not up to two.
To try to work through the challenges so well.
We will continue to update you on the calls or something happens.
In the meantime, we think is where the day.
Dan and his team.
And we will be reaching out to folks just to make sure.
We're in sync and you know, where we're going so with that be safe and thank you.
Ladies and gentlemen, thank you for participating on today's conference. This does conclude the program and you may all disconnect everyone have a great day.
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