Earnings Call Transcript - EXC Q4 2020

Operator, Operator

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 speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now like to turn the conference over to one of our speakers today, Dan Eggers, Senior Vice President, Corporate Finance. Sir, please go ahead.

Dan Eggers, Senior Vice President, Corporate Finance

Thank you, Michelle. Good morning, everyone and thank you for joining our fourth quarter 2020 earnings conference call. Leading the call today are; Chris Crane, Exelon's President and Chief Executive Officer; and Joe Nigro, Exelon's Chief Financial Officer. They're joined by other members of Exelon's senior management team who will be available to answer your questions following our prepared remarks. We issued our earnings release and separation announcement release this morning along with the presentation, all of which can be found in the Investor Relations section of Exelon's website. The earnings and separation announcement 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 to today's 8-Ks and Exelon's other SEC filings for discussions of risk factors and other factors, including uncertainties surrounding the planned separation 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 in the appendix of our presentation and our earnings release reconciliations between the non-GAAP measures and the nearest equivalent GAAP measures. I'll now turn the call over to Chris Crane, Exelon's CEO.

Chris Crane, CEO

Thanks, Dan and good morning, everybody. We have a lot to talk about this morning. So Joe and I will then try to go through it and allow adequate time for questions. Some of the topics we have to discuss include the recent events in Texas, where unprecedented sustained cold temperatures severely impacted the energy system in the state and those who live there. We had operational issues with our plants due to the extreme weather, and they were only periodically available when the price hit or maintained at the administrative cap of $9,000. Our preliminary estimate for the impact of this event across our portfolio is between $750 million and $950 million pre-tax, or $560 million to $710 million post-tax. The range is wide as it includes our best estimate for load obligations, ancillary charges, and bad debt, and it will take some time to refine this estimate. The data we normally receive is delayed from ERCOT, and with recent PUCT actions, that data has been further delayed, contributing to the uncertainty surrounding future actions by the PUCT or others. We expect to provide a better update no later than the first quarter earnings call. This loss is unacceptable to us. We are mitigating it through business updates, including first quarterly favorability, primarily through one-time cost reductions and deferral of non-essential maintenance, which Joe will cover in further detail. To date, we have identified updates and offsets that are expected to reduce our net impact to $0.20 per share at the midpoint of our loss estimates, which is reflected in our earnings guidance. These efforts are also expected to reduce the cash impact to $200 million. As you're aware, last week's events have raised many questions about Texas market design and associated risks. This has been a conversation ongoing for a while now, and we hope that through this, the proper actions can be taken regarding the design. As a result, we are evaluating our options concerning our ERCOT business. Moving on to good news, our 2020 operational and financial performance was strong. Our utilities maintained excellent operations, not only through the pandemic but also during an extremely punishing storm year which included a derecho and numerous hurricanes. For example, one day we had 13 tornadoes in the ComEd service territory. The power of our utility platform paid off for us this year. The mutual assistance across the fleet helped us achieve record restoration speeds for both ComEd and PECO. Each utility delivered excellent reliability, top desk outage frequency, and top quartile outage duration. These results were reflected in our Customer Satisfaction scores, with all utilities receiving their best on record scores in the first quartile for customer satisfaction. Strong operations led to constructive regulatory results, as we saw in the outcome of three rate cases across our jurisdictions in 2020. In December, the Maryland PSC approved BGE's first-ever multi-year plan, enabling investments in reliability. We're expecting orders for multi-year plans at both Pepco DC and Pepco Maryland, which will allow for timely recovery while supporting jobs and the economy in DC and Maryland. Turning to our nuclear performance, it was another very good year, generating 150 terawatt hours of zero-emitting power, which is equivalent to avoiding 78 million metric tonnes of carbon dioxide. The capacity factor was 95.4%, second only to last year's performance in fleet history. The nuclear group completed 12 refueling outages in fewer days than planned, despite rigorous pandemic protections. Our relationships with retail customers continue to remain strong, with a 79% customer renewal rate and an average customer duration of more than six years, alongside power contracts lasting 21 months on average. As for our financial results, excellent operations and robust cost management led to strong financial results. The pandemic did reduce our demand for electricity, particularly at Constellation, which created financial headwinds for us. We've reduced our earnings guidance on the first quarter call based on previously known information. Still, we sought ways to improve our earnings outlook throughout the year, delivering on $400 million of savings, which was $150 million more than previously announced and brought us well within our original earnings guidance range. Gains from the Constellation Technology Ventures portfolio brought us above the midpoint of our range guidance. We earned $2.01 on a GAAP basis and $3.22 on a non-GAAP basis. This morning's announcement regarding our separation is a very strategic move for us. With our board, we've concluded that separating our regulated utilities from the competitive businesses serves the best interests of all stakeholders, which will move us forward in this process. This separation establishes two best-in-class standalone companies; a high growth, high quality, 100% regulated utility in America and a leading clean energy company that produces the most clean energy paired with the best customer-facing business in the country. It better positions each business within its peer set and supports distinct business strategies tailored to meet unique customer needs. The operational expertise, customer focus, and financial discipline expected from this management team will continue to underpin the value proposition of each company. Regarding the dividend, the Board has approved a $1.53 dividend for 2021, which holds it flat to last year. The RemainCo expects to target a 60% payout in line with best-in-class high growth peers and will grow its dividend consistent with earnings.

Joe Nigro, CFO

Thank you, Chris and good morning, everyone. I will build on Chris's remarks by providing more detail about the two standalone businesses, and then we'll discuss our 2021 guidance. Our utilities will continue to be a premium business within the sector and share the characteristics of other high-quality utilities. They operate in constructive regulatory jurisdictions, with nearly 100% of rate base growth recovered through alternative recovery mechanisms. We will continue to meet our commitments to our customers through bill affordability and best-in-class operations. We will maintain a keen focus on our ESG initiatives, including clean energy and diversity, equity, and inclusion. Our financial policy will be balanced and disciplined, underpinned by a strong balance sheet, which will allow us to deliver on industry-leading rate base and earnings growth built upon strong returns on equity, propelling the RemainCo business model well into the future. We have a robust investment plan across our utilities to improve reliability and resiliency while enhancing the customer experience and preparing for a clean energy future. In 2021, we plan to invest nearly $6.6 billion, totaling $27 billion over the next four years. Our rate base is expected to grow by 7.6% annually to $58.8 billion, adding close to $15 billion to our rate base by 2024. Our growth outlook remains strong, targeting a 6% to 8% earnings per share growth amid these adjustments.

Chris Crane, CEO

Thanks, Joe. Turning to our focus for 2021, we will work on ensuring the separation of the businesses, including obtaining regulatory approvals. Meanwhile, most of the company will continue to focus on delivering operational excellence across our businesses, operating the grid reliably and safely, supporting our customers and communities during the pandemic, and providing zero-carbon energy while meeting or exceeding our financial commitments. We will continue our work to mitigate the impact of ERCOT losses and maximize our earnings and cash flow. We will prudently and effectively deploy $6.6 billion of capital benefiting our customers and meeting the state’s energy policy goals. We will advocate for clean energy climate policies with the new administration, Congress, and across state lines to ensure our country meets its carbon reduction goals. Thank you, and I'll open the call up for questions.

Operator, Operator

Thank you. Our first question comes from the line of Stephen Byrd with Morgan Stanley. Your line is open. Please go ahead.

Stephen Byrd, Analyst

Hey, good morning. Thanks for the thorough update on a lot of topics. I wanted to discuss your Constellation Technology Venture investment portfolio. I noticed that quite a few of these entities are public now with significant market caps. It can be challenging to determine the aggregate value that you all have generated here given the variable share counts available. At a high level, could you discuss the approximate value of those public entities? And could this potentially serve as an offset to the equity needs that you have over time?

Joe Nigro, CFO

So Stephen, good morning. I can tell you those entities contributed $0.14 to earnings in 2020. We've included an expectation of value in our 2021 forecast along with assumptions of what the IPO schedules could look like. Nevertheless, due to competitive reasons, I can't disclose more information at this point, but we have factored in some value into our 2021 forecast.

Stephen Byrd, Analyst

Understood. Is it possible this could offset the $1 billion of equity you need? Or have you ruled that out?

Joe Nigro, CFO

Those are two distinct aspects. The $1 billion of equity is specific to RemainCo and is linked to our growth and capital allocation plans. We’ll evaluate where these investments move through time and make decisions accordingly, but currently, they are not interlinked.

Steve Fleishman, Analyst

Hey, good morning. Just a couple of clarifications. Is it fair to say that the financing plan you have laid out incorporates the impacts of the Texas events?

Joe Nigro, CFO

Yes, Steve, it does.

Steve Fleishman, Analyst

You mentioned that the $1 billion in the plan could potentially change. Could you provide more color on that?

Chris Crane, CEO

While I can't give specific details, I can say we linked some aspects to Texas, and it's still early in our evaluations. We'll assess various factors impacting our overall strategy.

Joe Nigro, CFO

There are factors that could influence this, including the $500 million of incremental capital investment at our utilities. Regulatory settlements could also change from original assumptions. So, as of now, we see the $1 billion equity need.

Steve Fleishman, Analyst

On the dividend, it appears that if you take the payout times the utility guidance, you may have a slightly lower dividend than the current one.

Chris Crane, CEO

It's early in the process, and we'll assess sources and uses of cash comprehensively before we make any long-term suggestions to the Board.

Julien Dumoulin-Smith, Analyst

I wanted to follow-up on the confidence in executing this transaction, especially regarding New York prior approvals.

Bill Von Hoene, Executive

We’ve had conversations with New York, and we intend to file our approval request immediately after the announcement. This situation is very different from the Entergy spin-off since we have established a solid investment-grade framework for SpinCo.

Julien Dumoulin-Smith, Analyst

What are the preliminary conversations looking like?

Joe Nigro, CFO

We've made assumptions on EDF as well for our analysis. It's premature to comment on specific targets or metrics but we are confident both entities will maintain strong investment-grade ratings.

Shah Pourreza, Analyst

Do you anticipate any parental guarantees between RemainCo and SpinCo upon separation? How will you get the agencies to understand the business risks while maintaining investment-grade metrics?

Joe Nigro, CFO

We do not expect any parental guarantees held at RemainCo for SpinCo's benefit. We aim to enhance cash flows and leverage singular commitment to maintain investment grade for both entities.

Chris Crane, CEO

We will evaluate our Texas fleet in light of market designs and the future reliability needed in this environment. We will also ensure our investments allow us to operate safely and reliably.

Durgesh Chopra, Analyst

Regarding dividends, should we model them lower or expect a potential dividend at the SpinCo?

Joe Nigro, CFO

We have aligned the utility payout to grow with earnings and expect to return capital to shareholders in a disciplined manner. But the determination on capital allocation at SpinCo is yet to be made.

Chris Crane, CEO

We have been working with stakeholders on legislation that aligns clean energy goals while ensuring reliability without risking customer bills.

Kathleen Barron, Strategic Advisor

There are expectations for ambitious emission reductions, and we are supporting states, advancing clean energy goals at all levels while we also engage in federal legislative processes.

Michael Lapides, Analyst

How do you protect your retail business from broader risks and price volatility in the market?

Chris Crane, CEO

We differentiate market designs, especially Texas's, from others. Our hedging strategies and customer-facing products aim to mitigate volatility risks and ensure reliability in our operations. We'll be prudent in our evaluation of future RPM auctions and assess how results could affect our balance sheet. We continue to validate multiple scenarios to ensure sustainability of both SpinCo and RemainCo.

Jonathan Arnold, Analyst

Thank you for taking my question. I want to clarify the corporate segment drag on your 2021 guidance. Is that mostly allocated to RemainCo?

Joe Nigro, CFO

That is correct; most of it is allocated to RemainCo. While there may be fluctuations in earnings growth, rate case timing plays a significant role in anticipating strong growth trajectories driven by investments. The mitigation opportunities related to the Texas event will take time to materialize through the year, as we're focused on various levers to help revitalize earnings impacted by those events.

Christ Crane, CEO

We will continue to challenge ourselves on these savings and monitor progress closely.

Chris Crane, CEO

I want to thank everybody for joining today. We had a lot of information to cover, including the challenges presented by the ERCOT events. Our team is committed to addressing these issues, and I look forward to keeping you updated as we navigate through and work on our operational commitments. Stay safe and thank you.

Operator, Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day.