Earnings Call Transcript - EXC Q3 2022

Operator, Operator

Good day and thank you for standing by. Welcome to the Q3 2022 Exelon Corporation 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 is being recorded. And I would now like to hand the conference over to your speaker today, Mr. Andy Plenge, Vice President of Investor Relations. Sir, please go ahead.

Andy Plenge, Vice President of Investor Relations

Thank you, Chris. Good morning everyone and thank you for joining our third quarter 2022 earnings conference call. Leading the call today are Chris Crane, Exelon’s Chief Executive Officer; and Jeanne Jones, Exelon’s Chief Financial Officer. They’re joined by Calvin Butler, Exelon’s President and Chief Operating Officer, who will join Chris, Jeanne and other members of Exelon’s senior management team to answer your questions following prepared remarks. We issued our earnings release this morning along with the presentation, all of which can be found in the Investor Relations section of Exelon’s website. 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 to today’s 8-K and Exelon’s other SEC filings for discussions of risk factors and other factors 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 for reconciliations between the non-GAAP measures and the nearest equivalent GAAP measures. We’ve scheduled 60 minutes for today’s call. I’ll now turn the call over to Chris Crane, Exelon’s CEO.

Chris Crane, CEO

Thanks, Andy, and good morning to everybody. We’re glad to have you with us this morning. As you all know, yesterday, we announced my retirement from Exelon at the end of the year due to health reasons. I plan on addressing that at the end of the call after reviewing the operational and financial update of the quarter. Let me first address the operational aspects of that announcement. Calvin Butler, our President and Chief Operating Officer will become the President and CEO and a member of the Exelon Board upon my retirement. Since Calvin began with us, he has been a key part of the development of our industry-leading platform. During his time at BGE, he made customer satisfaction best-in-class, significantly increased leadership diversity, and became CEO of Exelon Utilities thereafter. In that role, he continued to push the operating companies to align with the management model and drive industry-leading operational excellence. Jeanne is now CFO, and we’re very pleased with that. Jeanne has been with Exelon for 15 years in various finance roles across the corporate and the former nuclear division. She was CFO at ComEd and most recently, Senior Vice President of Exelon Corporation. Jeanne has a strong background and experience, which positions her well for expanded responsibility. You’ll hear from Jeanne momentarily for the financial update. And both Calvin and Jeanne will join me for the Q&A portion of the call. I would also like to thank Joe Nigro for launching the new Exelon and successfully executing the spin. I'm happy to report solid performance for the quarter. The investments we’re making are on behalf of our customers and continue to drive strong operational and financial results. We reported GAAP earnings of $0.68 per share and adjusted operating earnings of $0.75 per share. We are reaffirming the midpoint of our range and narrowing it by $0.06. Jeanne will provide more detail on that. We continue to execute at high operational levels, which I’ll discuss further in the next slide. We had a construction rate case outcome this quarter. The commission in Delaware and Pennsylvania approved settlements on gas situation rates for Delmarva and other areas. We also reached a settlement on key elements with the first multi-year filing for Delmarva Power. We expect the final order in December. In Illinois, ComEd received the final order on its performance tracking mechanisms and plan in September. That’s a significant milestone in the transition they’re making to a multi-year distribution rate construct, and it gives us a good foundation to build upon. As a result, we intend to file a multi-year distribution plan in January with a four-year rate structure beginning January 1, 2024, continuing through the end of 2026. Choosing the multi-year plan over a future test year is the right choice for our customers and our shareholders. We appreciate the transparency and forward-looking planning in rate predictability that it allows. Our rate case will be filed simultaneously with our multi-year integrated grid plan, with the final order expected by the end of 2023. There has been significant operational and financial progress this year, and we’re on track to close a very strong year. We know investors are focused on our outlook for this year. First, I want to update you on the Inflation Reduction Act. We have always strived for transparency. So last quarter, we communicated the potential impact of higher annual cash tax as a result of the IRA. Since passing the bill, we’ve worked with the industry, and we remain optimistic that Treasury will implement the guidelines in a way that materially mitigates the impact. Regardless of the outcome from Treasury, we’re reaffirming our 6% to 8% annual growth target from 2021 to 2025, which I’ll talk more about shortly. In addition to reaffirming our growth commitment, we have emphasized the impact of the potential higher cash tax. Even in the event that impact is not mitigated through Treasury regulations, we expect that higher cash needs will not require us to issue additional equity beyond the original $1 billion commitment through 2025. On the positive side, the Inflation Reduction Act is very beneficial for our customers as we lead the energy transition. We look forward to the moment that we will build an industry as it takes advantage of this historic legislation passed this year. Our jurisdictions were already driving for clean energy, and federal support enacted this year is more affordable and accessible for customers. We see opportunities to connect renewables, support alternative fuel production and distribution, and make the grid ready for increased electrification, including electric vehicles. Legislation alongside the Infrastructure Jobs Act provides more than $550 billion in funding for energy-related infrastructure over the next 10 years, which will generate significant demand for our investments. Finally, I’d like to talk about our growth outlook. We told you on Analyst Day that we expect to invest $29 billion of capital to serve our customers and our communities over the next four years, supporting an annual growth rate of 8.1% that will drive long-term earnings growth. As many of you know, the path to achieving our annualized growth target is not linear, but our commitment of 6% to 8% through 2025 remains our focus. We'll see that more clearly when Jeanne covers Slide 9. On the operational highlights, we continue to ensure customers receive safety, affordability, reliability, and sustainability, which underpins everything we do. Reliability remains top-notch; we are again at the top quartile for outage duration across all our jurisdictions and outage frequency performance remains at high levels. ComEd and PECO achieved record performance. In fact, through the third quarter of 2022, ComEd has delivered the most reliable service it ever has in over 100 years. Reliability is 82% better than when ComEd set out on smart grid improvements in 2011. Our customers have greatly benefited from these investments as reliability on the grid has increased. Through the third quarter, BGE and ComEd have demonstrated reliability that has supported significant data center growth in the ComEd district in recent years. The data center additions have aggregated about 500 megawatts of new demand each year, which is approximately nine times the annual average seen in the prior decade. ComEd maintains top decile performance in safety; however, the three other utilities continue to fall outside that level. We expect only the highest safety standards and performance for all utilities. Each utility is dedicated to implementing safety practices developed through lessons learned to minimize the chance of incidents. There’s an intense training program ongoing with our supervisory personnel, which helps elevate expectations across all utilities. Through three quarters, BGE, ComEd, PECO remain in the top quartile of customer satisfaction performance. Lastly, we maintain top decile performance in odor response across our three gas utilities. For the third consecutive quarter, PHI responded to all gas odor reports in under one hour. Let me turn to Jeanne to provide the financial update.

Jeanne Jones, CFO

Thank you, Chris. And good morning everyone. Today, I will cover our third quarter results, upcoming rate case activity, and then, as Chris noted, provide further clarity on our earnings growth trajectory and potential balance sheet implications of the corporate minimum tax. On Slide 6, we show our quarter-over-quarter adjusted operating earnings. Exelon’s continuing operations earned $0.75 per share in the third quarter of 2022 versus $0.53 per share in the third quarter of 2021. As a reminder, the prior year third quarter reflects an $0.08 per share discontinued operations adjustment for certain corporate and overhead costs, previously allocated to generation that are required by accounting rules to be presented as part of Exelon’s continuing operations. These costs were borne by generation and are not indicative of our corporate overhead post-separation. Excluding this $0.08 adjustment, Exelon’s third quarter results were $0.14 per share higher than the third quarter of 2021. The earnings growth was driven primarily by higher distribution rates associated with incremental investments and completed rate cases relative to the third quarter of 2021. The impact of higher treasury rates on ComEd’s distribution return on equity, the absence of summer storm activity, and distribution formula rate timing at ComEd partially offset this growth. Year-to-date results and drivers from the prior year are detailed in Appendix 540. Turning to the full year, we are narrowing our 2022 EPS guidance range to $2.21 to $2.29 per share from $2.18 to $2.32 per share. At Analyst Day, we told you we expected to earn 28% of our full year earnings in the first quarter, 20% in the second quarter, and 32% in the third quarter, which would put us at about 80% of full year earnings by the end of the third quarter. Delivering year-to-date earnings of $1.84 per share puts us slightly ahead at 82% of the midpoint of our revised guidance range, which considers the impact of higher treasury rates on distribution ROE, the absence of storms, and our continued disciplined approach to cost management. These benefits are partially offset by higher financing costs at corporate and various businesses, along with one-time items occurring in the first quarter. We are delivering on our financial commitments and are confident we will remain within our revised guidance range at year-end. Moving to Slide 7, looking at our utility returns on a consolidated basis, our trailing 12-month ROE as of the third quarter has improved to 9.3% and is back within our targeted range of 9% to 10%. The 50 basis point increase from last quarter is in line with expectations as the timing of equity infusions from the first half of the year offsets the earnings growth in the second half. As discussed on previous calls, we expect the trailing 12-month ROE to remain in our 9% to 10% target range at year-end. Our focus continues to be on delivering strong earned returns at the utilities, which sustain the investments we make on behalf of our customers. Turning to Slide 8, there were several important developments in our open distribution rate case proceedings this quarter. Our successful execution builds momentum into 2023, when several jurisdictions expect to file multi-year plans. I want to begin by highlighting key developments in the 2022 rate cases. On October 12, the Delaware Public Service Commission approved Delmarva Power's settlement agreement without modification for its gas distribution rate case. The settlement was for a $13.4 million increase in distribution rates, which includes the transfer of $5.8 million of revenues from the distribution system improvement charge capital tracker into base distribution rates, reflecting an ROE of 9.6%. As permitted by Delaware law, Delmarva Power implemented full allowable rates on August 14, subject to refund. Additionally, on October 27, the Pennsylvania Public Utility Commission issued an order approving the joint petition for settlement in PECO’s GAAP rate case, including an annual natural gas distribution revenue increase of $54.8 million beginning January 1, 2023. We have two rate cases pending final orders. Notably, Delmarva Power reached a settlement on the majority of key elements for its first electric distribution multi-year plan with the Maryland Public Service Commission, including a cumulative revenue increase of $28.9 million beginning in 2023 through 2025, reflecting an ROE of 9.6%. This ability to reach a settlement is a testament to the many benefits of this progressive rate design, including customer rate predictability, reduced regulatory burden, and transparency into future system investments at our utilities. We expect a final order from the commission by year-end. Lastly, we expect a final order on ComEd’s final distribution formulary update in the fourth quarter. More details on the 2022 rate cases can be found on Slides 18 through 22 of the appendix. Turning to the 2023 rate filings, ComEd continues to prepare for a new rate filing in January of 2023. Throughout 2022, ComEd has been working with stakeholders on the performance metrics proceeding. On September 27, the Illinois Commerce Commission issued its order approving the performance and tracking metrics plans, which include seven performance metrics with a total value of plus or minus 32 basis points. The order clears the way for ComEd’s first multi-year plan filing in January 2023, for rates effective from 2024 to 2027. The details of this filing will be shared during our fourth quarter call. The multi-year plans across our East Coast jurisdictions have enabled the investments necessary to improve reliability and customer service. They’ve modernized the distribution system and supported state environmental goals that have served our customers and communities well. Building on this momentum, we anticipate filing a second multi-year plan at BGE in the first quarter, at Pepco Maryland in the second quarter, and at Pepco DC in the first half of 2023. We also anticipate filing the first multi-year plan reconciliation with BGE, expected in the first quarter of 2023. Our first multi-year plan reconciliation is an important milestone that helps us capture variances from the costs we filed as part of the multi-year plan in early 2020. This reconciliation process will also provide our first opportunity to understand how the implementation of potential cost variances in future multi-year plans will occur. As you can see, next year, we will be active on the regulatory front, and we are excited for the transparency and stability the multi-year plans will continue to provide our customers and stakeholders. Relationships across our jurisdictions will be constructive, and we are working together with our regulators, stakeholders, and communities to support their clean energy objectives. As Chris noted, this year’s federal legislation significantly bolsters support for, and the affordability of, our energy economy transformation. The multi-year plans create a strong structure to align on the pace and progress of that transition. As a reminder, we expect nearly 100% of our rate base growth will be covered by alternative recovery mechanisms, such as the multi-year plan, by the end of our planning period. Moving to Slide 9, as Chris described, we are confident that the $29 billion in investments we are making on behalf of our customers will result in an expected rate base growth of 8.1% and 16% annualized earnings growth from 2021 through 2025. Our business model does include some variability in year-over-year earnings growth due to the timing of rate cases, particularly in Pennsylvania, which generates strong returns that support our continued investment for the benefit of our customers. For 2022 and 2023, at ComEd, we are exposed to the 30-year treasury rate before making the transition to a more traditionally set return on equity. We have attempted to provide investors with additional information on year-over-year variability through the building blocks of our earnings growth trajectory. As defined in the chart, the gray arrows represent implied 6% to 8% compound annual growth rate from the 2021 guidance midpoint of $0.02 per share, as disclosed at Analyst Day through 2025. The subsequent chart illustrates expected year-over-year growth percentages from the prior year relative to the 6% to 8% range each year. Addressing the growth drivers, starting with 2023, we have already mentioned ComEd's exposure to the 30-year treasury rate. Although current forward indicators imply good upside for its ROE, we’ll need to monitor the impact throughout 2023, where it remains fully exposed to market fluctuations. PECO’s earnings should benefit from new GAAP rates, transmission, and its distribution system improvement charge tracker, which provides a mechanism for recovery on distribution investments made between rate cases. Weather and storm normalization will also influence PECO’s results, and we are modestly benefiting from weather conditions to date. Like all companies, we face challenges from higher financing costs and inflation, which we are actively working to offset through productivity initiatives, investments in technology, and by leveraging our size and scale. Reconciliation processes in 2023 in Maryland and DC will help establish precedents for future cost recovery under the multi-year plan. Lastly, at the corporate level, we expect increased costs as we continue to refinance our remaining floating rate from the separation, as well as financing the investment needs of our utilities at current higher rates. As we do with the utilities, we are continuing to challenge our corporate center to reduce costs. For all these reasons, we expect 2023 to be below the lower end of the 6% to 8% growth range based on our outlook as of September 30. In 2024, we expect to return to the range as we enter the next cycle of our BGE and PECO multi-year plans, aligning with stakeholders for the next three-year phase of the clean energy transition. PECO is expected to be in its third year of its existing electric distribution rate which will impact year-over-year growth. With an expected rate case filing for PECO electric in 2025 and the rest of our utilities growing generally in line with the rate base investments, we expect to exceed the upper end of the 6% to 8% range in 2025. The combination of growth across these years should put us firmly within the 6% to 8% range on an annualized basis for the 2021 through 2025 planning horizon. You can expect us to initiate 2023 guidance and provide a roll-forward of capital expenditures, rate base, and financing plans, as we normally do on our fourth quarter earnings call. Turning to Slide 10, Exelon remains committed to maintaining a strong balance sheet and ensuring our credit ratings remain a top priority. Our long-term corporate consolidated credit metric outlook remains strong for both S&P and Moody’s, regardless of the outcome of the corporate minimum tax. If the corporate minimum tax is enacted as written in the Inflation Reduction Act, the exposure on our balance sheet is approximately $200 million per year, as noted in our August 8-K filing. We are working with the industry and remain optimistic that this impact can be mitigated. Even if unmitigated, as Chris noted, we expect to absorb the cash impact on our balance sheet while maintaining a cushion above our downgrade thresholds. We expect to stay within our target of 13% to 40% average range over the planning horizon without the need for additional equity beyond the previously announced $1 billion commitment from 2022 through 2025. As a reminder, we issued $575 million in equity in August through a one-time offering, and we plan to raise the remaining $425 million over the 2023 through 2025 period. Our commitment to a strong balance sheet remains our top priority to ensure we can make the investments needed on behalf of our customers. I want to close by reiterating our confidence in investing an estimated $29 billion of capital from 2022 to 2025, driving 68% earnings growth from 2021 to 2025, and maintaining a strong balance sheet. This remains the case regardless of whether the corporate minimum tax is mitigated.

Chris Crane, CEO

Thanks, Jeanne. Moving to Slide 11. I’d like to emphasize our excellence in value proposition within the energy delivery industry. The economy is transitioning to a cleaner, more resilient energy model. The significant federal legislation passed this year, including the IIJA and the IRA, provides momentum and support to our jurisdictions, which have been leading the way for years. Exelon offers unparalleled exposure to these opportunities. We serve more electric and gas customers than any utility in the country, including in some of the largest cities. We have earned the trust of our customers and commissions by reliably providing top-notch operational performance. We are dedicated to our commitment to a clean energy pathway and environmental advocacy, supported by a strong governance model. As a result, there is tremendous demand and support for the investments we expect to make in our communities, totaling $29 billion from 2022 to 2025. We are focused on our 8.1% rate base growth and the projected 6% to 8% growth through 2025. We offer a very strong proposition – we have established a strong proposition that will continue for years to come. With our balance sheet and matching dividend commitments, our 3.5% dividend yield combined with the 6% to 8% annual growth offers a low-risk total return proposition of 9.5% to 11.5%. That brings me to my retirement announcement. As noted in the release yesterday, I will retire at the end of the year. As I mentioned earlier, Calvin will assume the role of CEO and join the Exelon Board. We made this decision recently as I need treatment for significant spine and hip issues that require me to focus on my health. Because of these issues, I won’t be able to join you. Calvin, Jeanne, and other senior team members look forward to seeing you. Being part of building this industry-leading company over the last 24 years has been an honor. Regardless of the economy, commodity prices, or regulatory output for our asset mix, Exelon has always focused on running its operations safely and at top levels to serve our customers. We have built an amazing platform over the decades. I want to thank all of our talented employees for getting us to where we are today and recognize the diverse experience and innovative approaches that will get us to where we need to go in the future. While I will miss being part of the team as the energy industry transforms, I have complete trust in Calvin and his leadership team to rise to the challenges Exelon faces. As always, thank you for your time and support, and we will now take questions.

Operator, Operator

Thank you. Our first question will come from Ross Fowler of UBS. Your line is open.

Ross Fowler, Analyst

Good morning, Chris. Good morning, Jeanne. Chris, best wishes as you deal with the spine issue. I sincerely hope everything works out okay. So just on Slide 9, let’s maybe go back to Jeanne to think about what this is communicating. If I look at the 210, which is the midpoint of 2021 guidance, that should be my base year for thinking about the 6% to 8% range. You’re saying in 2023, you’re below that. So, if I’m thinking about this correctly, I take the 225 midpoint of 2022, and that’s suggesting, given that 7% growth from 2021, you may be growing around 4%, if I’m thinking about the math correctly off 2022 into 2023. But then if I think about what you’re saying for 2024 and 2025, you will swing back around 7% and above 8%. Would I be correct in interpreting that?

Jeanne Jones, CFO

Yes, you’re thinking about it correctly. I’ll just reiterate that the year-over-year growth is represented for shareholders. The way you walked through it is right. We’ve tried not to provide specific numbers for every year but to narrow the outcomes based on the building blocks below the compound annual growth rate line. The combination of growth over those years puts us squarely in the 6% to 8% commitment from 2021 through 2025.

Ross Fowler, Analyst

Okay, great. Perfect. And then maybe on the $200 million cash tax impact you mentioned, that’s unmitigated. Is mitigation here really about the treasury rules? What’s the timing of possibly getting a first preliminary look at those rules? Would that be in Q1 since every corporation has to make an estimated tax payment in April? If you mitigate that impact, does that change the equity need at all? Or is that need pretty firm regardless of the scenario?

Jeanne Jones, CFO

Yes, your three questions are correct. When we think about mitigation, it involves working with EEI and the industry on the regulation. That would meaningfully mitigate if the regulations are written to allow for certain deductions we’ve previously had. I would also add that, internally, we will identify what we can do to mitigate costs. The 60 to 70 basis points on the slide represents the unmitigated impact. As for your second question, if regulations mitigate it, we don’t anticipate doing more than the $1 billion we announced. We’ve already done the $575 million, and the remaining $425 million will be executed between 2023 and 2025. Regarding the timing of regulations, it would be beneficial to have them by the first quarter, obviously, when we make our first payment.

Ross Fowler, Analyst

Okay, great. Thank you. I’ll jump back in the queue.

Operator, Operator

Thank you. One moment for our next question. Our next question will come from Paul Zimbardo of Bank of America.

Unidentified Analyst, Analyst

Good morning. It’s actually Julien here. Thanks for the time. Chris, my best wishes here. If I may, just with regard to these quick lines, does your statement about being squarely in the range equate to effectively at the midpoint of the 6% to 8%? Is that a fair way to interpret your specific language?

Jeanne Jones, CFO

Yes, we are committed to being solidly within the range. We haven’t specified our exact position but we affirm our commitment to the 6% to 8% range for 2021 through 2025, based on the prior year’s normalization.

Unidentified Analyst, Analyst

Okay, fair enough. Sorry if I didn’t word that correctly. Related second follow-up, if I may, on the balance sheet. I know you talked about uncertainties, but if I’m hearing you correctly, the risk of having to make a payment is uncertain, yet you’re confident in the current cumulative $1 billion of capital outlay on equity being maintained regardless of scenarios. There’s no indication it could be less than $1 billion, nor greater, is that correct?

Jeanne Jones, CFO

Yes, you’re thinking about it correctly. We’re affirming that we don’t need more than the $1 billion that we mentioned after analyzing the unmitigated impact. We can absorb that on the balance sheet while staying well above our downgrade threshold without needing additional equity, and maintain within our range over the planning horizon.

Unidentified Analyst, Analyst

Got it. All right. Thank you for the clarification.

Jeanne Jones, CFO

Thanks, Julien.

Operator, Operator

Thank you. One moment for our next question. Our next question will come from Steve Fleishman of Wolfe Research. Your line is open.

Steve Fleishman, Analyst

Hi, good morning. Chris, I also want to give you my best wishes and hope your health improves. I recognize we’re seeing this through another stock now with CEG, but the turnaround in nuclear you helped facilitate is quite remarkable. So congrats on that. Regarding the non-linear growth, I recall at the beginning you indicated the growth would not be linear and might not remain in range each year. Now that you’ve provided this additional info, is the trajectory consistent with what you indicated from the beginning, mostly reflecting the PECO rate cycle? Or have there been significant changes?

Jeanne Jones, CFO

The trajectory is consistent with our prior guidance. There have been some fluctuations, but the fundamental aspect is consistent with what was shared at Analyst Day that we’re investing $29 billion, driving 8.1% rate fees growth, ultimately delivering earnings growth. The rate case timing leads to variability. We are hopeful that this visual representation will provide clarity on how rate cases impact different years.

Steve Fleishman, Analyst

Okay. Regarding the expected numbers from Slide 9, some people look at those year numbers and add them, even though they’re estimates, projecting to the lower half of the 25 range. Would that method not provide an accurate picture of future growth? What’s your take?

Jeanne Jones, CFO

Yes, I’d advise against interpreting it that way. The combination of growth over the years is meant to highlight that we firmly align within the range due to the investments tied to the $29 billion. We aim to reaffirm our commitment to staying within the 6% to 8% range.

Steve Fleishman, Analyst

Back to the alternative minimum tax, one large focus with treasury is the repairs tax. If you address this within the regulations, would that mitigate most of the $200 million impact?

Jeanne Jones, CFO

Yes, it would substantially mitigate it.

Chris Crane, CEO

One important aspect, Steve, relates to the IRS's timeline. They operate on a unique schedule. Our team is collaborating closely with the industry to emphasize the necessity for swifter action. However, there are no guarantees about when we’ll have a resolution.

Steve Fleishman, Analyst

Thank you very much.

Jeanne Jones, CFO

Thanks, Steve.

Operator, Operator

Thank you. One moment for our next question. Our next question will come from David Arcaro, Morgan Stanley. Your line is open.

David Arcaro, Analyst

Good morning. Thanks for taking my questions, and Chris, best wishes from my end too. As we look at the upcoming ComEd multi-year plan filing in January, how confident are you in managing that jurisdiction within a four-year framework going forward? Do you anticipate the parameters will be manageable?

Gil Quiniones, CEO of ComEd

We have established a constructive relationship with stakeholders and other parties in our jurisdiction. Our plans will align directly with the goals of the Climate Equitable Jobs Act, as well as the energy, environmental, and economic policies of this state. We will reveal the details in our next earnings call.

David Arcaro, Analyst

Thank you. Regarding the PECO electric earnings dynamics, are there potential long-term opportunities to smooth out the EPS contributions, whether through shifting expenses or cost-saving strategies?

Calvin Butler, President and COO

Good morning. We’re always exploring ways to operate our business more efficiently while managing costs, as it’s our responsibility to deliver value to customers. Recall that PECO is our highest-earning utility, and the regulatory environment in Pennsylvania supports this relationship. Overall, yes, we will continue analyzing costs at both the operational and corporate levels.

Operator, Operator

Thank you. One moment for our next question. Our next question will come from Jeremy Tonet, JPMorgan. Your line is open.

Jeremy Tonet, Analyst

Good morning. I want to revisit the 2023 to 2025 growth drivers. Can you provide guidance on minimizing headwinds for 2023 and whether there’s an embedded expectation on the 30-year treasury rate?

Jeanne Jones, CFO

Certainly. Our focus remains on effective cost management, and we continue to do so. Additionally, we are monitoring interest rate volatility closely. In terms of long-term financing, we utilize tools like hedging to dollar-cost average into long-term rates before short-term debt issuance. We have interest rate caps protecting against upward trends while retaining benefits should rates fall.

Jeremy Tonet, Analyst

That’s helpful. If I could ask just one more question—if you applied the new Illinois performance metrics historically to ComEd, how would it have performed and what’s the outlook as you view the opportunity ahead?

Jeanne Jones, CFO

The categories here are somewhat consistent but distinct enough that it prohibits accurate backcasting. Under the formula rate, we faced downside risks with only penalties. Moving forward, the new path allows us the opportunity for improvement. ComEd has been performing at its best historically, which excites us about future performance. The multi-year plan’s upfront investment alignment has been effective.

Gil Quiniones, CEO of ComEd

Additionally, the performance metrics were developed collaboratively with stakeholders. This transparency approach, as ComEd files its multiyear rate plan, adds value as it ensures our investments meet the reliability, resilience, and strategic clean energy goals set out by the state.

Jeremy Tonet, Analyst

Understood. Thank you, I’ll leave it there.

Jeanne Jones, CFO

Thanks, Jeremy.

Calvin Butler, President and COO

Thank you.

Operator, Operator

Thank you. One moment for our next question. Our last question will come from Michael Lapides of Goldman Sachs. Your line is open.

Michael Lapides, Analyst

Thank you very much, and Chris, wishing you the best for your health. From a cost perspective, when you benchmark across areas, which do you think falls short of first-quartile performance? Where do you see the greatest opportunity set to enhance efficiency in the near to medium term?

Jeanne Jones, CFO

We examine this across all areas and identify opportunities everywhere. We aim to minimize costs while ensuring safety and reliability. Where we can is visible in our affordability metrics since O&M is a prominent lever for affordability. Our electric and gas rates are below national averages.

Calvin Butler, President and COO

In 2022, following the split, many talented individuals transitioned to Constellation. Nonetheless, we maintained operational performance metrics, keeping O&M flat or below inflation. Our corporate center has also stepped up. One of our commitments since the split is that we would maintain our corporate services despite significant transitions.

Michael Lapides, Analyst

Thank you for those insights.

Chris Crane, CEO

Thank you for joining the call today. We look forward to seeing many of you at EEI later this month. With that, I’ll conclude the discussion. Thank you.

Operator, Operator

Thank you. This concludes today’s conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.