U.S. Markets closed

Edited Transcript of EXC earnings conference call or presentation 2-May-19 2:00pm GMT

Q1 2019 Exelon Corp Earnings Call

CHICAGO May 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Exelon Corp earnings conference call or presentation Thursday, May 2, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Christopher Mark Crane

Exelon Corporation - President, CEO & Director

* Daniel L. Eggers

Exelon Corporation - SVP of Corporate Finance

* Joseph Nigro

Exelon Corporation - Senior EVP & CFO

* Kathleen L. Barron

Exelon Corporation - SVP of Governmental & Regulatory Affairs & Public Policy

================================================================================

Conference Call Participants

================================================================================

* Gregory Harmon Gordon

Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research

* Jonathan P. Arnold

Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst

* Julien Patrick Dumoulin-Smith

BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research

* Stephen Calder Byrd

Morgan Stanley, Research Division - MD and Head of North American Research for the Power & Utilities and Clean Energy

* Steven Isaac Fleishman

Wolfe Research, LLC - MD & Senior Utilities Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning. My name is Lindsay, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2019 Q1 Exelon earnings call. (Operator Instructions) Dan Eggers, Senior Vice President, Corporate Finance, you may begin your conference.

--------------------------------------------------------------------------------

Daniel L. Eggers, Exelon Corporation - SVP of Corporate Finance [2]

--------------------------------------------------------------------------------

Thank you, Lindsay. Good morning, everyone, and thank you for joining our first quarter 2019 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 this morning, along with the presentation, both of which can be found on 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 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.

I'll now turn the call over to Chris Crane, Exelon's CEO.

--------------------------------------------------------------------------------

Christopher Mark Crane, Exelon Corporation - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Dan, and good morning, everyone, and thank you for joining us today. During the quarter, we achieved success on several key fronts and reached a couple of milestones. First, the U.S. Supreme Court declined to hear the ZEC cases clearing the last legal challenge at the federal level for the Illinois and New York programs. The decision affirms that the states have the right to protect their citizens by favoring clean energy and it is a win for the consumers, policymakers and regulators.

Second, we received credit upgrades from both S&P and Fitch. These upgrades recognize the successful execution on our utility-driven growth strategy and reduction in business risk while maintaining strong financial metrics. Third, we reached settlements in New Jersey on the ACE rate case and the infrastructure investment program. These outcomes reflect the continued positive evolution of our partnership with regulators built on improvement in reliability and customer satisfaction.

Finally, turning to Slide 5, in March, we celebrated the 7th anniversary of the Constellation merger and the 3rd anniversary of the PHI merger. Each merger has positively contributed to our strategy of increasing our regulated business mix and providing more stable earnings. Before these mergers, Exelon earned a mix of 28% utilities, 72% generation. In 2021, we project that mix will have flopped with nearly 70% earnings coming from the utilities.

Both through the Constellation merger, we grew our regulated earnings with the addition of BGE and also benefited from the combination of Exelon and Constellation's competitive business, creating an industry leader integrated business that supports efficiently hedging of our plants while capturing incremental margins and cash flows.

The PHI merger further advanced our strategy to become more regulated while creating value for customers in communities we serve. We are meeting or exceeding all of our reliability merger commitments in customer -- across the PHI service territory and are experiencing record reliability.

The frequency and duration of outages have improved at each utility, customers are out of power less frequency -- with less frequency and are restored to service much faster when out of power. In 2018, Delmarva customers had the lowest frequency of outages. At Pepco, customers saw the fastest restoration time. And customer satisfaction is at an all-time high at ACE, Delmarva and Pepco.

We're also delivering on our promise to be a true partner with the communities we serve. The PHI utilities have contributed more than $470 million in total economic impact since the merger closed. In 2018 alone, these utilities spent $313 million with minority and women-owned suppliers, which is between 22% and 29% of each utility's total procurement spend.

Each utility has made investments in workforce development programs, including partnering with the District of Colombia to create the DC Infrastructure Academy. We are also an important community partner for hundreds of organizations in the PHI service territory, contributing more than $15 million in financial support and volunteering approximately 85,000 hours since the merger was approved.

Because of the improved service and the enhanced partnership with our communities, we are building trust in our jurisdictions and are seeing a more positive regulatory environment develop. Since the merger, we have reached constructions up -- constructive settlements in each of the PHI jurisdictions, including Pepco, Maryland and DC and we've had our first settlement since 1980s.

Exelon has delivered on the promises we've made to our customers and the communities and the shareholders when we merged with PHI in 2016.

Turning to our financial results on Slide 6. We had a strong quarter. On a GAAP basis, we earned $0.93 per share versus $0.60 per share last year. On a non-GAAP operating basis, we earned $0.87 per share versus $0.96 per share last year.

Joe will cover the drivers in his remarks. Turning to Slide 7, at the utilities we continue to execute at top quartile levels across key customer satisfaction and operating metrics. The investments we are making are resulting in improved reliability, which is strengthening up the relationship with our customers and the regulators. We remain focused on helping our customers and communities to become more energy-efficient, saving energy and money. We have been doing this for years, and I'm happy to say once again the EPA named all 5 of our eligible companies BGE, ComEd, Delmarva, PECO and Pepco as 2018 ENERGY STAR Partners of the Year.

Generation performed well during the quarter. Nuclear produced 39.2 terawatts hours of 0 emission electricity with a capacity factor of 97.1%. The best quarter performance in more than 10 years during the polar vortex, when the temperatures were significantly below 0, our fleet brand at full power keeping families in our markets safe and warm. Exelon power and gas and Hydro dispatch match of 97.8% and wind and solar capture of 96.5%, exceeding plan.

Moving on to Slide 8. Since the beginning of the year, there has been a number of important developments. The U.S. Supreme Court upheld the clean as of the -- the clean energy programs. Illinois is looking to advance its clean energy goals. Pennsylvania is considering adding nuclear to its alternative energy standard. New Jersey awarded 0 emission credits. PJM has made a scarcity filing in March with the request approval date by mid-December and FERC act on -- passed our energy pricing reforms. These actions recognize the importance of preserving the existing resources of carbon-free energy.

Addressing -- in addressing the underlying deficiencies in the market. In Illinois, legislation was introduced that would require the Illinois Power Authority to procure clean capacity for ComEd customers using the fixed resource requirement mechanism that is currently in the PJM tariff. In addition to supporting a course of truly clean energy future, in Illinois the legislation would also ensure that consumers pay less than they do today.

The concept of the FRR has a wide support and has been endorsed by the Illinois hub -- the Clean Jobs Coalition and organized labor. Another piece of legislation has been introduced into Illinois to extend the formula rate -- ComEd's formula rate provides tangible benefits to the consumers as well as certainty we need to make investments and improve reliability and resiliency in customer service while keeping the bills affordable. In the 9 years that ComEd has filed a formula rate we have asked for rate decreases 4 times.

It's a busy legislative season as Governor Pritzker and the General Assembly tackle Illinois' significant budget problems. However, we are optimistic these 2 priorities can get done this year. In Pennsylvania, a bipartisan group in the House and the Senate introduced legislation that would treat nuclear equal to other non-admitted resources by adding it to the ultimate energy portfolio standard.

Several hearings have been held in the House and Senate on the bill, but it's not clear the action will be taken in time to reverse our decision to retire TMI. We also achieved 2 important milestones for our existing ZEC programs in April. First, as mentioned, the U.S. Supreme Court declined to hear the challenges, the New York and the Illinois ZEC programs consistent with the resounding decision we received from the district and the circuit courts.

Second, the New Jersey BPU awarded ZECs to all 3 New Jersey -- units in New Jersey allowing them to continue to provide 0 carbon energy to the state. We are pleased to see the states moving forward with thoughtful energy policy that preserves the rights to chart a clean energy future.

Finally, turning to FERC and PJM. We are pleased FERC acted on Fast Start reforms that expand the price setting eligibility for block-loaded resources. FERC has requested that PJM submit a compliance filing by July 31 and we expect the reforms to be implemented shortly after that.

In addition, PJM filed a 206 petition to improve the pricing of reserves, which we have previously referred to as scarcity or ORDC reforms. These reforms, along with baseload price formation are essential to preserve an effective competitive market in PJM, and we're happy to see the programs being made to address these clear needs.

Turning to Slide 9. Much of the policy work we've engaged in, including preserving 0 carbon generation, we have viewed as necessary to bridge a comprehensive carbon policy. In the past time, not just for the government, but for every business, most particularly energy business, along with their customers and stakeholders to take action on reducing carbon emissions. For several decades, Exelon has been positioning itself for a carbon constrained world and acting as a leader, advocating for carbon policy at the state and federal level.

We have built the cleanest power generation company in the country. We have divested or retired all of our coal generation and invested in renewables and increasing our output of our nuclear footprint. As a result, Exelon has produced more clean energy than any other company in the United States by a factor of 2 and out of 9 -- every 9 clean megawatts in the U.S. comes from an Exelon plant.

We've avoided 67.8 million metric tons of greenhouse gas, the equivalent of making or -- taking 14.5 million cars off the road through 2 previous carbon reduction goals. And we are on track to meet the most recent goal of 15% additional reduction of emissions from internal operations.

We are the leading voice in supporting policies and regulations that require reduced emissions and encourage technology changes. And across our businesses, we are working to enable clean energy solutions for our customers and communities.

In 2018 alone, our energy efficiency programs saved customers 21.9 million-megawatt hours of electricity, avoiding 9.9 million metric tons of greenhouse gas emission. We're investing in electric transportation and charging infrastructure at both utilities and Constellation.

Exelon is also involved in grid scale energy storage development to enable faster and greater reliability for the use of renewables. One example of this is through our efforts to launch the Volta Energy, which works with the national labs and research universities to commercialize new technologies.

There world is changing in terms of awareness of the scope of climate change and the need for new potential solutions. Our customers are cities and our communities as well as our employees are demanding clean power so that is what we intend to provide. We still have a long way to go but the engagements that we are seeing at the state level affirms our view that these policies will be part of our country's future.

With that, now I'll turn it over with Joe to continue the call.

--------------------------------------------------------------------------------

Joseph Nigro, Exelon Corporation - Senior EVP & CFO [4]

--------------------------------------------------------------------------------

Thank you, Chris and good morning, everyone. Today, I'll cover our first quarter result and quarterly financial updates, including trailing 12-month ROEs at the utilities and our hedge disclosures. Starting with Slide #10, we had a strong quarter financially. We earned $0.93 per share on a GAAP basis and $0.87 per share on a non-GAAP basis, which is at the upper end of our guidance range of $0.80 to $0.90 per share.

Our performance in the quarter was consistent with our expectations, including a positive $0.01 of net benefit around timing and expenses. Exelon utilities delivered a combined $0.56 per share net of holding company expenses. Utility earnings were modestly well within our plan due to O&M timing at ComEd and PECO, which will reverse itself over the course of the year.

Exelon Generation earned $0.30 per share, outperforming plan. This was a result of some realized gains in our nuclear decommissioning trust fund and favorable timing of OEM. We are reaffirming our full year guidance of $3 to $3.30 per share. For the second quarter, we are providing adjusted operating earnings guidance from $0.55 to $0.65 per share.

On Slide 11, we show our quarter-over-quarter walk. The $0.87 per share in the first quarter of this year was $0.09 per share lower than the first quarter of 2018. Exelon Utilities less holdco earnings were up $0.10 per share compared with last year. This earnings growth is driven primarily by higher rate base, new rates associated with completed rate increases and lower storing costs at PECO and BGE relative to the first quarter of 2018.

Generation earnings were down $0.19 per share compared with last year. The biggest driver was the absence of $0.10 per share of ZEC catch-up payments from 2017 due to the timing of the final Illinois ZEC approvals. Generation was also impacted by lower realized power prices.

Moving on to Slide 12. As Chris mentioned, we celebrated the third anniversary of the merger with PHI in March. We have seen tremendous improvement in PHI's operational performance, customer satisfaction and relationships with our communities and regulators, which is leading to more constructive outcomes.

Given our progress on the commitment of our 9% to 10% ROEs across our utilities and the quarterly variability at the individual PHI utilities depending on rate case timing, we are now consolidating the PHI utilities' trailing 12 months ROEs. We have also changed the format of the slide to show the relative size of the aggregate PHI utility when compared to legacy Exelon utility and the consolidated Exelon Utilities.

In total, the PHI utilities represent approximately 26% of our total rate base of $41.2 billion. On a consolidated basis, the PHI utilities earned a 9.3% ROE for the trailing 12 months. This is a 90-basis-point improvement over consolidated 8.4% from the fourth quarter of 2018. The improvement is due to 2018 distribution rate case settlements at both Delmarva and Pepco, favorable transmission revenue from the higher peak load and true-ups, a roll-off of higher storing costs and favorable O&M timing at Delmarva and Pepco, which will reverse over the course of the year.

At the legacy Exelon utilities, our earned ROEs are modestly better, largely driven by the roll-off of the March 2018 winter storm costs as well as new rates associated with completed rate cases at PECO and BGE. Including PHI, the combined Exelon Utilities have a 10.2% earned ROE, which is above our 9% to 10% earned ROE target and 50 basis points higher than last quarter. We remain focused on meeting our utility earnings growth targets by maintaining the earned ROEs at PHI and sustaining strong performance at our other utilities.

Turning to Slide 13, since the last call, the New Jersey Board of Public Utilities approved Atlantic City Electric's settlement agreement, which provides for a $70 million revenue increase. The new rates went into effect on April 1. In addition, the BPU approved recovery of $96 million of capital over a 4-year period through the infrastructure investment program to improve reliability.

On April 8, ComEd filed its annual distribution formula rate update with the Illinois Commerce Commission, seeking a $6.4 million decrease to base rate, representing the fourth requested rate reduction under the formula rate design. We expect to receive an order in the fourth quarter.

Pepco Maryland filed its latest rate case in January, requesting a $30 million revenue increase, which has been updated to $27.2 million with the test year update to actuals. The request is based on the continued infrastructure investments to enhance reliability and customer service. We expect to receive an order in the third quarter of this year.

More details on the rate cases can be found on Slides 21 through 24 in the appendix. Turning to Slide 14. During the first quarter, we invested $1.2 billion of capital across the utility and are on track to meet our $5.3 billion commitment for 2019. These investments will improve the reliability and resiliency of the grid to the benefit of our customers.

This quarter I would like to highlight 2 projects: the first is the modernization of Pepco's Harrison substation in Washington, D.C. This $190 million project will renovate aging infrastructure to more reliably serve important loads, including 2 metro stations. It also expands regional transmission capacity, supporting future load growth.

The other project is the second phase of BGE's large gas line replacement program in Baltimore that will be recovered through Stride Capital recovery methods. The second phase includes $732 million of investment and will replace approximately 240 miles of gas lines by the end of 2023.

Replacing these lines will improve the safety and reliability of the distribution system. During the first phase of the program, BGE replaced 208 miles of gas lines. Since the program started in 2014, STRIDE has created 600 full time jobs in BGE service territories.

On Slide 15, we provide our gross margin update and current hedging strategy with the Generation company. As a reminder, our disclosure previously reflected the planned retirement of PMI and include New Jersey's ZEC revenues. Since last quarter total gross margin was flat in every year.

In 2019, open gross margin decreased $150 million, primarily due to lower prices at West Hub, New York's Zone A and NiHub.

During the quarter, we executed $150 million in our new business. In 2020 and '21, respectively, open gross margin is up $50 million relative to our prior disclosure, primarily on the back of higher power prices at NiHub and New York's Zone A which was partially offset by lower ERCOT's spark spread.

Mark-to-market of hedges were down $50 million due to our hedge position offsetting the increase in gross margin and we executed $50 million of power new business in both years. Our Generation to load matching strategy continues to yield positive results. We ended the quarter 8% to 11% behind ratable in 2020 and 1% to 4% behind ratable in 2021 when considering cross commodity hedges.

Our open position is primarily concentrated in the Midwest and Texas. Given the strength of our balance sheet, we are comfortable with our strategy to hold open market length.

Moving on to Slide 16. We remain committed to maintaining a strong balance sheet and our investment-grade credit ratings. As Chris mentioned, [our working have] rewarded in credit upgrade at S&P and Fitch in the first quarter. S&P upgraded Exelon's issuer credit rating from -- to BBB+ from BBB. In addition, all subsidiaries we're raised 1 notch. According to S&P, the rating upgrades reflect the successful execution of our business strategy, which has reduced business risk while maintaining strong financial metrics.

Fitch also upgraded Exelon to BBB+ based on similar reasons. Looking at ExGen, we are well ahead of our debt-to-EBITDA target of 3x. For 2019, we expect to be at 2.4x debt-to-EBITDA and 1.9x debt-to-EBITDA on a recourse basis.

With that, I will now turn the call back to Chris for his closing remarks.

--------------------------------------------------------------------------------

Christopher Mark Crane, Exelon Corporation - President, CEO & Director [5]

--------------------------------------------------------------------------------

Thanks, Joe. Turning to Slide 17, we remain committed to our strategy and are pleased that our consistent execution is being recognized by the rating agencies and others. I'll close on Exelon's value proposition. We continue to grow our utilities, targeting 7.8% rate based growth and between a 6% to 8% earnings growth through 2022.

We continue to use free cash from the Genco to fund incremental equity needs at the utilities, pay down debt and fund part of our growing dividend. We will continue to optimize the value of our ExGen business by seeking fair compensation for our zero-emitting Generation fleet, selling assets where it makes sense to accelerate debt reduction plans and maximizing value through the generation to load matching strategy at Constellation.

We will sustain strong investment-grade credit metrics and grow our dividend annually at 5% through 2020. The strategy underpinning this value proposition is effective and providing tangible benefits to our stakeholders. We remain committed to optimizing the value of our business and earning your ongoing support for Exelon.

Operator, we can now turn it over for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from the line of Greg Gordon with Evercore ISI.

--------------------------------------------------------------------------------

Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [2]

--------------------------------------------------------------------------------

Two questions. First, can you just give us a little more detail on the status of the bills that relate to energy policy in Illinois? What processes are moving them to vote and -- I think you've intimated that given the pressures on the legislature, with regard to other Illinois issues that there might be a chance that this slips from the regular session to the veto session. So could you just talk through all those issues, please?

--------------------------------------------------------------------------------

Christopher Mark Crane, Exelon Corporation - President, CEO & Director [3]

--------------------------------------------------------------------------------

Sure. And as you pointed out, there is a lot of activity in the session right now as the Governor prioritizes all of his issues. A lot of it is focused on the budget and revenue sources. Those bills are moving and being debated as we discussed. He also has a priority on achieving a 0 carbon generation fleet by the 2020 -- 30 time frame -- 2030 time frame. So there are numerous energy related bills to get to that point. Our bill for the FRR, there's one that's a path to 100, and then there is one that's the clean jobs coalition. So we're in the process right now of negotiating with all the bills so we can come together and provide the legislature with a coalition that agrees on many things right now. Just working through the details. We hope to be done. Meetings are constant. I've met with the leadership of both the House and Senate, talking about what we need to do and them showing their support for us going forward. So we're just going to keep working on it as we always do. If it's not done in the regular session because of the other priorities, we will have it positioned to move through during the veto session. That's the Generation bill.

The other bill in Illinois that will affect Exelon is the extension of the ComEd formula rate for 10 years. That bill is proceeding. We've been able to work with stakeholders to gain support and recognition. As I mentioned, out of the 9 past filings that we made with the formula rate, we've had 4 rate reductions. So it's very balanced for the consumer. It's very balanced for our investment strategy, and we are able to do so in a predictable way to serve our customers. So that's Illinois. Pennsylvania -- yes.

--------------------------------------------------------------------------------

Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [4]

--------------------------------------------------------------------------------

Sorry, you might as well cover Pennsylvania too. I interrupted, I apologize.

--------------------------------------------------------------------------------

Christopher Mark Crane, Exelon Corporation - President, CEO & Director [5]

--------------------------------------------------------------------------------

I figured that was coming so I was going to do it anyway. So Pennsylvania, as you know, we've been working with the other nuclear operators there to create an alliance to continue and allow those assets to compete in with the other non emitting assets. The bill has -- continues to garner support and we'll continue to work through that. As we've told folks, we need clarity on this by the end of May or we're going to have to make the final steps and shut down. We won't be able to adequately procure -- design, procure, manufacture fuel for continued operations without that certainty and would not want to make that investment without that. So we'll continue working on it. As you can see, the Governor has shown recognition that he wants to have a low carbon future for the state and all recognize that, that cannot be done with the current technology without including the existing nuclear assets. So we'll work on that one and combine with the Illinois effort.

--------------------------------------------------------------------------------

Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [6]

--------------------------------------------------------------------------------

One other real quick one for Joe. Just looking at Slide 19, it looks like the free cash flow profile mainly at the utility portfolio is lower than you projected, lower now for the year that you projected at year-end by $300 million or so. What's the cause of that? And because you didn't -- doesn't look like you've changed your overall guidance for the long-term cash flow profile of the company.

--------------------------------------------------------------------------------

Joseph Nigro, Exelon Corporation - Senior EVP & CFO [7]

--------------------------------------------------------------------------------

Yes, Greg, you're correct. The variance versus our Q4 disclosures is $300 million lower. It's being driven by increased working capital at the utilities and we're funding that with commercial paper. I think it's important to note, though, from a Genco perspective on a cash flow profile basis, we're still -- we're in line with the forecast that we've provided you on the fourth quarter call. I mean, I think that's an important element.

--------------------------------------------------------------------------------

Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [8]

--------------------------------------------------------------------------------

Okay. Is that working capital increase sort of a permanent structural issue? Or is that related to things like storms or other things that might slip in future years?

--------------------------------------------------------------------------------

Joseph Nigro, Exelon Corporation - Senior EVP & CFO [9]

--------------------------------------------------------------------------------

Yes, it's the latter. It's more just the ongoing business itself, and we had some favorable weather at points in the quarter and we took advantage of that from a work basis perspective.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Our next question comes from the line of Julien Dumoulin-Smith of Bank of America.

--------------------------------------------------------------------------------

Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [11]

--------------------------------------------------------------------------------

So just to follow up a little bit on Greg's question. Can you elaborate a little bit on the scenarios around capacity auction participation, versus the -- particularly if it happens in August? And I'm thinking that given your commentary in the prepared remarks around the timing of Illinois legislation, that it'd be difficult to implement any full FRR or anything else coming out of this Illinois legislation in time for the next upcoming capacity auctions. I suppose there's a litany of scenarios. How do you think about them particularly if FERC does indeed act around something else, say, a partial FRR, for instance?

--------------------------------------------------------------------------------

Christopher Mark Crane, Exelon Corporation - President, CEO & Director [12]

--------------------------------------------------------------------------------

So we put our input into FERC that we believe it's very inefficient to execute an auction when -- with the previous FERC ruling -- that for PJM to execute an auction in the August time frame with the previous FERC ruling, we actually need to get guidance from FERC on what the constructs should be. So we think it should be an April time frame but FERC feels -- but PJM feels like they're compelled to run forward, and hopefully, we'll hear something from FERC to clarify PJM's letter requesting clarification.

The most likely scenario for an FRR in Illinois would be the 23 auction time frame from everything we're looking at. We need to get the legislation passed, we need to have the IPA, who we've been working with, the Illinois Power Authority, to be able to build a construct to be able to run it. That estimate is aggressive on our side by about 8 months. Our folks have been in communications with the IPA to see how reasonable that is. And so we'll continue to work down that path. But to run an auction that's going to be potentially rejected without clarification does not seem like the most efficient use of all of our resources at this time.

--------------------------------------------------------------------------------

Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [13]

--------------------------------------------------------------------------------

Maybe even if it is delayed into 2020 and that is for the 22 auction, how do you think about the choices before you?

--------------------------------------------------------------------------------

Christopher Mark Crane, Exelon Corporation - President, CEO & Director [14]

--------------------------------------------------------------------------------

Kathleen, you want to cover it more?

--------------------------------------------------------------------------------

Kathleen L. Barron, Exelon Corporation - SVP of Governmental & Regulatory Affairs & Public Policy [15]

--------------------------------------------------------------------------------

Sure. Julien, it's Kathleen. As Chris said, we do know that the FRR Bill, once enacted, will take a period of time to implement. The IPA has to write the rules, the ICC has to approve them and the IPA has to conduct a procurement. And so if the auction is not delayed, there clearly is not enough time for that to occur before the auction if it happens in August. If it happens next April and the bill is enacted this spring, there would be enough time for it to be implemented by, let's say, the auction is delayed to next April. And then the big wildcard is what if the -- we don't know what FERC is going to do and we don't know when the -- exactly when the coalition that Chris mentioned, together with the other clean energy package -- packages will come together in Springfield. So we can't really speculate on what would happen because we have a couple of variables that are just unknown at this time.

--------------------------------------------------------------------------------

Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [16]

--------------------------------------------------------------------------------

All right. Fair enough. And then just to follow up on the business risk improvement and the credits out of the equation. Can you comment a little bit more about where you see that going over time in terms of added latitude from (inaudible) perspective and just where you would like to see the credit rating over time? Just perhaps following on some of the recent improvements?

--------------------------------------------------------------------------------

Joseph Nigro, Exelon Corporation - Senior EVP & CFO [17]

--------------------------------------------------------------------------------

Yes, Julien, we're -- first of all, we're happy with the upgrades by both S&P and Fitch, and we continue to work to stabilize the earnings and the cash flows of the company. We talked about how we're transitioning the earnings and the cash being driven from the much more regulated outcome and we're really focused on that and we'll continue to manage accordingly and continue to take -- work closely with the rating agencies.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Our next question comes from the line of Steve Fleishman with Wolfe Research.

--------------------------------------------------------------------------------

Steven Isaac Fleishman, Wolfe Research, LLC - MD & Senior Utilities Analyst [19]

--------------------------------------------------------------------------------

So just I guess on Pennsylvania, if -- obviously, something needs to get done there by the end of May to save 3 Mile Island but if it doesn't get done by then, does that -- I mean could something come back later on for the other plants? Or is it -- how should we just think about that?

--------------------------------------------------------------------------------

Christopher Mark Crane, Exelon Corporation - President, CEO & Director [20]

--------------------------------------------------------------------------------

We don't plan on stopping and the coalition doesn't plan on stopping if the TMI deadline has passed. There are other critical assets in the state that need to be recognized for the governor's low carbon future. And so we'll continue to work as hard as we are right now, after the end of May, for the other reactors in the state. So you've got 8 other reactors that are very critical that are highly reliable, but their environmental benefits cannot be replaced with technologies available today without a significant cost. So we'll continue to work on it and we believe that we'll end up successful at the end.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Our next question comes from the line of Stephen Byrd with Morgan Stanley.

--------------------------------------------------------------------------------

Stephen Calder Byrd, Morgan Stanley, Research Division - MD and Head of North American Research for the Power & Utilities and Clean Energy [22]

--------------------------------------------------------------------------------

I wanted to just drill into the Illinois Clean Energy Progress Act a little further. I'm thinking through the procurement process, and I've read through the legislation but I'm trying to understand the procurement process in terms of the clean bundles capacity. Is it possible to talk a little bit more about the generation that would be eligible? The mix of energy that would be procured? I'm thinking about 0 carbon versus renewables just to make sure I understand the nature of the clean bundled capacity that's going to be procured under this legislation if it passes?

--------------------------------------------------------------------------------

Christopher Mark Crane, Exelon Corporation - President, CEO & Director [23]

--------------------------------------------------------------------------------

Kathleen, you want to go through that?

--------------------------------------------------------------------------------

Kathleen L. Barron, Exelon Corporation - SVP of Governmental & Regulatory Affairs & Public Policy [24]

--------------------------------------------------------------------------------

Yes, thank you, Stephen. The way that we have envisioned this is that the state would be able to conduct a clean energy procurement, as you said, and that any 0 carbon resources would be allowed to complete to provide that capacity. And as you note, the bill is not specific about the exact timetable or there -- or other details that we believe are important, including how prices will be overseen by the IPA. And the reason for that is that the reason the future energy JOBS Act was so successful is it brought together a number of parties together towards a common future and what's exciting about this is that this FRR concept is integral to all the other clean energy bills that are being considered right now because everyone appreciates that it is that exact authority, letting the IPA conduct a clean energy capacity procurement and then having the ability to set its course towards a 0 carbon future will give it more flexibility than it has under current market rules where every asset gets the same capacity payment whether it's emitting or non emitting.

So we have left some room to have that discussion among other stakeholders to make sure that we have the right group who are supporting it and as Chris said at the top of the call, between the clean jobs coalition, including this in their bill, the consumer advocacy, the tremendous benefit associated with this, we think that's the winning combination.

--------------------------------------------------------------------------------

Stephen Calder Byrd, Morgan Stanley, Research Division - MD and Head of North American Research for the Power & Utilities and Clean Energy [25]

--------------------------------------------------------------------------------

That's extremely helpful. Just as a follow-up there, in terms of the state's overall energy mix in terms of clean energy versus fossil, I know there's an objective to move towards clean energy over time. What would that energy mix broadly look like over time? How should we think about that evolution in the state?

--------------------------------------------------------------------------------

Christopher Mark Crane, Exelon Corporation - President, CEO & Director [26]

--------------------------------------------------------------------------------

So you're starting off right now with 60% of the generation statewide being 0 carbon emitting. 90% of that statewide is nuclear. The concept that Kathleen talked about is we would -- in the ComEd zone, currently we can account for 100% carbon-free, but we would have a transition period where you would have the carbon-free assets bidding in at a greater percentage each year or being taken as a greater percentage each year as you build into 2030 when the procurement would become 100% carbon free. And those details, the finite details there will have to be worked out, but that's the concept.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

Our next question comes from the line of Jonathan Arnold with Deutsche Bank.

--------------------------------------------------------------------------------

Jonathan P. Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [28]

--------------------------------------------------------------------------------

Could I just -- just coming back to Illinois and the discussion about timing. If I understand you correctly, the ability to implement the FRR for the next auction should the next auction happen in April, that would only be the case if it passes in the Spring, am I right about that?

--------------------------------------------------------------------------------

Christopher Mark Crane, Exelon Corporation - President, CEO & Director [29]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Jonathan P. Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [30]

--------------------------------------------------------------------------------

Okay. And so to that, I mean, Chris, what exactly are you saying about the Spring session? Are you -- you said you were optimistic in your prepared remarks about this year, and I just wasn't clear in the previous answer if you -- if you're saying you think we're more likely in the veto session or do you think you're still kind of in play for the spring depending on how things go?

--------------------------------------------------------------------------------

Christopher Mark Crane, Exelon Corporation - President, CEO & Director [31]

--------------------------------------------------------------------------------

We're working with the coalitions as hard as we can to have something presentable to the -- that the legislature supports to move in the Spring. But what I've cautioned in our roadshows and on the calls previously, there is a very aggressive legislative agenda in Illinois this Spring. They're talking about graduated tax legislation that is needed to pass for constitutional amendment in the 2020 election. The work on legalization of recreation marijuana, the work on the gambling and the sporting issues to continue to increase revenue. Those are the top 3 priorities. We come after that. We need to be ready to be able to tell our story, communicate and have that coalition that we're building, endorsing where we're heading. But we need to be realistic. We do think if it doesn't happen in the Spring, we'll be ready to move it in the veto session in the fall.

--------------------------------------------------------------------------------

Jonathan P. Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [32]

--------------------------------------------------------------------------------

Okay. Great. So you're not saying it's impossible, you're just making us aware of the priorities and then fall back on the Fall.

--------------------------------------------------------------------------------

Christopher Mark Crane, Exelon Corporation - President, CEO & Director [33]

--------------------------------------------------------------------------------

Right.

--------------------------------------------------------------------------------

Jonathan P. Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [34]

--------------------------------------------------------------------------------

Okay. And then just one other thing I wanted to ask on the Slide 10, you call out the NDT realized gains as one of the driver in ExGen versus guidance. But it doesn't show up as a -- as a factor in the waterfall. So could you -- any chance you guys could quantify that piece and sort of explain the discrepancy there?

--------------------------------------------------------------------------------

Joseph Nigro, Exelon Corporation - Senior EVP & CFO [35]

--------------------------------------------------------------------------------

Yes. In the waterfall, you're looking at a year-over-year change in the NDT gains and each of the years was roughly the same. So there would be no delta on the waterfall.

--------------------------------------------------------------------------------

Jonathan P. Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [36]

--------------------------------------------------------------------------------

Okay. Got it. Roughly how much, Joe? Are you willing to share?

--------------------------------------------------------------------------------

Joseph Nigro, Exelon Corporation - Senior EVP & CFO [37]

--------------------------------------------------------------------------------

$0.02 a share.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

That is all the time we have for questions today. I will now turn the call over to Chris Crane, President and CEO of Exelon, for closing comments.

--------------------------------------------------------------------------------

Christopher Mark Crane, Exelon Corporation - President, CEO & Director [39]

--------------------------------------------------------------------------------

Thank you all for participating in the call today. I think we're off to a very good start for the year. And so with that, we'll close the call out and thanks again.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

This concludes today's conference call. You may now disconnect.