Exelon Corporation (NASDAQ:EXC) Q2 2023 Earnings Call Transcript

Exelon Corporation (NASDAQ:EXC) Q2 2023 Earnings Call Transcript August 2, 2023

Exelon Corporation beats earnings expectations. Reported EPS is $0.44, expectations were $0.4.

Operator: Hello and welcome to Exelon’s Second Quarter Earnings Call. My name is Gigi and I’ll be your event specialist today. [Operator Instructions] It is now my pleasure to turn today’s program over to Andy Plenge, Vice President of Investor Relations. The floor is yours.

Andy Plenge: Thank you, Gigi and good morning everyone. We are pleased to have you with us for our 2023 second quarter earnings call. Leading the call today are Calvin Butler, Exelon’s President and Chief Executive Officer and Jeanne Jones, Exelon’s Chief Financial Officer. Other members of Exelon senior management team are also with us today and they will be available to answer your questions following our prepared remarks. Today’s presentation, along with our earnings release and other financial information can be found in the Investor Relations section of Exelon’s website. We would also like to remind you that today’s presentation and the associated earnings release materials contain forward-looking statements, which are subject to risks and uncertainties.

You can find the cautionary statements on these risks on Slide 2 of today’s presentation or in our SEC filings. In addition, today’s presentation includes references to adjusted operating earnings and other non-GAAP measures. Reconciliations between these measures and the nearest equivalent GAAP measures can be found in the appendix of our presentation and in our earnings release. It’s now my pleasure to turn the call over to Calvin Butler, Exelon’s President and CEO.

Calvin Butler: Thank you, Andy. Good morning, everyone and thank you for joining us for our second quarter earnings call. We continue delivering on our plan as expected, which is a testament of all of the work put in by our dedicated employees. But before we get into our results and business updates, I’d like to first start by acknowledging a key milestone. In July, ComEd reached the end of the 3-year term of the deferred prosecution agreement with the Department of Justice. At the court status hearing, the government moved to dismiss the charge, noting the company fully complied with the DPA, which the court granted in the hearing. We remain committed at all levels of the company to the highest standards of integrity and ethical behavior and we look forward to building on the trust of our customers as we continue to move forward.

In that spirit, I am pleased to welcome Anna Richo to our Board of Directors. Anna is the General Counsel, Chief Compliance Officer and Corporate Secretary for Cargill and she brings highly complementary experience as an attorney and business leader. Her commitment to operational excellence and compliance will provide invaluable oversight. Now turning to the results for the quarter. As you can see on Slide 4, we earned $0.34 per share on a GAAP basis and $0.41 per share on a non-GAAP basis. These results are right in line with what we expected this quarter, and we remain on track to earn within our guidance range of $2.30 to $2.42 per share for 2023. We continue performing operationally at a very high level. Three of our four utilities had best on-record performance in outage frequency and outage duration, which I will touch on more on our next slide.

We have also continued to progress through our rate case calendar with 6 active base rate cases underway in Illinois, Maryland, Delaware, New Jersey and the District of Columbia. Most recently, on May 16, we filed our second multiyear plan for Pepco Maryland, the climate ready pathway plan. The filing outlines Pepco’s near-term proposal to advance the state’s climate and clean energy goals while taking steps to mitigate the impact of these efforts on customers’ bills. The proposal includes over $150 million of climate solution programs to help Maryland meet its goals in the areas of transportation electrification, building decarbonization, beneficial electrification and distributed energy integration. It also includes a proposed performance incentive mechanism to focus on reliability, greenhouse gas emission reductions and removal of equipment posing health and environmental risk.

We look forward to working through the process with stakeholders and the commission staff toward rates effective in the second quarter of 2024. Beyond Pepco Maryland, we have now received intervenor testimony in our BGE and ComEd multiyear rate plans and filed our rebuttals, and additional milestones await us in those cases in August, along with activity for Delmarva Delaware and Atlantic City Electric. The Public Service Commission of the District of Columbia has also set its schedule for the Pepco D.C. multiyear plan. You will hear more from Jeanne about all the work underway to align with our regulatory stakeholders. Now looking past 2023, we’ll also remind you of the guidance we’ve previously provided on our long-term outlook. We expect to be at the midpoint or better of our 2021 to 2025 and 2022 to 2026 6% to 8% annualized earnings growth ranges and to grow the dividend in line with those earnings.

Over the next 4 years, we anticipate investing over $31 billion to support the energy transformation, which is what’s driving that growth. And I’ll remind you that we continue finding opportunities to further support the transformation, whether it’s increasing affordability for customers or strengthening the durability of our long-term investment plans. For instance, we have talked about our efforts pursuing grants under the Infrastructure Investment and Jobs Act, which support the investment programs we have laid out for the commissions. And we recently announced winning approximately $30 million of grant funding for middle mile broadband investments at BGE and ComEd. Additionally, you may have also seen that PJM recently voted to proceed with transmission upgrades to address reliability challenges associated with the retirement of the brand insurers coal plant in Eastern Maryland with over $850 million of work assigned to our utilities.

Now, while most of the incremental spend for that investment occurs beyond our current guidance window, it’s a great illustration of how we continue to have opportunities to strengthen and lengthen our expected rate base growth as the largest pure T&D utility in the United States. Our transmission upgrades ensure customers are able to buy cleaner generation and that they can depend on a reliable, resilient grid to deliver that power. Before I move on to operations, I want to mention that we published our latest Exelon Sustainability Report in mid-July. This is the 12th report in our company’s history. We are incredibly proud of the work our organization puts into ensuring we are leading the energy transformation in an affordable and equitable manner.

Our purpose, powering a cleaner and brighter future for our customers and communities, really shines through that report. And the progress we continue to make in fulfilling that purpose is meaningful. Here are a few examples. We have connected over 200,000 customers with over 3 gigawatts of renewable energy resources, a 16% increase over 2021. We saved close to 25 million megawatt hours in 2022 with our award-winning energy efficiency programs, a 9% increase that avoided 9.5 million metric tons of greenhouse gases and saved customers over $30 million at our average retail rate. Our support for diverse suppliers is now up more than 56% from 2018 levels, having spent $2.9 billion with such suppliers in 2022. Additionally, 62% of our $7.5 billion total supplier spend is with companies in the communities we serve.

Our annual sustainability report illustrates all the ways in which our more than 19,000 employees ensure our communities greatly benefit from the work we are doing to support their energy transformation goals. Turning to Slide 5. I’ll provide an update on our operating performance for the first half of the year. As it pertains to reliability, we continue setting the bar for performance. All 4 utilities operated in at least the top quartile, and ComEd, PECO and PHI achieved best on record outage frequency performance. That makes it the second quarter in a row for ComEd and PHI for best on record performance. Those 3 utilities also happen to achieve best on record system outage duration performance, and BGE continues to operate in the top quartile.

Their performance illustrates that the investments we are making in the grid provide the footing for this operational excellence. And then it is up to our employees to rise to the challenge of keeping customers online or getting them back online as quickly as possible when outages do occur. Now that job is getting harder to do with storms growing more frequent and severe. But it’s increasingly important to do as society depends more and more on electricity. Nationally, we expect to see 50% annual growth in electric cars and 12% annual growth in data centers. And ComEd particularly, is already seeing sizable opportunity in data centers. The data center growth will only strengthen as industries increasingly rely on cloud services and AI. As the nation’s largest T&D company, we must rise to the challenge of meeting these incremental demands on the grid.

This operational performance was matched on the gas side, with all 3 utilities continuing to perform at top decile levels for gas odor response. Our customer satisfaction scores remain in line with those reported in our first quarter call. Our utilities are performing in the second quartile versus the 2021 benchmark when costs across the board were lower, pandemic relief had not yet rolled off and customers had not yet been impacted by the escalating interest rates and commodity prices. We are working every day to ensure customers are aware of the options they have to manage their costs, and we have seen increased engagement by our customers through these efforts. In fact, ComEd announced just 2 weeks ago that it won several recognitions in the 20th Annual Best Practices awards by Chartwell.

These annual Chartwell awards recognize excellence among electric and gas utilities with respect to customer-oriented projects, programs and service initiatives. One of these awards included recognition for ComEd’s community energy assistance ambassador program. This program originally launched in 2020 in response to the economic impact of the pandemic. It was designed with a community-based organization to increase education and access to financial assistance options that can help income eligible customers pay their electric bills while creating local employment opportunities for the same vulnerable population. But it is a constant reminder of the importance of focusing on value for our customers as well as affordability, and we are continuously seeking to reduce our own operating costs in addition to pursuing the customer-focused initiatives we have discussed.

I will conclude by discussing our safety performance, where we lost ground at 3 of our 4 utilities. Ensuring our employees and contractors operate in a safe environment is of paramount importance. Lower performance this quarter largely resulted from low-impact OSHA recordables like slips and falls and minor vehicle-related incidents. As a result, each of our operating companies have action plans underway to address areas of needed improvement to ensuring that we are operating at our standards. This includes revisiting our safety plans for the year to ensure they are adequately addressing the issues we have observed year-to-date. Other examples include facility reviews to enhance safety and expanding our simulation-based training to offer more opportunities for employees.

We are working hard to drive safety performance to the levels that we expect. I will now turn it over to Jeanne to discuss our financial performance and provide additional color on our regulatory activity in the second quarter. Jeanne?

Jeanne Jones: Thank you, Calvin, and good morning, everyone. Today, I will cover our second quarter financial update along with the outlook for the second half of 2023, our progress on the 23 rate case schedule, and I’ll also highlight an ongoing project that exemplifies our commitment to delivering sustainable value as the premier T&D energy company by modernizing critical infrastructure in the Philadelphia area. Starting on Slide 6, we show our quarter-over-quarter adjusted operating earnings. As Calvin mentioned, Exelon earned $0.41 per share in the second quarter of 2023 versus $0.44 in the second quarter of 2022, reflecting lower results of $0.03 per share over the same period. Results of $0.41 in the second quarter were right in line with the expectations provided in the prior earnings call.

Earnings are lower in the second quarter relative to the same period last year, driven primarily by $0.04 of higher interest expense due to the rise in interest rates and higher levels of debt at the holding company and at some of our utilities as well as $0.03 of unfavorable weather at PECO. This was partially offset by $0.03 of higher distribution and transmission rates associated with incremental investments net of depreciation as well as a $0.01 of carrying costs related to the carbon mitigation credit balance at ComEd. Despite another quarter of mild weather impacting our non-decoupled jurisdictions, we delivered earnings results exactly where we said. Through the first half of 2023, operating earnings are $1.11 per share, reflecting 47% of the projected full year earnings.

This is in line with how we performed through the first half of 2022. Looking ahead to next quarter, we expect a relative EPS contribution in the third quarter to be approximately 28% of the midpoint of our projected 2023 operating earnings guidance range. Recall that Q3 2022 saw strong growth from $0.04 of higher rates and effect with PECO’s electric rate case in year one of its current rate cycle as well as $0.03 of realized 30-year treasury rate uplift on ComEd’s formula rate distribution ROE and another $0.03 of distribution formula rate timing at ComEd. While the fundamentals underpinning the earnings remaining this year, we expect third quarter ‘23 results to be lower. Net distribution and transmission growth will be offset by higher interest and we also expect some timing of O&M and taxes.

For the fourth quarter of ‘23, we expect year-over-year earnings growth to benefit from the absence of proactive derisking that occurred in the fourth quarter of ‘22, the expected reversal of the O&M and tax timing and the anticipated onetime impact of BGE’s reconciliation for the ‘21 and ‘22 under recovery of its first multiyear plan. As we do not receive the final order on the reconciliation for BGE until December of ‘23, we cannot record BGE’s earnings associated with the reconciliation until that time. In line with discussion on the first quarter earnings call, we expect the $0.07 of unfavorable weather experienced year-to-date to be offset with the combination of O&M levers across the platform, favorable depreciation at PECO and the full year earnings impact of the carrying costs associated with the CMC regulatory asset balance.

On a full year basis, we continue to reaffirm our 2023 EPS guidance range of $2.30 to $2.42 per share. Through a continued increase in rate base as we deploy capital for the benefit of our customers and strong cost control across the platform, we remain on track to deliver earnings at the midpoint or better of our guidance range. With several months of weather and storm exposure remaining, you can expect we will manage utility work plans to deliver earnings within expectations. Lastly, we are reaffirming the fully regulated operating EPS compounded annual growth target of 68% from 2021’s and 2022 guidance midpoint through 2025 and 2026, respectively, with the expectation to be at the midpoint or better of that growth range. Turning to Slide 7.

As Calvin mentioned, there have been some important developments on the regulatory front. Since the last earnings call, there was one new rate case filed, so I’ll provide a status update on each of the six current open proceedings, starting with the most recent filing. On May 16, Pepco Maryland submitted its climate ready pathway, a 3-year multiyear plan application to the Maryland Public Service Commission. Pepco is requesting a $213.6 million revenue increase over the April 2024 and to December 2027 period, inclusive of a proposed 9-month extension reflecting an ROE of 10.5%. The filing outlines investments the company expects to make to support a climate-ready grid and enable cleaner energy programs and technologies that support Maryland’s goal to reach net zero emissions by 2045.

As an example of the $150 million of climate solution programs that Calvin mentioned are included in Pepco’s proposed plan, more than half are dedicated to incentive for approximately 10,000 equipment electrification conversions for customers transitioning to cleaner technologies like heat pumps in the building sector. Another key category of spend is dedicated to enhancing reliability, resiliency and grid security through the installation of more modernized equipment that automatically detect system issues, reinforces the grid against more severe weather and protects the grid from potential physical or cyber threats. Overall, these investments are anticipated to inject more than $1.42 billion into the local economy and support more than 11,000 full-time jobs.

For the last 3 years, spanning 2020 to 2022, Pepco has reported the best reliability performance of any electric distribution utility in the state of Maryland, a true testament to the company’s commitment of powering a cleaner and brighter future for its customers and communities. Equally as important as reliability, Pepco is focused on keeping affordability front and center for our customers. The multiyear plan includes the acceleration of tax benefits to serve as a bill offset as well as efforts to increase participation in energy assistance and energy efficiency programs, which in 2022 alone provided approximately $23 million to Pepco Maryland customers. An order is expected by June of 2024. Let me also remind you of the other electric distribution rate cases in progress.

First, Delmarva Power Delaware has revised a revenue request for a $41.8 million increase based on an updated test period in the electric rate case and, as permitted by Delaware law, implemented full proposed rates on July 15 subject to refund. A decision is expected in the second quarter of 2024. Similarly, ACE revised their revenue request for a $93.6 million increase based on an updated test period, with the final order expected in the first quarter of ‘24. Additionally, after an 8-month receiving, the New Jersey Board of Public Utilities approved a 4-year capital tracker at ACE called Powering the Future, which accelerates the portfolio of projects totaling $93 million designed to enhance reliability and resiliency for customers, advance New Jersey’s energy master plan goals and sustained economic growth in the region.

Next, ComEd and BGE surpassed two key milestones in their multiyear plan rate cases, having received intervener testimony and filed their rebutals to support the key elements of the company’s initial proposals earlier this year. As discussed on prior earnings calls, both plans outline the investments needed to provide essential service to customers while meeting the clean energy and equity goals of their respective states. In both the ComEd and BGE multiyear plan rate cases, evidentiary hearings are scheduled to begin in late August with briefs to follow before final orders are expected in December. Lastly, Pepco received a procedural schedule from the Public Service Commission of the District of Columbia in its second multiyear rate plan filing.

Upcoming milestones include intervenor testimony expected to be filed by the DC Public Service Commission staff on October 16 and evidentiary hearing set to begin in January of 2024 with final briefs in March of 24. Relationships across our jurisdictions remain constructive, and we are working together with our regulators, states and communities through every step of the process to reach our shared goals. As Calvin mentioned, by next year, we expect our resolution on all four of the ongoing multiyear rate plans in Illinois, Maryland and D.C. and a clear path forward to supporting clean energy and climate goals in an affordable and equitable manner. More details on the rate cases can be found on Slides 20 through 26 of the appendix. Moving to Slide 8.

During the second quarter, we continued to invest capital for the benefit of our customers and are on track to meet our $7.2 billion guidance for 2023. These investments in energy infrastructure are vital to maintaining the high standard of service that we have in serving our customers while preparing the grid for the clean energy transformation and increasing levels of electrification. Today, I’ll talk about how PECO is partnering with the community to build a new 69-13kV substation in Philadelphia at the Civic Terminal Yard and neighboring property. PECO’s commitment to building for the new civic substation began in 2019. This $130 million project includes installation of insulated switchgear and modifications to 4 69-kV and transmission lines into civic substations that will allow for the retirement of 2 69-kV transmission lines currently running under the [indiscernible].

The new substation is expected to increase distribution and transmission reliability through the reconfiguration of the lines and increased flood resiliency in the low-lying areas surrounding the substations, where access has been restricted in the past following heavy thunderstorms. It will also enable PECO to relieve low constraints, supply additional capacity to the University City area and better serve critical customers on the west side of the river. Once it’s fully energized, which is expected by the second quarter of ‘24, the Civic substation will be PECO’s newest and most modern insulated substation. While traditional open-air substation construction would have required 5 to 7 acres of land, the upgraded electrical that meant associated with the insulated substation allows PECO to build on less than a 2-acre plot of land.

That represents a 60% to 70% reduction in required land use. Since project inception, PECO has partnered with its customers, government agencies and other local utilities to ensure construction of the Civic substation has a minimal impact to the city of Philadelphia, the surrounding customers and on the environment, protecting the nearby waterway and riverbank. With vital customers in the area such as the Children’s Hospital of Philadelphia, the University of Pennsylvania Hospital and the Philadelphia Veteran Affairs Medical Center, operational excellence is imperative. As an Exelon utility, PECO is ready to deliver it. Turning to Slide 9. I will conclude with a review of our balance sheet activity. As a reminder, we continue to project 100 to 200 basis points of cushion on average over our guidance period for our consolidated corporate credit metrics above S&P and Moody’s downgrade thresholds of 12%, demonstrating our commitment to maintaining a strong balance sheet.

If the corporate alternative minimum tax is not mitigated through an inclusion of repairs in its calculation, we anticipate being at 100 basis points or the lower end of that range. We continue to await specific guidance on the corporate alternative minimum tax implementation and are hopeful to have resolution by year-end. In the meantime, the Department of Treasury issued a notice granting deferral of estimated tax payments associated with the corporate alternative minimum tax until 2024, which points to the appreciation that more guidance is required for implementation. From a financing perspective, we successfully raised nearly $1.3 billion for BGE and PECO in the second quarter, which completes all of our planned debt financing needs for 2023.

The strong investor demand we continue to see for our debt offerings is supported by the strength of our balance sheet and by the low-risk attributes of our platform. In line with the last earnings call, there has been no change in our guidance to issue $425 million of equity at the holding company by ‘25. We will continue to update you as we make progress on the plan. Thank you. And I’ll now turn the call back to Calvin for his closing remarks.

Calvin Butler: Thank you, Jeanne. I will once again remind the investment community of what we’re working to accomplish in 2023. We take great pride in our operational excellence, which our employees dedicate themselves to daily. Summer is when we see some of the most severe weather activity, and our teams embrace the challenge to get customers back online quickly and safely. As we proceed with our work of supporting the energy transformation in our ongoing rate cases, we are very focused on listening to our stakeholders. We want to ensure that we are delivering the right investment plans and the right services to support meeting their energy transformation and climate goals in an affordable and equitable manner. After this year, much of our path forward for the next several years will be established and clear.

The team also understands it must deliver on our financial priorities and guidance. Efficiently investing $7.2 billion of capital and earning ROEs in the 9% to 10% range will support meeting our 2023 earnings guidance range of $2.30 to $2.42 per share and keeping our balance sheet strong. And finally, we’re continuing to look for innovative ways to support our customers and communities end-to-end throughout our business. In partnership with the Exelon Foundation, we are looking to place our next round of investments in the $20 million climate change investment initiative fund or 2c2i, an innovative way to advance solutions to the challenges brought by climate change, while improving the quality of life for residents of our cities. For this year, five companies were selected to receive investments, spanning areas like software analytics to track air quality, non-recyclable plastic reuse and novel EV charging solutions.

Every day, we’re reminded that the energy transformation is happening, and we have to be a vital role in it. And we have a talented team that’s incredibly excited to play that role. We recently announced that Colette Honorable will be joining us as our Executive Vice President of Public Policy and Chief External Affairs Officer, as a renowned energy policy leader who brings expertise in areas like clean energy transformation and equable ratemaking, she will be an invaluable addition to our team. And she’ll help us build on the strong foundation we already have in place, built by the team that got us here. In particular, I want to recognize Executive Vice President and Chief Operating Officer of our business services company, Bridget Reidy who is retiring in September and played an integral role in shaping our organizational commitment to excellence.

She also made incredible strides in diversity, equity and inclusion across the wide variety of corporate support groups that she led like IT and supply. Thank you, Bridget, for your leadership. Our team’s commitment to leading the energy transformation is what makes us the premier transmission and distribution utility, one that lives by its values, supports its communities and offers a uniquely strong expected total shareholder return of 9% to 11%. Thank you, as always, for your interest. I’ll now turn it to Gigi for your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of David Arcaro from Morgan Stanley.

David Arcaro: Hey, good morning. Thanks so much for taking my questions.

Calvin Butler: David, good morning.

David Arcaro: Let’s see, wondering if you could speak to the comment and BGE rate cases and how these have progressed so far relative to your expectations? Just when you look at the key intervener testimony that we’ve gotten so far, like staff in both cases, how have these shaped up overall in terms of the focus areas versus what you had expected?

Calvin Butler: Yes, David, thank you. This is Calvin. I would tell you that they are proceeding as planned. And the teams have provided their responses, and as Jeanne mentioned, we’re going through the process. But we have with us both Gil Quiniones, President and CEO of ComEd; and Carim Khouzami, President and CEO of BGE, who can – I will ask them to just kind of take your time and walk you through some of the highlights of each and what you can expect moving forward. I’ll start with Gil of ComEd.

Gil Quiniones: Yes. This is Gil from ComEd. The ICC staff and interveners in the aggregate did not waver from their initial positions filed in their direct testimony in May. They maintained their position in ROE and the pension asset. Their challenges on capital center on certain IT projects, our fiber and proposed private LTE communications network upgrades and systematic and programmatic spending. The rate case process still playing out, as Calvin mentioned, and we will continue to make our case for those capital investments. We continue to have regular meetings with staff and interveners to provide additional information, answer any of their questions and provide clarification.

Calvin Butler: Carim?

Carim Khouzami: Good morning. This is Carim Khouzami from BGE. As Calvin mentioned, the case is proceeding as expected. The staff has come in with a proposal of about 70% of our ask. As expected, some of the areas of debate surround ROE investments in our gas system and some building electrification programs that BG proposed for the first time to help the state meet its climate change goals. One of the things to point out, as you know, reconciliations of the first time it is being done in Maryland in a multiyear plan. Both staff and OPC and other intervening parties suggested about 90% of our requests. So again, that is proceeding well. So all in all, going well. As Calvin and Jeanne mentioned, we have more hearings at the end of August, early September with the final order expected in mid-December.

Calvin Butler: And David, I would just add to that, both plans were built on helping the states meet their environmental and climate goals as well as economic development and job creation opportunities. So the stakeholder process, I don’t want to underrepresent because both companies have been very engaged in that process and meeting with all stakeholders. So again, proceeding, it’s a process that will play itself out. But we expect orders for both companies by the end of the year.

David Arcaro: That’s really helpful color. Thanks for all that. And appreciating that there are new commissioners in both states, do you see an opportunity for settling on any issues, partial settlement, full settlement? Or is the expectation and strategy just kind of see this through kind of a fully litigated case more likely?

Calvin Butler: No, great question, David. We expect to see them both fully through and recognizing that, as Carim mentioned, first time for the reconciliation process in Maryland. And it’s the next 3 years, we will see it through and let it play out. And for Gil, moving from the formula rate to a 4-year multiyear plan, it’s important that everyone feels that they have had a chance to voice their opinions and that stakeholder process is critical to that. So we do see it playing out all the way to the end of the year.

David Arcaro: Got it. Okay, great. Thanks very much.

Calvin Butler: Thank you.

Operator: Thank you. [Operator Instructions] Our next question comes from the line of James Kennedy from Guggenheim Partners.

Calvin Butler: Good morning, James.

James Kennedy: Hi, guys. Good morning. How it going?

Calvin Butler: Good.