Q4 2023 Earnings Summary
- Strategic shift towards transmission investments: Exelon is reallocating capital from distribution to transmission projects, adding $3.2 billion to their four-year outlook, which is expected to drive 7.5% rate base growth to $74 billion and long-term earnings growth. This includes new transmission opportunities to support data center growth and grid modernization. ,
- Commitment to earnings growth guidance: Exelon remains confident in delivering at the midpoint or better of their 5% to 7% annualized operating earnings growth guidance through 2027, despite regulatory challenges in Illinois, demonstrating strong financial outlook and management resilience. ,
- Strong balance sheet and financial flexibility: Exelon maintains credit metrics comfortably above agency thresholds, with plans to fund capital investments prudently, including only modest equity issuances, and expects to maintain a 100 basis points cushion above downgrade thresholds, ensuring financial strength and supporting shareholder value. ,
- Regulatory setbacks in Illinois leading to reduced earnings growth: Exelon faced a disappointing rate order from the Illinois Commerce Commission, which adopted a significantly below average ROE, rejected ComEd's grid plan, and failed to recognize the financial cost of ComEd's investments. This has caused Exelon to lower its annualized operating earnings growth target from 6%-8% to 5%-7% through 2027.
- Reduction in capital expenditures in key market: Due to regulatory challenges, Exelon has dramatically reduced approximately $1.25 billion in planned distribution investment in Illinois, impacting growth prospects in that market.
- Financial impact and uncertainty in Illinois operations: The negative regulatory outcome has not only reduced expected year-over-year earnings growth but also introduced volatility and uncertainty into Exelon's financial projections, particularly concerning ComEd's future earnings.
-
Illinois Regulatory Challenges
Q: How are you addressing the recent Illinois regulatory order and its impact on growth?
A: Exelon acknowledged disappointment with the Illinois Commerce Commission (ICC) order and is actively engaging with stakeholders to align with the commission's objectives. They emphasized their commitment to providing safe and reliable electricity in Illinois and maintaining a strong financial position. The company is building a plan to meet the ICC's requirements and believes their goals align with those of the commission. They are prepared to make adjustments as needed to sustain their 5% to 7% earnings growth, considering multiple outcomes.
-
CapEx Shift to Transmission
Q: What's driving the changes in your CapEx plan, especially the shift from distribution to transmission?
A: The CapEx plan reflects a $3 billion increase, but the 2026 rate base appears lower due to pulling back on distribution investments and replacing them with transmission projects. The shift is because transmission investments, such as the projects related to RTEP Window and "Brand insurers," will close beyond the planning period (2028-2030), and thus, their rate base impact is realized later. Other transmission projects will close within the period but are back-end loaded, affecting rate base differently than distribution investments.
-
Maintaining Balance Sheet Health
Q: How are you managing your balance sheet relative to agency requirements amid these changes?
A: Exelon aims to maintain a 100 basis points cushion above the minimum thresholds set by rating agencies. Despite the impact of the ComEd order, they mitigated effects through reductions in distribution spend, O&M reductions, and pension contributions. They are funding new capital with about 40% equity, helping preserve financial metrics. The company expects the balance sheet to strengthen over the planning period, particularly as transmission projects begin contributing cash flows.
-
Potential for Illinois Regulatory Settlement
Q: Is there a chance to settle regulatory issues in Illinois to improve outcomes?
A: While a settlement on the rate case is considered unlikely, Exelon is actively engaging with stakeholders, including staff and intervenors, to address gaps identified by the ICC in the final order. They are working closely to align their grid plan with the commission's expectations, addressing specific concerns to achieve alignment where possible. Communication with the commissioners themselves is limited due to the pending proceedings, but they remain focused on aligning policy and practice under the Climate and Equitable Jobs Act.
-
Earnings Growth Commitment
Q: Are you confident in meeting your earnings growth targets amid these challenges?
A: Exelon is committed to delivering at the midpoint or better of their 5% to 7% earnings growth target. They have demonstrated the ability to overcome headwinds, as shown by exceeding their 2023 midpoint guidance with earnings of $2.38 per share. The company continues to plan prudently, incorporating potential scenarios and maintaining flexibility to adjust investments and costs to achieve their financial goals.
-
Mitigating Downside Risks in Illinois
Q: What levers can you pull to offset potential downside risks in Illinois?
A: Exelon includes prudence in every plan to address uncertainties. If necessary, they are prepared to further reduce distribution capital expenditures, explore financing savings, and identify additional O&M levers. They are also pursuing other opportunities, such as transmission projects related to the interconnection of offshore wind in their jurisdictions, which could provide additional growth avenues. Their diverse operations across multiple jurisdictions allow them to leverage the power of their platform to mitigate risks in any single area.