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Xcel Energy (XEL) Benjamin G. S. Fowke on Q1 2016 Results – Earnings Call Transcript

Xcel Energy, Inc. (NYSE: XEL ) Q1 2016 Earnings Call May 09, 2016 10:00 am ET Executives Paul A. Johnson – Vice President-Investor Relations Benjamin G. S. Fowke – Chairman, President & Chief Executive Officer Robert C. Frenzel – Chief Financial Office & Executive Vice President Analysts Ali Agha – SunTrust Robinson Humphrey, Inc. Julien Dumoulin-Smith – UBS Securities LLC Travis Miller – Morningstar, Inc. (Research) Operator Good day, everyone, and welcome to the Xcel Energy First Quarter 2016 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the conference over to Paul Johnson, Vice President of Investor Relations. Please go ahead, sir. Paul A. Johnson – Vice President-Investor Relations Good morning, and welcome to Xcel Energy’s 2016 first quarter earnings release conference call. Joining me today are Ben Fowke, Chairman, President and Chief Executive Officer; and Bob Frenzel, Executive Vice President and Chief Financial Officer. In addition, we have other members of the management team in the room to answer your questions. This morning, we will review our 2016 first quarter results and update you on recent business and regulatory developments. You may have noticed that our earnings call is a bit later than normal this quarter. We just implemented a new general ledger system, so we built a little extra time into the schedule. We’re pleased to report that everything went very well with the implementation. Today’s press release refers to both ongoing and GAAP earnings. 2015 first quarter ongoing earnings were $0.46 per share, which excludes a charge of $0.16 per share following the decision by the Minnesota Commission in the Monticello nuclear prudence review. GAAP earnings for the first quarter of 2015 were $0.30 per share. As a reminder, some of the comments during today’s conference call may contain forward-looking information. Significant factors that could cause results to differ from those anticipated are described in our earnings release and our filings with the SEC. I’ll now turn the call over to Ben. Benjamin G. S. Fowke – Chairman, President & Chief Executive Officer Well, thank you, Paul, and good morning. Bob will go into more detail later, but in summary, we reported ongoing earnings of $0.47 per share for the quarter, compared to $0.46 per share last year. Overall, it was a solid quarter in which declining O&M expenses offset unfavorable weather and lower than expected sales. While electric sales in the first quarter were below expectations, we expect sales to improve in the second half of the year, and we remain very confident in our ability to deliver earnings within our guidance range. As a result, we are reaffirming our 2016 ongoing earnings guidance of $2.12 to $2.27 per share. As we’ve previously discussed, we are executing on our upside capital investment plan. Later this month, we’ll make a filing with the Colorado Commission to add 600 megawatts of wind generation and associated transmission. This represents a rate base investment of just over $1 billion. In April, the Commission confirmed our interpretation of a Colorado law that allows utilities to own 25% to 50% of incremental renewables without going through a competitive bid process, if the project is developed at a reasonable cost compared to similar renewable sources available in the market. The levelized cost of this wind project including transmission is projected to be below any other existing wind PPAs in the PSCo portfolio. We therefore believe we’ll be able to demonstrate to the Commission and the independent evaluator that this project meets and exceeds the reasonable cost standard and represents tremendous value to our customers. We plan to request a Commission decision by November so that we can capture the full production tax credit benefit for our customers. This capital investment is currently reflected in our upside capital forecast (3:23). If the Commission approves this project, we will move it to our base capital forecast, which will result in rate base growth of 4.5%, a great example of organic and disciplined growth that provides value to shareholders, customers and the economy in our service territory. You should expect us to continue to find investment opportunities of this nature that will drive us to our upside capital goals. Next, I’d like to spend a few minutes recognizing the outstanding efforts of our employees in responding to a major snowstorm in Colorado. In March, Denver and Northern Colorado were hit with a blizzard with 12 to 18 inches of snow and wind gusts over 60 miles per hour that caused approximately 350,000 outages. As a result of proactive planning prior to the storm and the work of over 950 employees and contract crews, we were able to restore service to 90% of our customers within 12 hours, 98% of our customers within 36 hours, and 100% of our customers within 60 hours. This was another example of our world-class storm restoration, and I want to thank all of our employees for their dedication and tremendous efforts to provide excellent customer service and reliability to our customers. Turning to other accomplishments, we recently received several awards that are worth mentioning. In March, the EPA and others recognized Xcel Energy with a 2016 Climate Leadership Award for Excellence in Greenhouse Gas Management. The award acknowledges our commitment and progress in reducing CO2 commissions (sic) emissions. Military Times ranked Xcel Energy as one of the Top Employers of Veterans in 2016. Finally, in April, AWEA named Xcel Energy the number one wind provider of energy for the 12th consecutive year. Finally, we recently announced the hiring of Bob Frenzel as our new Executive Vice President and CFO. Bob brings more than 17 years of experience in energy, banking and consulting in addition to six years of experience as an officer in the U.S. Navy. He most recently served as Senior Vice President and CFO for Luminant. Bob brings a wealth of experience that complements our strategies and our business. He understands our industry and has a proven track record of driving excellent performance and solid growth. Some of the key attributes that Bob brings to the table include strong financial and commercial acumen, excellent strategic vision and execution, an engineering and nuclear background, and an outstanding experience managing cost. He will be a valuable addition to the Xcel Energy team. I think it’s important to recognize that our strategic plans and priorities are not changing. We will continue to focus on organically growing our regulated operations and maintaining the disciplined financial approach you’ve come to expect from us. I also want to recognize the outstanding service and contributions of Teresa Madden, who is retiring after a career spanning 36 years. Teresa played a major role in building our track record of delivering on our value proposition and she leaves a solid platform for continued strong results. We’re very grateful for her many contributions and we wish her much happiness in her retirement. So I’ll now turn the call over to Bob to provide more detail on our financial results and outlook in addition to our regulatory update. Bob? Robert C. Frenzel – Chief Financial Office & Executive Vice President Thanks, Ben, for that introduction. I’m very excited to join Xcel and I’m honored to follow in Teresa’s footsteps. I commit to continuing Xcel’s long tradition of delivering on our financial objectives and growing earnings in a low risk, transparent and predictable manner. Now, let’s get to the details of the quarter. As Ben indicated, we reported ongoing earnings of $0.47 per share for the quarter as compared to $0.46 per share last year. The most significant drivers in the quarter include the following. Improved electric margins increased earnings by $0.06 per share; this was largely due to interim rates in Minnesota and capital rider revenue for recovery of capital investment, partially offset by unfavorable weather. Higher gas margins in our gas segment increased earnings by $0.01 per share, which is primarily due to rate increases from higher rate base, partially offset by unfavorable weather. Lower O&M expenses increased earnings by $0.01 per share, which reflects cost management and some timing-related issues. Partially offsetting these positive drivers was higher depreciation expense, which reduced earnings by $0.06 per share, primarily reflecting depreciation from new capital investment. Turning to our sales results, although the economy in our region remains strong and we continue to add customers, our weather-adjusted electric sales declined by 0.3%. Further adjusting for the impact of an extra day of sales in the quarter due to leap year, our weather-adjusted electric sales actually declined by 1.4%. The decline in sales is largely driven by lower use per customer from energy efficiency, an increase in the number of multi-family units, the impact of distributed solar and the impact on consumption of lower oil and natural gas prices on some of our larger customers. As a result, we have lowered our full-year electric sales growth assumption to 0.5% from 0.5% to 1% range. We continue to expect positive sales growth for the full year in all jurisdictions, due to customer growth as well as planned expansion from some of our larger customers. In addition to lowering our sales assumptions, we’ve also taken actions to lower our full-year O&M expenses. We implemented plans early in the year to offset the impact of the rate reduction in Texas as well as unfavorable weather and lower sales growth. As a result, we now expect to limit our annual O&M expenses to 0% to 1% increase for the full year. As we continue to strive to close our ROE gap, we have been pretty active on the regulatory front. Let me provide you a quick update. There are additional details included in our earnings release. In Wisconsin, we recently filed a case seeking an electric rate increase of $17.4 million and a natural gas increase of $4.8 million. This is a limited scope case, and ROE and capital structure are not expected to be an issue. The decision is expected by December, with final rates effective in January of 2017. We also have pending rate cases in Minnesota and in Texas. Both cases are in the discovery stage, and as a result, there aren’t any material new developments. Finally, we recently filed a settlement in our New Mexico rate case, which was reached between SPS, the staff, and other parties. The black box settlement reflects a non-fuel base rate increase of $23.5 million. The settlement represents a compromise which we think is reasonable. The New Mexico Commission is expected to rule on the settlement later this year and new rates are expected to go into effect in August. As Ben mentioned, we are reaffirming our 2016 ongoing earnings guidance with no changes. However, as I previously mentioned, we have updated several of the key assumptions, including electric sales and O&M expenses as detailed in our earnings release. Also, please note that we’ve reduced our assumption for capital rider recovery to reflect the transfer of some pipeline recovery from the rider to base rates as part of our last Colorado natural gas rate case. The transfer has no material impact on earnings. In summary, it was a good quarter for the company. Continued vigilance on cost management resulted in lower O&M expenses, which offset unfavorable weather and sluggish sales to deliver solid first quarter earnings. We made significant progress to convert some of our upside capital to base capital with a planned filing to own 600 megawatts of wind in Colorado. We anticipate a Commission decision later this year. Finally, we remain on track to deliver ongoing earnings solidly within our 2016 guidance range. This concludes our prepared remarks. Operator, we’ll now take questions. Question-and-Answer Session Operator Thank you. We’ll go first to Ali Agha at SunTrust. Ali Agha – SunTrust Robinson Humphrey, Inc. Thank you, good morning. Benjamin G. S. Fowke – Chairman, President & Chief Executive Officer Good morning, Ali. Robert C. Frenzel – Chief Financial Office & Executive Vice President Good morning, Ali. Ali Agha – SunTrust Robinson Humphrey, Inc. Good morning, Ben. Good morning. First question, the sluggish sales growth that you alluded to in the first quarter, anything specific – I know it’s early in the year and it’s a small quarter, but that would give you that confidence that we’re still going to end up on the positive for the year given the negative start to the first quarter? Benjamin G. S. Fowke – Chairman, President & Chief Executive Officer Sure, Ali. It’s really the result of conversations our account managers have had with our large commercial and industrial accounts. So we know we’re going to be seeing more load come on in the second half of the year. Ali Agha – SunTrust Robinson Humphrey, Inc. Okay. Okay, and you highlighted the earned ROE through the LTM ending in March 31. Can you just remind us what kind of regulatory lag that would translate into? Benjamin G. S. Fowke – Chairman, President & Chief Executive Officer Well, it’s about 90 basis points of lag. And again, as you know, our goal is to cut the lag by 50 basis points by 2018, and Ali, I think we remain on track with that. If you look at Colorado, I think we are on track. The Minnesota case here should put us on track and we will continue to work diligently at SPS to get that on track including filing of cases that take advantage of new legislation in forward test years in Minnesota – I mean in New Mexico. Ali Agha – SunTrust Robinson Humphrey, Inc. And Ben, this Colorado wind filing, are you anticipating much opposition there or I mean is it pretty much a done deal, all you need to do is show the numbers? Can you just handicap us like how we should think about this filing and the approval? Benjamin G. S. Fowke – Chairman, President & Chief Executive Officer Well, I’d never say it’s a done deal. You need Commission approval, but Ali, in tune to the first part of your question, this project has tremendous community support and it’s going to create tremendous value for our customers in fuel savings, even if you look at the lower gas forecast. So we’re excited about it, and the community and our stakeholders are excited about it, so we’re very confident this is going to go through. Ali Agha – SunTrust Robinson Humphrey, Inc. Okay and last question, when should we start to see some of the other growth investments that you’ve highlighted for us start to show up in terms of filings and potential move into base CapEx? Benjamin G. S. Fowke – Chairman, President & Chief Executive Officer Well, some of that will come through resource plans. I mean that’s the big part of it – filings for grid monetization opportunities that we might be out there to capture value for our customers. So I mean I think you’ll see it over the next 12 months basically. Ali Agha – SunTrust Robinson Humphrey, Inc. Okay. Thank you. Operator We’ll go next to Michael Weinstein with UBS. Julien Dumoulin-Smith – UBS Securities LLC Hey. It’s actually Julien here. Good morning. Benjamin G. S. Fowke – Chairman, President & Chief Executive Officer Hi. How are you? Robert C. Frenzel – Chief Financial Office & Executive Vice President Hey, Julien. Julien Dumoulin-Smith – UBS Securities LLC Good. Thank you. Hey. I wanted to follow up – a couple quick questions here. Can you elaborate a little bit on your eligibility to participate more than 25% to 50% in Colorado? What would the requirements there be, and elaborate a little bit more on the requirements of that 25% to 50% and what that threshold would be? And then, perhaps, a separate related question would be, the latest on solar, and specifically community solar in Colorado, and any opportunity to own or rate base those assets. Benjamin G. S. Fowke – Chairman, President & Chief Executive Officer Okay. Well, let’s start, Julien, with the 25% to 50% standard of the Colorado legislation. The 25% standard is just – is the reasonable cost standard that I mentioned in my prepared remarks. The 50% standard – without going through a competitive bid, you need to show economic value to the community. And I think you asked, can you do more than that? Yeah, you potentially could do more than that. But at this point, we would anticipate you’d have to go through a competitive RFP to do that. And that doesn’t mean we can’t prevail on that. But that’s the law that we were referring to. So we’re pleased with that. Now you asked about community solar gardens. At this point, we don’t have plans to buy any of those projects or provide any of those projects. It doesn’t mean we couldn’t, but – nothing would prevent us, but it’s not something we’ve been actively pursuing at this point. Robert C. Frenzel – Chief Financial Office & Executive Vice President The other point, Ali – or Julien, we will be making a resource plan filing later this spring and we will potentially include some solar in as part of that resource plan, so we’ll go forward with that too. Julien Dumoulin-Smith – UBS Securities LLC Got it. And then just following a little bit on the first quarter results themselves. Obviously, little bit further from plan on the normalized, and it’s always tough to read tea leaves, but what stood out if you were to go back and try to rehash things in terms of factors driving that negative delta? Benjamin G. S. Fowke – Chairman, President & Chief Executive Officer Julien, you broke up a little bit. Were you asking what drove the negative sales outlook? Julien Dumoulin-Smith – UBS Securities LLC Yeah or was there a specific factor more than others? I know you delineated a few there, but was there one that stood out? Benjamin G. S. Fowke – Chairman, President & Chief Executive Officer Well, I mean other than the factors that we mentioned, there’s always the art versus science of capturing weather and the impact of weather, and we did have some significant mild weather in the quarter, so I’m not sure you can ever fully scrub that out. We follow the formulaic approach, which is blessed by our commissions, but there’s always some potential for anomalies. Julien Dumoulin-Smith – UBS Securities LLC Got it. All right. Thank you. Operator We’ll go next to Travis Miller with Morningstar Financial. Benjamin G. S. Fowke – Chairman, President & Chief Executive Officer Hi, Travis. Travis Miller – Morningstar, Inc. (Research) Good morning, thank you. I guess I’ll continue on this demand question line here. If you think about that flat type demand, even 0.5% demand, if that continues for not just this year, but let’s say the next two years to three years, how does that put you in position for closing that 50 basis point gap? Does that require more rate cases? Does it require you to change the types of requests you’re making, the capital investment? Can you just walk me through kind of how that picture would play out? Benjamin G. S. Fowke – Chairman, President & Chief Executive Officer Well, I think it does a number of things, but we’ve been anticipating relatively flat sales in our outlook for quite some time now, Travis, so our ability to close the ROE gap assumes that we are not going to have robust sales to bail us out. So it means you have to manage your O&M carefully, and we are and we will continue to do that, and in fact I think we’re in the early days of cost management. We will make sure our resource plans reflect those kinds of sales growth opportunities, so we don’t overbuild. And of course as you know, we have decoupling mechanisms here on the electric side in Minnesota, which are helpful as well. So there’s a number of things you can do from a regulatory standpoint and from an internal management standpoint, and of course from a resource planning standpoint, and that’s the environment we anticipate being in. Travis Miller – Morningstar, Inc. (Research) Okay. And then just mix between residential and C&I, what’s approximately your margin mix, I guess, is the simplest way to put it? When commercial and industrial is 1.5%, residential is down 1.1%, how does that translate into profitability, if you get kind of where I’m going there? Benjamin G. S. Fowke – Chairman, President & Chief Executive Officer Let me try to – I ask my team if they can help me with this one. I’ll have a much higher profit margin in the residential, and then when you get to the C&I, it really depends on which customer you’re talking about and which jurisdiction. For example, the largest industrial customer is in SPS. The sales there will have the most minimal impact on margin, if anybody can help further define that for Travis a bit. Robert C. Frenzel – Chief Financial Office & Executive Vice President Yeah, I mean, Travis, if you think about it, the rate per megawatt hour for residential customer is probably going to be somewhere around that $0.11 range and large C&I customer is probably going to be more in that $0.07 range. So it’s pretty different revenue stream. Benjamin G. S. Fowke – Chairman, President & Chief Executive Officer And they pay a larger demand charge too, so variable sales tend to be more of the energy – it’s more the energy pass-through than it is the high margin that you’re getting with residential. Travis Miller – Morningstar, Inc. (Research) Yeah. Okay. Great. I appreciate the thoughts. Operator We’re standing by. With no further questions at this time, I would like to turn the conference back to Bob Frenzel for any closing or additional comments. Robert C. Frenzel – Chief Financial Office & Executive Vice President Thank you for participating in our earnings call this morning. I look forward to meeting many of you over the next few weeks at the Deutsche Bank and AGA conferences. If you have any questions in the interim, please contact Paul Johnson with any follow-ups. Benjamin G. S. Fowke – Chairman, President & Chief Executive Officer Thanks, everyone. Operator This does conclude today’s call. We do thank you for your participation. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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Gas Natural’s (EGAS) CEO Gregory Osborne on Q1 2016 Results – Earnings Call Transcript

Gas Natural, Inc. (NYSEMKT: EGAS ) Q1 2016 Earnings Conference Call May 9, 2016 16:30 ET Executives Deborah Pawlowski – IR Gregory Osborne – President & CEO Jim Sprague – VP & CFO Kevin Degenstein – COO & Chief Compliance Officer Analysts Liam Burke – Wunderlich Securities John Bair – Ascend Wealth Advisors Operator Greetings, and welcome to the Gas Natural Inc. First Quarter 2016 Financial Results Conference Call. At this time all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn conference over to Ms. Deborah Pawlowski of Investor Relations. Thank you. You may begin. Deborah Pawlowski Thank you, and good morning everyone. We welcome you to our 2016 first quarter earnings teleconference call. We certainly appreciate your time today and your interest in Gas Natural. Joining me on the call are Gregory Osborne, President and Chief Executive Officer; Vice President and Chief Financial Officer; Kevin Degenstein, our Chief Operating Officer and Chief Compliance Officer as well as Vince Parisi, Vice President and General Counsel. Gregory and Jim are going to review the quarter and year and also give an update on our outlook and strategic progress and then we will open it up for a question-and-answer session. You should have a copy of the financial results were released yesterday after market closed and if not you can access this on our company’s website at www.egas.net. As you’re aware, we may make some forward-looking statements on this call during the formal discussion as well as during the Q&A. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated on today’s call. These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at sec.gov. I would also like to point out that during today’s call we will discuss some non-GAAP measures which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared to record of this GAAP. We have provided reconciliations as non-GAAP comparable GAAP measures on the table accompanying today’s earnings release. So with that, let me turn it over to you Gregory to begin. Gregory Osborne Thank you, Deb and good afternoon everyone. I appreciate your time today and your interest in Gas Natural. Our strategic and operational progress was matched by unfavorable record setting warm weather in most of our markets. In fact 71% of our gross margin decline was due to weather. Let me first highlight our strategic and operational progress. As you may know in February we announced a proposal to form a new organizational structure subject to regulatory approval that will line our eight regulated utility operations under one fully owned subsidiary. We believe this structure will create efficiencies, streamline regulatory processes while simplifying our financing arrangements and enhancing financial flexibility. In conjunction with this proposal we have reached agreement with lenders to refinance and consolidate our debt at the parent company level. As previously noted, the new $99 million debt facilities will replace our existing debt agreements and provide more balance to our capital structure placing closer to a 50-50 debt to equity ratio. We also expect the new credit arrangement will provide us with much greater flexibility. Secondly, the implementation of the final phase of our enterprise resource planning, or ERP, system is now complete. This has been a major undertaking and facilitates operational efficiency and scalability. Having divested of our non-core assets in 2015, we are focusing our energies and resources on the remaining four markets. North Carolina and Maine are underserved natural gas markets with higher growth potential and we’re leveraging our larger scale in Montana and Ohio. In the first quarter of 2016 we had an approximately 340 customers. On the regulatory front, stipulation and recommendation between Ohio utilities and Ohio commission staff related to a 2014 investigative audit of our Ohio utilities scheduled for hearing tomorrow, May 10. Our financial results were unfavorably affected by much warmer weather in the first three months of 2016 compared with the prior year although our markets are geographically diverse which typically mitigates the impact of unseasonably warm weather. In this winter, the weather was much warmer across all markets we serve. Looking ahead in all of our jurisdictions, we’ll be evaluating mechanisms that the fix components were service fee structure in order to reduce the impact of unfavorable weather conditions on our financial performance. Of course these mechanisms are subject to regulatory approval. Additionally, first quarter results from our main operations were unfavorably affected by the closure of two industrial facilities and the reduction in rates for third transportation customer. At the beginning of the second quarter we established a new dividend policy that enables greater capital investments for higher returns and positions us for the future dividend increases in line of our earnings growth. The new annual dividend rate is $0.30 per share or equal quarter payments of $7.50 per share. The dividend rate resulted in a pay ratio more in line with our peers. And it also sets our dividend at a sustainable level. The plan to grow dividend as its peer ratio as earnings grow in conjunction with the reduction of dividend from its previous annual rate of $0.54 per share, executive management and the board are taking reductions in the compensation for 2016. I will now turn over to Jim to fully review the financial details. Jim? Jim Sprague Thank you, Gregory, and good afternoon everyone. Thank you for joining us today. Our first quarter 2016 financial results reflect lower full service distribution through point, primarily due to warmer weather in all of our markets as Gregory mentioned. Consolidated revenue was down due to volume declines and lower gas prices. Gross margin was $14.7 million, down 16.5% from the prior year first quarter. The majority or 71% of the decline was due to lower volume attributable to warmer weathers in the prior year. The following factors also contributed to the gross margin decline. $517,000 due to two plant closures and the rate decline for our Kojan [ph] facility; and two, $376,000 from the sale of our Pennsylvania and Kentucky utilities last year. Consolidated operating expenses were $9.2 million, down 6% compared with the prior year quarter primarily as a result of reduced legal cost. Reflecting the decline in gross margin for lower weather dividend through put, consolidated net income for the quarter was $2.7 million or $0.26, down from $4.9 million or $0.46 per share in the 2015 first quarter. Adjusted EBITDA from continuing operations, a non-GAAP number was $7.7 million compared with $10.5 million in the 2015 first quarter. According to the balance sheet, we had $4 million of cash in March 31, 2016, up from $2.7 million at year end 2015. Notes payable and balance withdrawn against our line in credit were $52 million. Our refinance is expected in the latter half of the year after regulatory approval on our reorganization. It will provide us additional capital and greater borrowing capacity. Cash provided by operating activities increased $1.5 million to $9.4 million on lower working capital requirements as a result of warmer weather. Capital expenditures were $2.3 million. Our CapEx for 2016 is currently budgeted at approximately $4.5 million to $5 million. We are evaluating that budget now given the reduction in our dividend, the expected refinancing and the timing of unusual expenses. With that summary, let me turn the call back to Gregory. Gregory? Gregory Osborne Thank you, Jim. Our management team recently met for a strategic summit to advance our strategic growth plans. For the immediate future, our growth plans were focused on expanding our customer base and through put in each of our four utility markets. Across our current market footprint, we have steadily increased our customer base and we believe we can step that up out of the new proposed capital and financial structure currently under consideration by our regulators. Over the next several years, our plan is to drive Gas Natural’s return of equity to the high single digits were trailing by average of approximately 5%. Now let’s go over now for our line of questions. Question-and-Answer Session Operator Thank you. At this time we will be conducting the question-and-answer session. [Operator Instructions] The first question comes from Liam Burke of Wunderlich. Please go ahead. Liam Burke Thank you, good afternoon. I know you said record of favorable weather for the quarter, but could you give us a sense on both Maine and North Carolina properties on how the underlying economic outlook is going, especially in Maine where you saw some plant closures which exacerbated the weather situation? Gregory Osborne Liam, how are you doing today? Liam Burke Good, thanks, Greg. How are you? Gregory Osborne Good. Kevin, do you want to speak to the markets particularly in Maine and also North Carolina? Kevin Degenstein Yes, I’d love to. Good afternoon, and thank you for the question. I’ll start with Maine. It’s probably the best place because it’s where we’ve seen some paper mill loss and a power generating loss. But if you look at the potential going forward we’re quite optimistic with the Maine system. You really need two pieces to come in place, and that’s supply pipelines which our plan to come to that area which will drive down the market cost of natural gas which is higher than the NYMEX index and tends to be probably one of the higher markets in the country, and then the potential is you look further oil has been creeping back up, a little over $40 a barrel. It’s off its all-time low, and as the differential gets greater we tend to get more demand for services. We’re already starting to see an uptick from the bottom of demand for growth opportunities to convert on existing main and to run facilities to new customers. So we’re optimistic that ultimately the potential in Maine is there and that there is growth potential in those communities that we serve and that we can ultimately grow that market as we had planned and ultimately it will be a good utility that becomes a normal diverse customer group of utilities. When you look at North Carolina, we’ve also got opportunity there to continue the filling behind what we run. We’ve got very favorable rates there, propane tends to be higher and we’re in the process of looking at opportunities in the poultry market and looking at possibilities of assistance there based on subsidies and those types of things. So we see both those markets as real growth potential. Recognizing there was somewhat a glitch in Maine just based on pricing, but we see and we believe that will change. Liam Burke Great, thank you, Kevin. And this is just a point of clarification. You did say your CapEx budget is $4.5 million to $5 million this year? Gregory Osborne That is correct for the systems across the four organizations. Liam Burke Okay, great. Thank you very much. Gregory Osborne You’re welcome. Operator The next question comes from John Bair of Ascend Wealth Advisors. Please go ahead. John Bair Thank you. Good afternoon, gentlemen. First question was related to some recent announcements by Kinder Morgan about the failure to get necessary permit approvals to build some pipelines that would be delivering Marseilles [ph] gas to New England. And I’m wondering how that plays into your growth potential in Maine since that gas has got to go through those New York and Massachusetts to get up that way, so can you talk about that a little bit? Gregory Osborne Go ahead, Kevin. Kevin Degenstein Yes, this is Kevin. Ultimately, diversity is to find Maine is critical and we’d love to see that, and obviously we’re disappointed that any pipelines that can’t come from the lower 48 up into that area ’cause it provide this alternate supply. But we do recognize today that the Oagland [ph] market has softened. It’s not as high as it was a couple of years back when we had the extreme cold weather, and those prices are nudging down. As it stands today, if we don’t get pipelines from the lower 48, we are subject to Canadian gas and the Oagland [ph] market prices. But we do enhancing that market’s softening, and it’s not the prices it was a couple of years back. And we see ourselves trending towards being more competitive. However, yes, any pipelines coming from the lower 48 will be very much welcomed by anybody in the Northeast, not just gas. John Bair Politicians does seem to agree with you on that, but they’re denying the permit. So if I’m understanding it correctly then if we can’t get adequate supplies within the U.S. coming up that way you have access to Canadian gas coming across the border then? Is that a fair statement? Gregory Osborne That is correct. We have supplies from Canada. Really what supplies from the South does is give us a price advantage and hopefully lowers the price. But as it stands today, capacity into Canada is not limiting our growth potential. John Bair Okay, very good. Thank you. Operator [Operator Instructions] There are no more questions at this time. I’ll now turn the conference back over to Greg Osborne for any closing remarks. Gregory Osborne Thank you, Ben. In closing I’d like to thank you all for joining us this afternoon for our 2016 First Quarter Earnings Teleconference. I’d also like to thank all of our employees for their dedicated hard work and the commitment to Gas Natural’s long term success. Finally, I’d like to thank our board for their ongoing support and advice. This is an exciting time for Gas Natural as we continue to execute our strategy to establish our business as a benchmark gas utility with greater earnings power. Thank you. Operator This concludes today’s conference call. Thank you for participating. You may now disconnect your lines. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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Exelon (EXC) Christopher M. Crane on Q1 2016 Results – Earnings Call Transcript

Exelon Corp. (NYSE: EXC ) Q1 2016 Earnings Call May 06, 2016 11:00 am ET Executives Dan L. Eggers – Senior Vice President-Investor Relations Christopher M. Crane – President, Chief Executive Officer & Director Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Analysts Steve Fleishman – Wolfe Research LLC Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Julien Dumoulin-Smith – UBS Securities LLC Praful Mehta – Citigroup Global Markets, Inc. (Broker) Operator Good morning and welcome to the Exelon Corporation’s Q1 2016 Earnings Conference Call. My name is Prasanthi and I’ll be facilitating the audio portion of today’s – and active broadcast. All lines have been placed on mute to prevent any background noise. For those of you on this stream, please take note of the options available in your event console. At this time, I would like to turn the show over to Dan Eggers, Senior Vice President of Investors Relations. Dan L. Eggers – Senior Vice President-Investor Relations Thank you, Prasanthi. Good morning, everyone, and thank you for joining our first quarter 2016 earnings conference call. Leading the call today are Chris Crane, Exelon’s President and Chief Executive Officer; and Jack Thayer, Exelon’s Chief Financial Officer. They are 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 in the Investor Relations section of the 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, comments made during this call, and our Risk Factors section in the earnings release, and the 10-Q, which we expect to file on May 10. Please refer to today’s 8-K, the 10-Q, and Exelon’s other filings for a discussion of 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 a reconciliation between the non-GAAP measures to the nearest equivalent GAAP measures. We’ve scheduled 45 minutes for today’s call. I’ll now turn the call over to Chris Crane, Exelon’s CEO. Christopher M. Crane – President, Chief Executive Officer & Director Good morning. Thanks for joining us this morning. Once again we had a great quarter financially, where we closed near the upper end of the range even with the milder weather. And operationally, our utilities and plants continue to operate at high levels. The big news for the quarter is we closed the Pepco Holdings transaction in March. We are excited to have Pepco utilities as part of the Exelon family. We know this has been a long journey and it took much longer than any of us anticipated, but we appreciate the patience of our investors as we pursued the merger. Our employees who worked tirelessly from the inception to the completion of the deal and the many stakeholders who’ve supported was critical to getting the deal done. PHI is an important piece of our strategy to become a more regulated company with more stable earnings streams. While we are still in the early stages of integrating PHI, PHI’s earnings outlook is consistent, if not better, than what we showed you at EEI. It brings meaningful benefits to our customers, communities in Delaware, District of Columbia, Maryland, New Jersey, including bill credits and reliability investments. More than $500 million in total commitments have been made and will be achieved due to this merger. We’re now focused on integrating Pepco into Exelon. We will bring our management model and our best practices to improve the experience of our customers. The transaction confirms Exelon’s role as a leader in the industry. We serve 10 million customers, more than any other utility company. We will spend nearly $23 billion in capital across our utilities and generating business over the next three years, which is the second-highest among our peers. We are the largest pure T&D by rate base and within the top five when including rate base generation. We are the second-largest generator of electricity in the country, the largest competitor by a factor of nearly two, while producing power at the lowest carbon intensity of any large generator. We are the leader in the retail electric provider in the country serving 139 terawatts. The culture of the industry leadership is found throughout our organization, positioning us very well for the future. Switching to operational performance. Our first quarter operating performance was strong and we’re on track for a strong year. At our legacy utilities, our SAIFI and CAIDI are on track to meet reliability targets; we are in top quartile in both. At the GenCo, our nuclear plants ran at a capacity factor of 95.8%, our solar and wind assets outperformed their energy capture targets. Switching to Illinois in the nuclear plants. While there is much to celebrate this quarter, we also need to make tough decisions on the future of Clinton and Quad Cities nuclear stations in Illinois. The board has given me authority to go forward with early retirements for Clinton and Quad Cities plants, if for Clinton adequate legislation is not passed during the spring legislative session that is scheduled to end May 31, and if for Quad Cities adequate legislation is not passed and the plant does not clear the upcoming PJM auction. Otherwise, we plan to retire Clinton on June 1, 2017, and Quad Cities on June 1, 2018. This is consistent with planned refueling outage and capacity market obligations. We committed to our employees, our shareholders and the communities to try to find a path to profitability for our distressed assets. This is because these plants are vital to the communities that they are located in and provide economic and environmental value to the state. The state’s own analysis showed that closing Clinton and Quad Cities would result in $1.2 billion in lost economic activity and 4,200 jobs lost, and a significant reduction of supply of reliable electricity for Illinois residents and businesses. We worked hard over the last few years to find a path to sustainable profitability. To bring $120 million in strategic capital to these plants, we’ve pursued legislation and regulatory market changes. We’ve been successful in some areas: the PJM market reforms that were put into place last year, the cost reductions that we’ve achieved, and the large number of stakeholders who have worked so hard to help in this fight. We have strong allies in our cause, our employees, our plant communities, the bill sponsors and co-sponsors, our partners in labor, and our vendors among others. I want to thank them all very much for their support and regret the impact on this decision that we have on them. But for reasons outside of our control, we have not seen progress in Illinois policy reforms, also the Supreme Court stay creates uncertainty regarding the EPA’s Clean Power Plan. Power prices have fallen to a 15-year low in PJM, causing the economics of Clinton and Quad Cities to further deteriorate. These plants have lost $800 million in cash flow from 2009 to 2015. Just to be clear, we are not covering our operating costs or our risks, let alone receiving a return on our invested capital. We’ve done all we can up to this point and we continue to work through the spring legislative session to enact the much needed reforms. However, without adequate legislation we no longer see a path to profitability and no longer can sustain the ongoing losses. On a more positive note, we continue to see a pathway to reform in New York where Governor Cuomo, the legislature, the Public Service Commission have recognized a need to preserve the state’s nuclear plants. New York is quickly moving forward to implement a clean energy standard that will allow us to continue to operate our challenged Ginna and Nine Mile plants. I’ll turn the call over to Jack to discuss the first quarter results further. Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Thank you, Chris, and good morning, everyone. My remarks today will cover our first quarter results, 2016 guidance, update our gross margin disclosures and provide an update on developments since Q4. I’ll start on slide eight. As Chris stated, we had a strong quarter financially and operationally across the company. For the first quarter we delivered adjusted non-GAAP operating earnings of $0.68 per share, near the top of our guidance range of $0.60 per share to $0.70 per share. This compares to $0.71 per share for the first quarter of 2015. Exelon’s utilities delivered a combined $0.37 per share. During the quarter, we saw unfavorable mild weather at PECO and ComEd versus planned, which was partially offset by lower bad debt expense at BGE. There are only eight days of PHI included in our results, which had a minimal impact on the quarter. Generation had a great quarter, earning $0.34 per share. We had strong performance from our nuclear assets with better capacity factors than budgeted. And while weak power prices and lower volatility were a drag, our Constellation team delivered strong results. Our generation to load matching strategy continues to provide value and we benefited from a lower cost to serve our customers. For the second quarter, we are providing guidance of $0.50 to $0.60 per share. This compares to our realized earnings of $0.59 per share for the second quarter of 2015. The appendix contains details on our first quarter financial results compared to the first quarter of 2015 results by operating company on slide 16 and 17. Turning to slide nine, we are affirming our full-year guidance range of $2.40 to $2.70 per share which now includes the contribution from PHI and assumes an average of 926 million shares outstanding for 2016. This should help calibrate your segment models. On slide 10, we are still working through a comprehensive financial plan now that we have closed the PHI deal, but want to address the pieces that we can today. We are reaffirming our earnings growth at our legacy utilities of 7% to 9% per year from 2015 to 2018. On PHI, we are still working through the plan, but see the contribution equal to or better than what we showed you at EEI and consistent with sustaining our 7% to 9% utility growth target. On slide 11, to meet these growth targets we are going to be busy on the regulatory front. The PHI utilities have been out of rate cases for at least two years. We are continuing to invest $800 million per year to improve reliability and customer service leading to the low-earned ROEs that we show on slide 30 in the appendix. However, by the third quarter, we plan to file distribution cases in all of PHI’s jurisdictions and expect decisions in all cases by the middle of next year providing needed revenue release. Atlantic City Electric and Pepco Maryland have already filed their cases. ACE filed an electric distribution base rate case on March 22 with the New Jersey Board of Public Utilities requesting an $84 million revenue increase and a 10.6% return on equity. It also included PowerAhead, a five-year $176 million grid resiliency plan. On April 19, Pepco requested a rate increase of $127 million with the Maryland’s Public Service Commission. The rate cases include smart meter recovery and a two-year $32 million grid resiliency plan. In addition to reducing the number and length of outages, Pepco’s five-year smart grid program is generating nearly $4 in customer benefits for every $1 invested. In addition, ComEd made its annual formula rate filing with the Illinois Commerce Commission. ComEd requested a revenue requirement increase of $138 million reflecting approximately $2.4 billion in capital investments made in 2015. Those investments, which included $663 million for smart grid-related work has helped strengthen and modernize the electric system, resulting in record power reliability and customer satisfaction, operational savings, and new ways to save on electric bills for ComEd customers. More details on the rate cases can be found on slide 33 – slides 34 through 37 in the appendix. Slide 12 provides our first quarter gross margin update. In 2016 total gross margin is flat to our last disclosure. During the quarter we executed on $200 million of power new business and $100 million of non-power new business. We are highly hedged for the rest of this year and well-balanced on our generation to load matching strategy. Total gross margin decreased in the first quarter by $150 million in 2017 and $200 million in 2018, as PJM power prices moved approximately $1.60 to $2.10 lower since the beginning of the year. We ended the quarter approximately 5% to 8% behind ratable in both of these years when considering cross-commodity hedges with a majority of modeling concentrated in the Midwest to align to our fundamental view of spot market upside at NiHub. Power prices have risen since the start of the second quarter and we are timing our hedging activity to lock in the value of the recent price increases while remaining well positioned to capture our fundamental view. On slide 13, I wanted to give you a quick update on some tax implications that are associated with the completion of the PHI merger. With the inclusion of PHI, we expect to realize $700 million to $850 million of additional cash from 2017 to 2019 related to legacy NOLs and the impacts of bonus depreciation. However, now, as a very modest cash tax payer for 2018, we have less ability to take the domestic production activities deduction, or DPAD, in 2018 which effectively increases our overall consolidated tax rate by as much as 200 basis points or the equivalent of $0.06 to $0.08 per share in 2018. Although this is a one-time negative impact to 2018 ExGen earnings, it comes with significant positive cash flow and we expect to return to normalized tax rates in 2019. With the variability of interest rates, I’d like to remind you that ComEd’s allowed ROE is based on a 30-year treasury rate plus 580 basis points, and thus sensitive to moves in this rate. Every 25 basis point move in treasury rates results in a $0.01 move in EPS. Before turning the call over to Chris, I wanted to raise a few scheduling points. We’ll be hosting an Analyst Day on August 10 in Philadelphia and we’ll get details around shortly. Therefore, we will not be having a second quarter earnings call and will release earnings before Analyst Day. I will now turn the call back to Chris for his closing remarks. Christopher M. Crane – President, Chief Executive Officer & Director Thanks, Jack. Just closing out on slide 14, the capital allocation philosophy. I want to cover that before we turn it over to Q&A, and take a moment to reiterate our capital allocation philosophy. Balance sheet strength remains a top financial priority. We have a strong strategy to deliver stable growth, sustainable earnings, and an attractive dividend to our shareholders. We will be growing that dividend at 2.5% each year for the next three years, starting with the dividend payable in June. From a capital deployment perspective, we will continue to harvest free cash flow from the generation business to invest primarily in our utilities to benefit our customers, invest in long-term contracted assets which meet our return requirements, and return capital to our shareholders. This is the right strategy for our markets and our assets. Thanks and we’ll open the line up now for your questions. Question-and-Answer Session Operator And we do have audio question from Stephen Byrd (17:13). Christopher M. Crane – President, Chief Executive Officer & Director Hey, Steve (17:15). Unknown Speaker Start on the Illinois legislation. And wonder if you could speak to the breadth of support that you have for the proposal. And then also if you could just go through the mechanics of if it was implemented, how it’d work? So we can start to think about modeling the impacts. Christopher M. Crane – President, Chief Executive Officer & Director Joe, you want to cover that? Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Sure. Steve (17:36), the support is the same support we had for the original bill, labor, the host communities. And in addition, we now have the support of some groups that represent climate scientists and others that are concerned with greenhouse gas emissions. In terms of how the program would work, let me just start with a policy analogy that I think all of you are familiar with. Existing state RPS programs for renewables provide compensation of qualified resources through renewable energy credits, RECs. The REC value is the difference between available wholesale revenues and the costs needed to keep the existing renewables in operation and get new renewables built. All this is done in order to get the benefit of greenhouse gas reductions while protecting customers. If wholesale revenues go up, the needed REC payment goes down. We see that happening every day in REC spot markets. The ZEC program is designed the same way. It’s a payment for the state value of zero emission credits from nuclear plants which represents the difference between the needed revenues and the costs of operating the plants. In the case of the New York and Illinois programs, the way it would work is that experts at the Commissions will determine on a prospective basis the cost of operating the plants plus risks, less available market revenues. And where there is a delta between that, in other words where the costs and risks are not covered by available market revenues, the ZEC program will kick in and provide compensation for greenhouse gas avoidance. The program is not a PPA or a contractor difference. If revenues or costs are different, there is no true-up. And – so, Steve (19:26), I think if you have additional questions, perhaps after the call we could work with Dan and Emily to set up a meeting, go through more programmatic details. Unknown Speaker That’s great. That’s a great start. Thank you. And then just shifting over to renewables more broadly, could you just speak to your degree of appetite for more acquisitions? It sounds like you’ll be a full taxpayer, I believe, in 2019, if I have that correct. But just broadly, what degree of opportunities do you see out there in renewables? Is this an area that you would expect that you’ll see further growth in? Christopher M. Crane – President, Chief Executive Officer & Director It is definitely throttled based off of our tax capacity and we are looking at that now. You do get a certain amount of dilution with delaying the benefits of the tax attributes of the project, so we have some projects in the pipeline now and are re-evaluating others to see if they’re – they would be viable to go forward in the near-term. Unknown Speaker Understood. Thank you very much. Operator And your next question comes from the line of Steve Fleishman. Christopher M. Crane – President, Chief Executive Officer & Director Hi, Steve. Steve Fleishman – Wolfe Research LLC Hi. Good morning. A couple of – first, a logistical question. The Ginna $101 million that you mentioned that you’re getting, is that – is kind of a trued-up amount including past years, is that in your guidance for this year? Or is that kind of like a one-time item or how are you treating that? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Steve, that’s in our guidance. Steve Fleishman – Wolfe Research LLC Okay. Including any back from prior periods? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP That’s correct. Steve Fleishman – Wolfe Research LLC Okay. And then a question just – is there any way you can give us some sense on the cash flow or losses from Clinton and Quad Cities, let’s say, in your guidance for last year or something of that sort? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP So we’ve stated that it’s greater than $800 million since 2009. There are some variables in there on cash savings going forward or cash losses going forward, power prices coming down, cost cutting initiatives; and we do have an element of overheads that would not be as controllable. So you would see the run rate to be similar to what has happened in the past. Steve Fleishman – Wolfe Research LLC Okay. Christopher M. Crane – President, Chief Executive Officer & Director Steve, you know, on this point – so for 2017, the cost exceeded available market revenues or at current marks (22:12) by $140 million. But I think importantly and Joe raised this point, it’s not the whole picture. The closure also avoids millions of dollars in basis and unit-contingent risks that we face by operating the plants. And stated differently, in order to reverse course we need Illinois as well as New York to provide a structure that allows us to cover our cash costs plus normal operating risks in order to reverse this course. Steve Fleishman – Wolfe Research LLC Okay. And $140 million that’s kind of cash flow? Does that include like CapEx, or is that just kind of cash flow without CapEx? Christopher M. Crane – President, Chief Executive Officer & Director That’s cash flow. Steve Fleishman – Wolfe Research LLC Okay. One last question just on the – in the event legislation doesn’t happen and you need to shut the plants, what – is there any cost related to that? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP As you saw in the K, and we reiterate in the Q, there is some unfunded liabilities on the decommissioning trust. Those numbers are in there at full 100% ownership of the plants. And so the way that we would have to handle that is – you know, you can start out with parent guarantees, but you have to have it funded over a 10-year period, I think 60% by the end of the fifth year, and then the rest by the end of the 10 years. Steve Fleishman – Wolfe Research LLC Okay. Those numbers in the K are still good then, so that we just can use those? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP They’re updated in the Q. Christopher M. Crane – President, Chief Executive Officer & Director That’ll be coming Tuesday. Steve Fleishman – Wolfe Research LLC Okay. Thank you. Operator And your next question comes from the line of Jonathan Arnold. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Hey, good morning, guys. Christopher M. Crane – President, Chief Executive Officer & Director Good Morning. Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Good Morning. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Just to clarify one thing on the current proposal that I think was emerged last night around the legislation. So originally this applies to all nuclear plants in the state, but is it correct that this would just be Clinton and Quad? And can you just explain how that works in terms of the discussion of the ZEC structure? Christopher M. Crane – President, Chief Executive Officer & Director Joe? Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Sure. Jonathan, all plants could apply, but quite obviously the only plants that would receive revenue under this program would be those where the costs exceed the revenues. And so there is – it’s a 20 terawatt-hour cap which has enough room in it to accommodate Clinton and Quad Cities. And our expectation is that Exelon would seek to have those two plants participate. The other plants would not participate. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. And that’s sort of nuanced in how the legislation’s worded effectively? Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. That’s correct. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. It’s the same offer to you, Jonathan; if you’d like, after the call, we could sit down and work through some of the details. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. That’ll be great. And is there any… Christopher M. Crane – President, Chief Executive Officer & Director And, Jonathan, just to interject just to make the clear point, they would provide the opportunity to be compensated for cost plus risk. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. That was one thing. The second thing, in your fourth quarter deck, you have this forecast around leverage ratios and the like going out through 2018, which, I believe, was assuming that Pepco would not happen. This was of the ExGen. Can you give us a sense of how that progression would look if you kind of market to the – with Pepco scenario? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Sure. So, Jonathan, we still anticipate reducing leverage of ExGen by $3 billion over the five-year planning period, albeit this is not to the extend that we would have under the standalone scenario, because ExGen’s free cash flow is now being deployed to help fund PHI’s capital spending program. And we’ll provide more detail on the puts and takes of that at the Analyst Day in August. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. So $3 billion is kind of the new ExGen delevering number? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP That’s right. That’s over the next five years, we have a large maturity. And I believe it’s 2019, that we would look to retire at maturity. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. So that’s over five years? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP That’s correct. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. And then the 2.3 ExGen debt-to-EBITDA that you were looking at for 2018, roughly what does that look like now? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP It, over the five-year period, would go to right around three times. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. So that’s again over five years, rather than three years? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP That’s correct. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay, great. Thank you. And then I guess you mentioned in the prepared remarks the prices have rebounded… Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP So, Jonathan – sorry, just let me correct, 2.7 times at the end of the five-year period. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. So whereas you have 2.3 times in 2018, it’s now 2.7 times after five years? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Yes. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay, great. Thank you. And then you mentioned that prices have rebounded. So can you give us a rough sense of how the kind of gross margin mark would look if you use more like today’s prices? Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Yeah. Jonathan, good morning. It’s Joe Nigro. I think if you look at our hedge disclosure at the end of the quarter and then factor in the changes since the end of March, you would see all of that drop in 2017 and 2018 being recovered. We’ve seen an appreciable move, as you know, in prices since the end of March. We’re actually higher in NiHub than we were at the end of the year. We’re higher at West Hub than we were at the end of the year, so we would have recovered all that drop and probably adding to it. We calculated that a couple of days ago, but the market has continued to move higher, so we probably have seen it actually go over where it ended the quarter. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Great. Okay. That’s it. Thank you very much, guys. Christopher M. Crane – President, Chief Executive Officer & Director Thanks. Operator And your next question comes from the line of Julien Dumoulin-Smith. Julien Dumoulin-Smith – UBS Securities LLC Yeah. Hi. Good morning. Christopher M. Crane – President, Chief Executive Officer & Director Good morning. Julien Dumoulin-Smith – UBS Securities LLC So perhaps to follow up on the same theme, can you elaborate a little bit on the balance of the nuclear portfolio that is ex-Clinton, ex-Quad? How you think about their cash flow profile? And if you don’t get this legislation, what the prospects are for further rationalization? I don’t mean to jump the gun too much here, but just talking about the future a little bit more? Christopher M. Crane – President, Chief Executive Officer & Director So there’s varying cash flows by assets depending on their location. They are positive at this point. If you look at the other units that are more challenged, you’re looking at Ginna and Nine Mile. One – we know about Oyster Creek and it’s coming up in 2019, the other one that has a real focus on it right now is Three Mile Island. Julien Dumoulin-Smith – UBS Securities LLC Got it. And specific to Illinois, is there any commentary around – so let’s say we don’t get it in 2016 or 2017, does that trigger another set of reviews? Again, not to push it too much. Christopher M. Crane – President, Chief Executive Officer & Director At this point we’ll have to watch the capacity auction clearing in the out years. It’s tight on energy at some of the assets, but they are positive. Julien Dumoulin-Smith – UBS Securities LLC Got it. Okay, great. And then turning back to the utilities real quickly, can you comment, or I’m curious, if you will, what the earned ROEs embedded at Pepco for 2016 – just what’s the baseline on the Pepco side as far as you see it post the close? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Julien, in terms of – I think we included it on slide, I believe it’s 30, the earned for 2015. Obviously, while we’re in the pendency period during the rate cases that – obviously, there’s regulatory lag, so we’re going to see that decline, but we’ll have a much deeper dive in the PHI as part of the August 10 meeting. You can see on slide 29 the rate base statistics and I think can work through some assumptions on regulatory lag using that information. Julien Dumoulin-Smith – UBS Securities LLC Got it. And perhaps not to jump the gun too much on the Analyst Day, but what is the thought process on the baseline for a future regulated CAGR? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP I think the thought is the 7% to 9% that we confirmed on the call and PHI is absolutely consistent with that expectation. We, as we mentioned, are seeing improvement relative to what we forecasted or projected at EEI using PHI’s internal forecast. And Dennis and team continue to work to identify further opportunities around efficiency as well as regulatory policy to work to get those earned and allowed ROEs in line with the success we’ve experienced within Maryland, Pennsylvania and Illinois. Julien Dumoulin-Smith – UBS Securities LLC Got it. You wouldn’t roll it forward though? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP I’m not certain I understand what do you mean roll it forward? Julien Dumoulin-Smith – UBS Securities LLC The 7% to 9%, just roll it forward to CAGR off a 2016 base? Christopher M. Crane – President, Chief Executive Officer & Director We’ll address that at the Analyst Day. Julien Dumoulin-Smith – UBS Securities LLC All right. No worries. Thank you. Christopher M. Crane – President, Chief Executive Officer & Director I mean, embedded in there is 7% to 9% through 2018, so just thinking it through, it’s in there. Julien Dumoulin-Smith – UBS Securities LLC Got it. Thank you. Operator And your next question comes from the line of Brian Chen (32:25). Christopher M. Crane – President, Chief Executive Officer & Director Hey, Brian (32:30). Unknown Speaker Going over to slide 13, the EPS impact that you’ve laid out in that top table, I just want to verify that that is not including the use of capital from that positive cash flow impact that you’ve got on the second row right? Christopher M. Crane – President, Chief Executive Officer & Director That’s right, Brian (32:46). Unknown Speaker Okay. Great. And then I just want to verify that Quad Cities didn’t clear in the 2018 and 2019 auction, correct? So the closure of Quad Cities shouldn’t have any sort of residual obligation that you have for the 2018, 2019 capacity through (33:03)? Christopher M. Crane – President, Chief Executive Officer & Director That’s correct. Unknown Speaker Great. Thanks a lot. Operator And your next audio question comes from Praful Mehta. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Hi, guys. Christopher M. Crane – President, Chief Executive Officer & Director Good morning. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Good morning. So just on the leverage a little bit, just to ensure we understand both at the holding company level and at ExGen. You’ve kind of talked about the ExGen debt and what you see over the 20 – the five year period. How are you looking at holding company debt given the leverage you’ve assumed post Pepco transactions? Is there any objective to delever a little bit at the holding company as well? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP So Praful, as you’ve heard us comment in the past, we do target at 20% FFO to debt on a consolidated basis and that was one of the benefits of adding PHI to the Exelon family. And so we will certainly be looking at our leverage ratios at the GenCo. I think you’ll also see us consider to the extend we have available cash at the holding company as well, we just need to see as we get further out what the realized power prices are and what the free cash flow coming off of the GenCo is in those five years. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Got you. And just so if you think about from the sources/uses perspective, the source is primarily out of ExGen coming to fund CapEx at the utilities and then deleveraging both at ExGen and the parent. Is that a fair way to think of it or is there some cash generation coming out of the utilities as well over the next two year, three year period? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP I would say, on a net basis, utilities are consumers of cash. So you’re correct. That ExGen cash flow as well as debt raise at the utilities is the primary source for funding the significant CapEx that we see, $25 billion over the next five years at the utilities. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Got you. Thank you. And then just finally, we saw that the power new business and the to-go business, the EBITDA, or the growth margin of that is going from $250 million in 2016 up to about a $1 billion by 2018. Could you just give us a little bit of context of what’s driving that significant ramp-up in that side of the business? Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Yeah. Hi. It’s Joe Nigro. That’s pretty standard shape that we have. If you go back and look at disclosures over the years, you would expect to see much less new business in the prompt years – in the prompt year, in this case 2016, than you would in the out years, for example, in 2017 and 2018. Embedded in that power new business is things like the execution of our retail business and the margins associated with that. So as we get closer to the swap period more and more of those contracts get layered in, we begin to reduce that bucket of power new business. I mean, there’s other elements of our business that follow that same timing shape, so this isn’t unique in the sense of seeing a ramp up between the prompt year to two years forward and we’re very comfortable with the numbers that we’ve put out there. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Got you. Thank you so much guys. Operator And this does conclude today’s conference call. You may now disconnect. Christopher M. Crane – President, Chief Executive Officer & Director Thank you. 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