Ladies and gentlemen, thank you for standing by and welcome to the Exelon 2019 Third Quarter Earnings Call. At this time all participant lines are in a listen only mode. After the speakers’ presentation there will be a question and answer session. [Operator Instructions]. I would now like to hand the call over to your speaker today, Dan Eggers, Senior Vice President of Corporate Finance. Please go ahead, sir.

Thank you, Tamara. Good morning, everyone, and thank you for joining our third quarter 2019 earnings conference call. Leading the call today are Chris Crane, Exelon's President and Chief Executive Officer; and Joe Nigro Exelon's Chief Financial Officer. They're joined by other members of Exelon 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 Exelon's website. The earnings release and other matters, which we discuss during today's call contain forward-looking statements and estimates that are subject to various risks and uncertainties, actual results could differ from our forward-looking statements based on factors and assumptions discussed in today's material and comments made during this call. Please refer to today's 8-K and Exelon's other SEC filings for discussions of risk factors and factors that may cause results to differ from management's projections, forecasts and expectations. Today's presentation also includes references to adjusted operating earnings and other non-GAAP measures. Please refer to the information contained in the appendix of our presentation. And our earnings release for reconciliations between the non-GAAP measures and the nearest equivalent GAAP measures. I'll turn the call over to Mr. Chris Crane, Exelon's Chief Executive Officer.

Thank you, Dan, and good morning, everyone. We had a good quarter delivering strong earnings, excellent customer service across our utilities and our nuclear units ran at high levels of reliability. I'll turn to our regular reporting of our financial performance in a minute, but I first want to address a matter that I know is on all of our minds. We have publicly reported we have received two grand-jury subpoenas; the subjects which are lobbying practices in Illinois and the company's relationship with an Illinois state senator. These subpoenas and the speculation about what's behind them have dominated the news about Exelon and ComEd. Given that the investigations are ongoing we cannot discuss many details, but I'll tell you this, when we learned of these investigations we pledged complete cooperation with the government and that is the path we have taken. The company's outside lawyers are undertaking an exhaustive investigation of the facts relevant to the subpoenas, a special committee of the Board represented by its own outside counsel has also been informed and is being briefed on the investigation. Exelon's outside lawyers are sharing the results of the investigation with the government on an ongoing basis. Their investigation is enabling us to determine what changes necessary internally to ensure that going forward we operate at the highest possible standards, not whether actions have been legal or not but rather which go beyond the ethical reproach. We are keeping our eye on the ball by staying focused on the operational and the strategic path that has delivered the success. Now I'll turn to the regular report and answer any questions about that I can at the end of the call. Starting on Slide 5, we've had positive developments over the quarter. First, we were named Dow Jones Sustainability Index…

Thank you, Chris, and good morning, everyone. Today, I will cover our third quarter results, quarterly financial updates, including trailing 12 month ROEs at the utilities and our hedge disclosures. I will also provide an update on our full year 2019 guidance and our cost management program. First, turning to Slide 7, we earned $0.79 per share on a GAAP basis and $0.92 per share on a non-GAAP basis which exceeded our guidance range of $0.80 to $0.90 per share. The outperformance was driven by Exelon utility which delivered a combined $0.56 per share net of holding company expenses. Utility earnings were higher relative to guidance, driven largely by O&M timing during the quarter and favorable weather in our non-decoupled jurisdictions including PECO, Atlantic City Electric and Delmarva Delaware. As a reminder, in total, we are approximately 70% decoupled across our utilities. ExGen earned $0.36 per share, which was a little behind our plan. The third quarter was impacted by unplanned outages at owned and contracted assets in ERCOT which unfortunately hit during periods of high prices. Although, we had one of the top 10 hottest summers in 70 years in PJM and the third hottest September on record, we saw lower prices and volatility which resulted in less ability to optimize our wholesale portfolio during the quarter. Turning to Slide 8, we show our quarter-over-quarter walk. The $0.92 per share in the third quarter of this year was $0.04 per share higher than the third quarter of 2018. Exelon Utilities less HoldCo earnings were up $0.001 per share compared with last year. The earnings growth was driven primarily by higher distribution rates, associated with completed rate cases relative to the third quarter of 2018. This was partially offset by unfavorable weather in load at PECO. ExGen's earnings were up…

Thanks, Joe. Turning to Slide 16, we are accomplishing things we committed to do, including maintaining industry leading operations, meeting our financial commitments, effectively deploying more than $5 billion in capital across our utilities this year and advocating for policies that support clean energy. Our strategy remains the right one and we are committed to our value proposition. We will continue to grow the utilities targeting a 7.8% rate base growth and a 6% to 8% earnings growth through 2022. We continue to use, as Joe mentioned, the free cash flow from Genco to fund incremental equity needs at the utilities, paydown debt and fund part of the growing dividend. We will continue to optimize the value of our ExGen business by seeking fair compensation for zero emitting generation fleet, closing uneconomic plants like we did with TMI and Oyster Creek, selling assets where it makes sense to accelerate our debt reduction plans and maximizing value through the Generation to load match strategy at Constellation. We will sustain strong investment-grade metrics. We'll grow our dividend annually by 5% through 2020. The strategy underpinning this value proposition is effective. We remain committed to optimizing the value of our businesses and earn your ongoing support of Exelon. Operator, we can now turn it over to questions. Thank you.

[Operator Instructions]. Your first response is from Greg Gordon of Evercore. Please go ahead.

Thanks, good morning. Got a couple of questions. First as it pertains to ExGen, you sort of commented at the end with regard to plant closures. If you're, for one reason or another, unable to get the state of Illinois to understand the economic necessity of increased compensation for your nuclear fleet. At what point do you go down the path of moving to shutdown of the most uneconomic units?

I can't stress how important the spring legislative session will be for the future of the four sites that are not covered under the ZEC program. So we'll be watching -- there's couple of variables here, we'll be watching what happens with the FERC order and what PJMs responses to the FERC order driving the legislation, but the first half of 2020, will be a real critical point in decision making and potential announcements one way or the other.

And Joe. As it pertains to the details of the guidance, it's sort of two steps forward, 1.5 steps back on the outlook for ExGen better wholesale prices, but -- and the cost cutting, but lower optimization expectations. Is that a function of just lower volatility and lower overall prices making it less some -- less -- that volatility lessening the opportunity for your traders to manage the book effectively or can you give us a little more color on that?

Yeah, Greg. You're spot on. I think it's a combination of factors. It's -- the lower volatility in the marketplace, I mean, we had a warm summer here and we didn't see much volatility, we didn't see prices respond. I do want to stress that we're talking about the wholesale side of our business, our retail business remains very solid. And as it relates to ExGen, we announced these cost cuts which mostly offset the reduction in new business targets. As Chris mentioned, depending on the outcome of Illinois, there is still other things that we would have to evaluate on how our business model changes and disposition of assets. There is other costs that we would look at -- some of the levers we have at hand, we'll continue to address capex obviously and any other asset financing. So there is a combination of factors here. But specifically to the drop in the new business targets, it is the market environment that we're seeing.

Okay. And then on -- two more questions, one on the regulated side, the ComEd sounds like it's operating very well but 30-year is a headwind and it'll continue to be a headwind into next year and until we see a steepening of the yield curve. So like -- as you're looking at the outcomes in the other areas of the utility business. The other 60%, 65% of the earnings contribution from outside ComEd, are you seeing opportunities to offset the impact of interest rates or should we assume that all things equal, you're trending lower in that 6% to 8% guidance range than you were before?

Yeah, Greg. Good questions, Joe again. We update once a year on our Q4 call and we -- and as it relates to Exelon utilities and we will expect to do that on the call in February. Having said that, we are seeing the impact of the lower ROEs at ComEd just for reference every 50 basis point move up or down is about $0.03 of EPS. So for 2019 for example, the weighted average 30-year is down approximately 50 basis points and you see that with our revised guidance. The 30-year treasury on the forward curve is down approximately 70 basis points versus 12/31. I would say though that's one piece of the plan. The capex plan, as we've said, only corporates identified projects that benefit the consumer and improve the liability in the customer experience. We have seen through time that as we get closer to a given period, we find need for an additional investment to continue to improve the liability in that customer experience and we'll continue to work hard at that as we move forward.

All right. And my last question, Chris, I know it's a difficult topic, the investigation. The second subpoena and the retirement of Anne Pramaggiore, they're all very disconcerting public disclosures. What is it that you can tell us about how you can potentially resolve this investigation? What kind of timeline are we looking at between now and when you can get the other parties and this comfortable with the way that you've acted or comfortable that they've gotten the information they need, so that we can resolve this?

There is a grand-jury investigation going on. There's not a lot of details that we can provide at this point. The timeline is not set by us, it's set by the government and the grand-jury and we'll continue to cooperate. Anything we learn from our outside attorneys doing the independent investigation will immediately take action on and correct. But our cooperation with the government -- full cooperation, very open cooperation is the imperative here. And like I said, we're not passing judgment on is anything legal or illegal and some of our past practices with contract lobbyists or consultants. So these things can take a while. I don't expect it will impede our business at all. Going forward is keeping the eye on the ball, improving the operations, driving the reliability while driving efficiency at the same time. The management team is very focused. There's a lot of speculation in news articles. There is things out there that people are speculating on that they're getting to say that the best. So we'll just have to continue the process, continue to cooperate, continue to keep our eye on the ball and when it comes time that we're able to speak we can provide a little bit more color on any corrective actions we've taken. But for now, it's -- we can't go there.

Thank you. Your next question is from the line of Julien Dumoulin Smith from Bank of America.

Hey, good morning, team. Hey just wanted to follow up on a few details perhaps we can talk to as a function of the process today. And I'll include that the two of them together here. First the Clean Jobs Coalition and just some of the headlines around where the legislative -- legislation stands today. I know whether it happens this year or more importantly next year. Just wanted to understand how we're framing that conversation today given the realities? And then separately and somewhat related, I'd be curious how would you position the conversation of the franchise extension at ComEd next year? It seems unrelated, but I just want to make sure we at least talk through some of the process on that front as well?

Sure, I'll cover the first part and Joe Dominguez is with us and I'll let him cover the second part. The conversations, negotiations, strategy for the legislation is still an active conversation with many stakeholders. And when you talk about the Clean Jobs Coalition, just so you know that's not a very structured organization. And to speak as a body, as somebody did to one publication, we're still very close in conversation with some of those members of the coalition and we'll continue, but there is a lot of people involved, there is different coalitions, there's the path to one hundred to the clean jobs coalition. There is the labor. So things are continuing to evolve in conversations with leadership and the legislature are continuing to take place. So it's not like we're stalled or stopped or don't have parties to deal with. Kathleen is doing -- for the Generation side doing a significant part of that. And Joe is working to not only support what the Governor wants and what the State wants, but in the meantime, also protecting the consumers to make sure what we're doing to get to the path to a 100% clean by 2030 is done in a most economic fashion. I'll Kathleen if she wants to add anything more to the first part and I'm going to turn it over to Joe.

The only thing that I would add is that the same news story is talking about that question, Julien. I also mentioned that the FRR is the center piece of this CJC bill. And that's because it's essential to achieving the state's clean energy goals. If we do not address this, the PJM market will send over $1 billion a year to old coal plants rather than investing the money toward the state's clean energy ambition, and that the fact that folks are lobbying and rallying in the capital around this. The fact that it's an important policy change and that it needs to happen right away is something that should be noted. Now obviously there are other elements of the bill both from the CJC, the path to 100 others that there is not agreement about and that's why it's going to take all stakeholders together to deliver piece of legislation that will get the states to its clean energy goals in a way that's affordable and we are committed, as Chris said, to working with all stakeholders to achieve that goal.

Joe?

Great, Julien good morning. Let me just start off explaining what the franchise agreement is. At its most basic level, it's an agreement that sets for the procedures for us to use city right away for our infrastructure and the fee schedule that we pay in order to use their right away. So what I'm talking about here that are kind of granular things that are in the franchise agreement is, how many times could you open up a street to interconnect a new business, what the fees are for those operations that kind of granular detail. We've been in negotiations with the city now for some time. There was a pause in those negotiations while the mayor's race was being sorted out and her new team was put in place, I'm pleased with the progress we're making right now. There are three potential outcomes here. The agreement that is scheduled to come to an end at the end of next calendar year, at the end of 2020. Either party ComEd or the city have an option at the end of this year to terminate the agreement or they could continue to negotiate. As I said the path we're on right now is that we're continuing to negotiate and if we're successful we'll will get a new agreement. If the city elects to terminate at the end of this year, we will continue negotiations and if we do not reach a resolution. It's not like we stop providing electric service to the city but our fee schedule and our procedures will drop out of the franchise agreement and will be governed by the municipal code that'll add a little bit of process to our work, but it doesn't shut down quite obviously our activities. If the city does not issue…

Thanks, Joe.

Excellent. Guys, I appreciate that.

Your next question is from the line of Steve Fleishman from Wolfe Research.

Yeah. Hi, good morning. So I guess one of the things that we struggle with these disclosures has just been really what benefit if any you've gotten from legislation over the last few years. And for example on the formula rates, the ROE right now is actually really low and, as Joe mentioned. And then also, I guess, you've gotten the ZECs on Clin and Quad. So just but I think those plants would have been losing a lot of money if you didn't get them. So I guess, maybe you could just give some color of kind of what value really is at risk from this from an investor standpoint because it's just not clear that you've gotten a lot of value out of any legislation over this period?

Well, we -- the value is the consistency in the process of the rate cases. We are tied to the 30-year and that was a negotiation that was done. If you look at the history of the rate cases and how it has improved the regulatory process and the consistency of the regulatory process, I think there's a lot of value in that. When you get 100% of ask or 99.6% of ask and you're not litigating something over an extended period, it creates predictability. We can't control the 30-year, but we can control the efficiency and the productivity of the system with the right regulatory format and that's what we've done. As for Clinton and Quad cities it did save the plants and it's more than just saving losing cash, we would have shut them down and that issue would have been resolved very quickly. It's meaningful to state in the community but it also is providing a profitable cash flow from those units. We're working on legislation that would either secure on the other four sites in the state through the FRR process or we will shut those plants down. So -- in a point in time with the low interest rate, you could point to that and say we haven't got anything, but that is not been the historical case, and going forward, we'll watch what we can do if interest rates persist to stay low what action we should take. But I would have to tell you that, I understand the sentiment of your view or your question but there has been a great deal of consistency that's happened and a great deal of ability to invest capital. It's more than just the ROE, right. We have been able to through legislative terms -- been able to consistently invest needed capital for reliability and efficiency and be able to earn a return. They may be a little bit lower returns but we're able to predictably invest the money and predictably get a return on the money. So that's huge, if you go back historically to what's happened in some of our jurisdictions investing money at risk and then getting the disallowances in the regulatory process was much more damning than having a low 30-year rate and having a low ROE , but still an ROE that's above our cost of capital.

Yeah. Got that. And then just one other question with respect to the nuclear plants. This may be premature, but just could you give us a sense, I am assuming they're -- money-losing on their own the 4 nuclear plants that you're referring too, is there any way to kind of get a sense of the -- if you ended up having to shut them, what it would do?

We don't evaluate the market response -- projected market response from shutting the plants down. So what we do evaluate is the current financial performance of the free cash flow and earnings and then the forward projected based on the forward curves and look at the credit metrics and the balance sheet to see what's happening. And so we have discussed openly that there -- the four sites are in the future at current forwards with the current capacity market being managed the way it is by PJM versus the needs that the state wants to maintain the clean energy sources with lack of being able to get legislation to change and be able to pull ourselves out of a very inefficient by what the state wants auction process at PJM and go into FRR. They're marginal at best to looking forward to losing cash and earnings. So that's the situation. Now, I don't think we're announcing the amounts yet. We're continuing to evaluate these numbers, but I can tell you that some are more dire than others at this point and we need to move forward with the legislation to prevent the loss for the state from an environmental perspective and from economic perspective.

Thank you.

Thank you. Your next response is from Stephen Byrd from Morgan Stanley. Please go ahead.

Just wanted to go back to the point you mentioned about the special committee at the Board with respect to the Illinois investigation. Are there any targeted deliverables in terms of reports or updates and will any of that eventually be made public or is that more for internal purposes?

I'll let Bill answer that.

Steven, it's Bill Von Hoene. The special committee of independent directors will continue to meet periodically as needed. They have their own counsel. There is no particular deliverable that you should anticipate out of that. It's just part of the regular process that's undertaking in circumstances such as this. So no particular deliverable should you foresee.

Understood. And in terms of the scope of the investigation, to your knowledge, is this focused solely on Illinois or there are other states or elements of the business involved?

We're not at liberty to talk about the particulars of the investigation but you've seen what has been reported about the subject matter and the subject matter of that has been reported by us in our case, and I refer you to that.

Yeah. No, that's fair. And then just lastly -- just in terms of the scope of the investigation. I think there are four individuals mentioned. And I think we've seen two announcements from Exelon I assume just at a high level, you had mentioned, Chris at the beginning the policy is to cooperate with investigations. I presume that employees who do not cooperate would not be employed at the firm or is there sort of policy we should think about in terms of how you approach cooperation with the investigations?

Yeah, the expectation is for all employees and all executives to participate in whatever manner they're requested to, if that's providing information or having discussions. That's the expectation. Peoples employment is based on their total record, but our expectation is full cooperation and ethical behavior.

Thank you. Your next response is from Praful Mehta from Citigroup.

Hi. Good morning. So maybe I just wanted to focus on the generation side a little bit, as comparing Q2 and Q3 power prices and it looks like every region the power prices go higher. However, given as you talked about your volatility was lower and so margins came in lower and there is also a little bit of cost cutting now for 2021. So just wanted to understand how we should think about the generation business, it seems like curves itself aren't enough volatility is now a new element that we need to consider. How should we think about the stability of the generation business? And also in the context of reserve margins in PJM, if you could just give us a little bit more on how you think about the business that would be really helpful.

Let me have Joe starting and Jim McHugh go into more detail.

Praful. Good morning. What -- I think if you think about what the intrinsic strategy of our generation business is, it's been producing electric generation and we deliver it to our customer-facing businesses and that still continues. Obviously, the power markets have some challenges and you've seen what we done -- we've done with our new business, we continue to work hard to find ways to reduce the cost structure both from an O&M and capital investment perspective of our generation assets as well as our Constellation business. And I think that's -- what you'll see us continue to do. I think the second piece of that gets into the industrial strategy of what we're trying to accomplish as a company. You see how we're investing in our utilities, you see how we continue to manage our balance sheet and we continue to return value to the shareholders. That is being done on the back of cash flows that are being generated -- free cash flow that's being generated at Exelon Generation and we will continue to work hard to do that as we continue to transform the Generation business. So last piece is obviously, as we've talked about in our prepared remarks and with some of the questions, we announced this cost cutting exercising business as usual state, depending on the outcome of the legislation in Illinois, clearly there is other elements to our business that would need to evolve under certain scenarios, so we'll continue to work hard at that and then that'll be dictated by other outcomes.

Hey, Praful, it's Ken Cornew. I'll just add a comment. We can -- our strategy continues to be a premier operator of generation particularly nuclear and other clean generation and also be a solutions provider for customers that has not changed. I wouldn't think about the Generation company any differently than that. And I'd like Jim to comment a little more on the customer side of our business.

Yeah, so I think it's important to note that the new business generation -- we put new business targets in our hedge disclosures, that's an expectation of the value we're going to create both from our customer-facing businesses as well as the optimization of the assets in the markets. The customer-facing businesses are performing very strongly and the stable value that has been there for a while, we still see good margins in really product enhancements and product solutions for customers who are demanding more. What's happening on our wholesale business side is the lower volatility in the markets which actually where we've reduced our new business targets around that end of the business, which actually, in my view point, leads to more stability. We have an environment where 70% to 75% of the gross margin in our new business will come from the stable customer-facing businesses that we run that are still performing strongly. So a smaller portion of our overall gross margins would come from this optimization activity. We happen to have an expectation of those numbers in our forward disclosures and that's the number that we are lowering based on this environment where we just see the supply stack being strong in markets like PJM and policy adding more generations to the stack, low natural gas price volatility and low demand growth in markets like PJM. So I think we're able to shift our business focus here to this customer-facing business that's more stable. We can reduce our costs to match that new business model and really provide an environment that I think is a less risk environment for the Generation company.

Got you. That's super thoughtful and helpful color. So I appreciate that. I guess just the quick follow-up in terms of the federal investigation, as you mentioned earlier on the call, it could take a long time or it could take some time. So if it does take time and your Illinois legislation for some reason is delayed linked to that. How do you decide on what happens with the units? Do you still run them? Do you still -- nuclear refueling is still continued or do you kind of wait? What kind of decision making you kind of expect around that from a timing perspective?

Well nothing has been linked to the investigation and the legislation. Right now, there is -- to run any legislation we've got to see a FERC order and we probably won't see the FERC order of PJMs response. Both of those tied together till sometime in the first quarter which will enable us to refine a legislative path going forward. If for some reason we don't garner support as a coalition in a large group of stakeholders to go forward with the legislation by what we see in the market forwards today, plants will start to shut down. That's the reality if something doesn't happen in the Spring. Because PJM will run there are auctions, and if there is lack of legislation or our ability to withhold the load and the generation from that auction, the expectation of clearing megawatts you've seen the trend. So without being able to get capacity revenue for those eight reactors and the market forwards being as low as they are right now. It's uneconomic and the one thing we are not going to do is sit around and damage the balance sheet and create a situation that's unrecoverable. The responsibility of the balance sheet is very felt very strong by the management team and the actions that we will take. If lack of cohesive and complete resolution path forward. We can't sit here for years and bleed cash and build up debt and damage the HoldCo and further damage the Genco.

Understood. That's very helpful. Thank you so much.

Thank you. I will now turn the call back over to Chris Crane, President and CEO for closing remarks.

I just want to thank everybody for participating in the call today and the questions. And I understand that we can't answer everything right now, but rest assured, we're taking all the actions that are necessary to ensure we can put this behind us. So thank you. With that, I'll close out the call.

Thank you for joining us today. This concludes today's conference call, you may now disconnect.