Hello, and welcome to Exelon's Third Quarter Earnings Call. My name is Gigi, and I'll be your event specialist today. All lines have been placed on mute to prevent any background noise. Please note that today's webcast is being recorded. During the presentation, we'll have a question and answer session.
If you would like to view the presentation in a full screen view, click the full screen button by hovering your computer mouse cursor over the PowerPoint screen. Press the Escape key on your keyboard to return to your original view. It is now my pleasure to turn today's program over to Dan Eggers, Senior Vice President of Corporate Finance. The floor is yours.
Thank you, Gigi. Good morning, everyone, and thank you for joining our Q3 2020 earnings conference call. Leading the call today are Chris Crane, Exelon's President and Chief Executive Officer and Joe Nigro, Exelon's Chief Financial They're joined by other members of Exelon's senior management team who will be available to answer your questions following our prepared remarks. We issued our earnings release this morning along with the presentation, both of which can be found on the Investor Relations section of Exelon's website. The earnings release and other matters which we discuss during today's call contain forward looking statements and estimates that are subject to various risks and uncertainties.
Actual results could differ from our forward looking statements based on factors and assumptions discussed in today's material and comments made during this call. Please refer to today's 8 ks and Exelon's other SEC filings for discussions of risk factors and other factors, including uncertainties surrounding the impact of the COVID-nineteen pandemic that may cause results to differ from management's projections, forecasts and expectations. Today's presentation also includes references to adjusted operating earnings and other non GAAP measures. Please refer to the information contained in the appendix of our presentation and our earnings release for reconciliations between the non GAAP measures and the nearest equivalent GAAP measures. I'll now turn the call over to Chris Crane, Exelon's CEO.
Thanks, Dan. Appreciate it. And as you can see from our release, we've had strong earnings and operational performance while continuing to focus on the health and safety of our employees and the communities. Our GAAP basis earned $0.51 per share, our non GAAP basis earned $1.04 per share. We did outperform our guidance that we had originally given at $0.80 to $0.90 per share due to some favorable weather and more cost savings coming through sooner than we anticipated.
Joe is going to get into the detail that I want to highlight. In August, we had a tropical storm that battered the East Coast with rain and strong winds, significant impacts to A. Stelmarva and Pico. It was Pico's 10th largest storm on record following the 8th largest storm in June. Then a hurricane like Direcchio tore through the ComEd service territory, spawning 13 tornadoes.
Between the two storms, we had more than 1.5 customers lost power. We had more than 500 employees and contractors that were helping their system utilities moving back and forth between the East and the West to try to respond to the needs of the customers. And despite the intensity, we were able to restore the power to our customers at record time due to the power of our Exelon Utilities platform. Our employees' quick response and collaboration made the difference for our customers. So what really want to thank our employees for their great work, restoring service to customers during not just the pandemic, but a very active storm season as we've seen.
As I mentioned on the last call, Exelon is committed to our values of diversity, equality and inclusion. Part of this commitment calls on our businesses and our partners to recognize these values and include women and people of color in key roles on our accounts. For 10 years, we've recognized partners who have excelled in this area. This year, we've included 30 companies in banking, insurance, legal investment, professional and IT services to our 2020 Diversity and Inclusion Honor Roll. We also are committed to delivering clean energy in a clean energy future.
Exelon Foundation and Exelon selected 10 startups as part of the first round of $20,000,000 in climate change investment initiatives. Beyond the financial support, Exelon will mentor the startups on accessing capital, structuring the business, capital allocation and meeting the regulatory requirements. Through this program, the foundation will invest early in stage startups working on climate change, mitigating, adapting and resilience in our service territory. 50% are minority or women owned, 60% of the projects focus on greenhouse gas mitigation and the others are on resiliency and adapting to the changing climate environment that we're living in. These investments will bring us a step closer to clean energy future by helping entrepreneurs translate their ideas for reversing climate change into practical solutions.
Finally, we made the difficult decision to retire some on economic generation stations. Mystic generation gas fired station in Boston will retire in 2024 when the cost of service agreement expires. And very disappointingly, we announced our Dresden, Byron and Dresden Nuclear Stations will retire in 2021. These plants produce 30% of the carbon free electricity in Illinois. They provide over 1500 good paying full time jobs and they support 2,000 supplemental workers during refueling outages, most from local union halls, paying $63,000,000 in taxes annually to support local schools, fire departments and other services in their community.
Despite being among the most efficient reliable units in the U. S. Nuclear fleet, they face revenue shortfalls, declining energy prices, lack of capacity revenue and market rules that allow fossil plants to underbid clean energy resources in the PJM market auction. Given these losses, we have made a tough decision to shut these units down and give our employees and the host communities time to manage through the personal and economic challenges ahead. Without these plants and others at risk, customers will pay $483,000,000 in increased annual energy costs under the PJM auction structure that is about to incur.
The electric sector emissions will increase by 70% and instead of growing 0 carbon energy in Illinois to reach the state's goal of clean energy, will fail decades behind. We continue to work with interested parties on the best way to achieve these state goals, but urgent action is needed. We have to protect our consumers from higher bills, our state from dirtier air and our communities from the loss of these irreplaceable power plants and the jobs that they create. Turning to operations, even with the pandemic conditions, extreme storms and record heat across our territories, all our utilities have achieved 1st quartile operating performance in outage duration and frequency. Customer service remains a top quartile across all utilities with BGE, ComEd and PECO delivering service in top decile.
Power dispatch match of 98 point 9% and renewable energy capture at 91.9%. Constellation has also had a very strong quarter of execution as a result was able to increase the new business targets for the year that we talked about that looked trouble in the Q1. The nuclear performance was excellent. The plants ran at 96% for the quarter. They led the nation in 0 carbon electricity production producing almost 38 terawatt hours of emission free generation.
Like all of our plants, Dresden and Byron ran at nearly full power through the hottest summer on record. Employees at Dresden and Byron are entirely focused on ensuring the reliability and safety of these plants through their retirement dates. The plants' forced retirement is simply hard to deal with and it's a shame. I'll now turn the call over to Joe for a financial update.
Thank you, Chris, and good morning, everyone. Today, I will cover our Q3 results, quarterly financial updates and our hedge disclosures. I will also provide an update on our full year 2020 guidance. Turning to Slide 7, we earned $0.51 per share on a GAAP basis and $1.04 per share on a non GAAP basis, which exceeded our guidance range of $0.80 to $0.90 per share. A key driver in our quarterly EPS performance for both the second and third quarters has been success in managing costs.
As you may recall on our Q1 call, we announced $250,000,000 of savings across the organization to help offset the impacts of COVID. At that time, we expected our offices would reopen in late summer. Since then, we have pushed Phase 1 of our reopening for remote enabled workers until January of next year at the earliest. This change in expectations, along with the hard work of the organization, led to higher savings than originally anticipated. For the quarter, Exelon Utilities delivered a combined earlier recognition of bad debt regulatory assets and favorable summer weather in our non decoupled jurisdictions.
This was partially offset by costs related to tropical storm Isis, which hit the East Coast in August. ExGen outperformed expectations for the 3rd quarter earning $0.47 per share. The upside was largely driven by lower O and M, where targeted savings exceeded our original expectations and were achieved sooner than planned. Additionally, favorable weather and lower cost to serve benefited our gross margin. On Slide 8, we show our quarter over quarter earnings walk.
The $1.04 per share in the Q3 of this year was $0.12 per share higher than the Q3 of 2019. Exelon Utilities less HoldCo earnings were up $0.01 per share compared to last year. The earnings growth was driven primarily by higher distribution and transmission rates associated with completed rate cases relative to the Q3 of 2019 as well as favorable weather at PECO. This was partially offset by storm costs at PHI and PECO. ExGen's earnings were up $0.11 per share compared with last year, benefiting from lower O and M and higher capacity revenues.
Turning to Slide 9, we are raising our 2020 EPS guidance range to $3 to $3.20 per share from $2.80 to 3.10 dollars per share and are now comfortably within our original 2020 guidance range of $3 to $3.30 per share. When we revised guidance on the Q1 call, there was a great deal of uncertainty about the severity and the length of the impacts of COVID on our business. Our updated guidance considers the strong XGen performance to date, our successful cost management, as well as the favorable weather we saw in the Q3. We are delivering on our financial commitments and we are confident we will be within our revised guidance range at year end. Moving to Slide 10.
Looking at our utility returns on a consolidated basis, we have dipped slightly below our consolidated 9% to 10% target range with an 8.9% trailing 12 month ROE as of the Q3. The 20 basis point decline from last quarter was primarily due to equity infusions at BG and E and ComEd to support capital investments. This calculation is backward looking, so you should continue see some pressure on ROEs over the next couple of quarters. This is simply due to the roll off of better pre COVID-nineteen quarters, the burden of poor first quarter weather, summer storms and the continued impact of lower treasuries on ComEd. Looking further into the future, we remain focused on delivering strong earned returns at the utilities and supporting our growth targets.
Turning to Slide 11. Since the last call, we had 2 major developments on the regulatory front. Pepco filed its 1st multiyear plan in Maryland and PECO filed its 1st gas distribution case in 10 years. Pepco was the 2nd utility in Maryland to file a multiyear plan with BGE filing the first plan in May. The filing will support capital investments in the electric distribution system made during 2019 2020 and planned investments through March of 2024.
Pepco's planned investments will continue to improve reliability in customer service, advance technologies and investments to modernize the distribution system, support state environmental goals and provide tools to assist customers in managing their energy use. The filing considers the current health emergency and economic challenges in Maryland, while allowing for timely recovery of investments that benefit our customers. A few highlights from the filing include flat distribution rates for the 1st 2 years of the plan, partially offset in year 3. Residential electric bills are projected to be lower in 20 24 than they were in 2011 recovery of electric vehicle program costs and COVID-nineteen costs and inclusion of tracking performance incentive mechanisms focused on system reliability, customer service and the environment. We expect an order in May of 2021.
On September 30, PECO filed a gas distribution case with the Pennsylvania Public Utility Commission. PECO is seeking a revenue increase of $69,000,000 for continued investments in its gas distribution system to maintain and increase safety, reliability and customer service. We expect an order in June of 2021. We also have several rate cases still in progress, 2 of which we expect orders on this year. In October, Evidentxi hearings were conducted as part of BG and E's pending multi year rate case.
As a reminder, the filing supports planned capital investments from 2020 to 2020 3 as well as investments made in late 2019 to maintain and increase reliability and benefit customer service for our electric and gas distribution systems. We expect an order in December. Additionally, ComEd's annual formula rate update filing is expected to be decided in December of this year. On October 14, draft proposed orders were filed by ComEd, the ICC staff and intervenors as part of the case. This filing requests a reduction in delivery rates for the 3rd year in a row and the 5th decrease in 10 years.
Since the formula rate has been in place, ComEd's investments in grid modernization and enabling clean energy growth have improved reliability by 70%, while keeping bills lower than they were nearly a decade ago. More details on the rate cases can be found on Slides 20 through 27 of the appendix. Turning to Slide 12, the utilities continue to deploy capital largely as planned for the year, investing $1,600,000,000 during the Q3. And year to date, we have spent $4,500,000,000 of capital at our utilities, improving our infrastructure and increasing reliability and resiliency for the benefit of our customers. Despite some early challenges from the pandemic, our capital plan is on track for the year.
Today, I will talk about 2 projects that advance Exelon Utility strategy. A key element of that strategy is involving our capabilities to anticipate and meet changing customer needs and expectations of the system. The first project is Pepco's streetlight modernization project in Maryland. This project includes conversion of approximately 66,000 existing streetlights to smart LEDs and integration with notifications to the central management system, improving outage response time, maintenance efficiency and customer billing accuracy. Additionally, LEDs improve light quality and benefit public safety and security.
This project is included in the Pepco, Maryland multiyear plan filing I discussed earlier. The second project is the Exelon Utilities customer information system upgrade, which was completed on time even though it was done almost fully remotely. This is a $130,000,000 project upgrade BG and E's customer care and billing system and implement Oracle's customer experience service cloud at BG and E, ComEd and PECO. This new system will provide operational efficiencies as well as improve customer satisfaction. It's simply one piece of an ongoing project across the utilities to transform the customer information system.
These improvements will support a platform to enable future customer benefits. Improvements will include a more personalized customer experience, allowing for more efficient issue resolution and a streamlined and simplified implementation of billing for new customer offerings such as community solar, where energy is produced at different locations than the customer's residence. Additionally, it will allow for faster implementation of new rate structures, bringing pricing for new services such as EV charging and storage pricing to market faster. Transitioning to Slide 13, we provide our gross margin update and current hedging position at ExGen. Our disclosures now reflect the impacts of the planned retirements of the Byron and Dresden nuclear plants in September and November of 2021 respectively.
For 2020, total gross margin is up $50,000,000 Open gross margin decreased $100,000,000 primarily due to lower spark spreads in ERCOT, partially offset by higher prices at NiHub and West Hub. Our mark to market of hedges were up $250,000,000 due to our hedge position, which offset the decrease in open gross margin, including the execution of $150,000,000 of Power new business. We also executed $50,000,000 in non Power new business during the quarter. Based on the higher load volumes associated with favorable 3rd quarter weather and lower cost to serve across the portfolio, we are raising our 2020 new business targets by $50,000,000 For 2021, total gross margin is down $150,000,000 driven by the retirements of Byron and Dresden nuclear plants, which is flowing through the open gross margin line. However, open gross margin is flat due to higher prices at West Hub, NiHub and New York Zone A.
Mark to market of hedges was down $100,000,000 due to our hedge position being down $150,000,000 offset by the execution of $50,000,000 of Power new business inside the quarter. As a reminder, the Vibrant and Dresden retirements are expected to be earnings and cash flow accretive. However, they are essentially flat in 2021 due to the timing of the retirements. The $150,000,000 decrease in gross margin is offset by lower O we remain slightly behind our ratable hedging program in 2021 by 2% to 5% when considering cross commodity hedges. Our hedge percentages reflect the removal of Byron in Dresden in the fall of 2021.
Moving on to Slide 14, our consolidated FFO to debt is projected to be 18% for 2020, consistent with last quarter. Looking at ExGen, we are ahead of our debt to EBITDA target of 3.0 times. For 2020, we expect it to be at 2.3 times debt to EBITDA and 1.9 times when excluding non recourse debt. On the ratings front, Moody affirmed its existing ratings for Exelon Corporation and ComEd in the 3rd quarter. We remain committed to maintaining a strong balance sheet and investment grade credit ratings.
Thank you. And I'll now turn the call back to Chris for his closing remarks.
Thanks, Joe. Finally, turning to Slide 15, I want to close as we do each one of these calls with our value proposition. We are focused on growing our utilities and now we're targeting a 7.3% rate base growth with a 6% to 8% EPS growth through 2023. We will use the free cash flow from the Genco to support the utility growth, pay down Genco debt and support the external dividend. We continue to optimize the value of excellent generation business by seeking fair compensation for our 0 emitting generation.
And I'll have to say that many editorials and others call what we're asking for as a bailout. It's not a bailout. We're the nuclear fleet is the only 0 emitting fleet that does not get compensation for its value. So this is not a bailout. It's leveling the playing field.
It comes across nice in political venues or editorial venues, but the last thing it is, is a bailout, it's leveling the competitive field. We'll continue closing on economic plants like we announced the retirement of Dresden, Byron and Mystic monetizing these assets and maximizing the value through Constellation, retail and wholesale. We'll continue to sustain investment grade credit metrics and maintain a strong balance sheet while and have grown our dividend annually at 5% through 2020. Before turning to Q and A, I want to comment on some recent news reports that Exelon is considering separating the Exelon generation from the utilities. As discussed recently on our last earnings call, we regularly evaluate whether our corporate structure best serves the interests of our communities, customers and our employees and also our investors.
We would consider modifying that structure when we can create value and recognize those interests. The nature of our business and the landscape that it's in has been evolving over the years. In addition, you've seen a number of competitive integrated companies in our sector that has shrunk considerably. Given those circumstances, a review of our corporate structure is underway, started earlier this year and we have the help of outside advisors. As we continue this review, we focus on creating value, taking into account, as I've mentioned, all of our stakeholders, the investors, the employees, the customers and the communities we serve.
So I want to emphasize that the separation of the companies would involve addressing some complex operational, financial and regulatory issues. No decision has been made, but we continue to do the work to determine the best outcome for our stakeholders and we'll provide you an update on our progress on next earnings call. So with that operator, we can now open it up to questions.
Our first question comes from the line of Stephen Byrd from Morgan Stanley. Your line is now open.
Hi, good morning.
Hey, Steve.
I just wanted to first talk about the strategic review and I respect that you're at, I guess, a fairly early stage of thinking through your options. But I was just trying to think about the strategy here. And I guess maybe I wanted to start with what sort of attributes or sort of risk profile would you want to achieve for your merchant fleet for XGen to be consistent with your strategy versus sort of what risk profile would be not consistent with your strategy? I know overall you're trying to de risk the business provide greater stability. How do you at a high level think about that?
Yes, I wouldn't say we're at the early stages. I would say that we were in an in-depth review of the evaluation. And some of the things we look at are the cost of capital, things like that, the degradation of the Constellation business with collateral costs. There's many aspects to it that are under review right now. But what we want to make sure is that we have 2 healthy companies, a utility business, if we and the Board determine this is the right thing to do, 2 healthy businesses that can stand on their own and provide the support needed for the balance sheets, the customers, the employees, the shareholders as we go forward.
So, a lot to be taken in there, but I don't think we have pinpointed our risk profile yet that or I can say we haven't pinpointed a risk profile yet that I've agreed with and the Board has agreed with.
Understood. Is it fair to say it is an objective to try to reduce the volatility and also just improve the viability, I guess, of that business going forward, right? That seems clear that that's part of the strategy here.
Yes, it's a free cash flow machine. And how do we optimize that to be the best that it can and produce the most on valuation side and shareholder return side. So that's kind of the focus.
Yes, that makes sense. And maybe just one last one for me, more on the tactical side, thinking about your nuclear plants, you've obviously made some shutdown decisions already, but I guess we calculate that some of your remaining nuclear plants are currently or will be negative cash flow. Would you agree with that assessment? And I guess over what timeframe are you thinking about making decisions for some of the plants that look like they're negative cash flow?
You've looked at our disclosures. We've outlined the plants that are sliding into that space. A lot depends on what we do with the capacity market or the FRR and how we treat the plants is comparable with others, 0 carbon emitting plants, which they're not being treated equally right now. So the timeframe, we have to watch the auction, we have to watch legislation. If we don't get a capacity redesign and the auctions run, you could anticipate there would be some issues coming up in the future.
Understood. Thanks so much. Appreciate it.
Thank you. Our next question comes from the line of Steve Fleishman from Wolfe Research. Your line is now open.
Hi, good morning. Can you hear me okay? Good morning.
Yes, I can hear you fine.
Hey, Chris. Great. So I guess first, arguably for the last year or so, you've been getting little value, if even maybe negative value for ExGen in the Exelon stock price. So the value case seems obvious, but obviously there's probably risks and obstacles to just get through. Could you maybe just talk to what some of those are in making this decision?
Yes, I mean, you can imagine this is a complex combination of a competitive integrated and I wouldn't get on the path of laying out each one of those. But I will tell you that when you start to look at the corporate center, splitting out the IP, splitting out the financials, splitting out the corporate organization has a lot of design and we have to make sure we're not creating, distance synergies and we do that properly. There's other considerations that we have to make, for the employees, for the regulatory bodies to do that. And it's not an easy one. Many of the competitive integrated that have switched and split have not had the complex level of the integration or the size of the scale that we have.
If you look at our we have the most premier retail and wholesale trading organization. Nobody that has split at anything like that. So there's value being created, but there's expense there too. So we have to watch how we do it, make sure we do it properly. There's a lot to be said about what we do for the consumer in the 0 carbon market.
You haven't seen anybody that has a 0 carbon fleet like ours split off. You've seen coal plants, you've seen gas plants, you've seen gas infrastructure split off. We have to make sure that when or if we do it, that we have the right compensation for the assets that are being spun off. And that's not something that's been recognized by the regulators or the legislators or the administrations thus far. They recognize wind, they recognize solar, but they have not recognized nuclear.
And if you look at just the state of Illinois right now, 60 percent of the generation is carbon free, 90% of its nuclear. Nuclear is the only one that's not compensated for its low carbon or 0 carbon element. So there's a lot of different avenues we have to go down to get this right. But as I said in the last call, the market is changing and we have to figure out how we change with it.
Great. Just based on the comments you just made, Chris, is it fair to say that you need to get some type of decision on Illinois law either supporting nukes or not before making this kind of business structure decision?
I'll let Bill jump in here, but I would not say that that is going to be a gating function. Bill, I don't know if you want to add anything to that.
Yes. No, Chris, I agree with what you said, but Steve, you have identified a big point of sensitivity here. As Chris alluded to, we have to take into account in considering whether to do this or not a variety of stakeholders, including the communities we serve, our customers, employees and the like. So all of that goes into the equation of not only the substance of this, but the timing of this. There's lots of ground to plow before we get to the exact decision on time before we decide whether we're doing it or not, number 1, the Board has not decided that.
And number 2, if so, what the timing would be. And obviously, the FRR is relevant to that, but it's hard to I wouldn't put it as a gating function. It's a function that's relevant to our consideration of what's the optimal timing if we decide to do this.
The only thing I would add to that is if the plants are not profitable, they don't cover their cash needs or their earning requirements, we'll shut them down and with or without FRR. So it's a business decision. Some people have called it a threat. It's not a threat. It's just a reality.
When businesses don't make money on assets, they shut them down. And so we have to look at the timing of all these decisions and make sure we're doing the right thing. But the legislation is important for the value, but we have to make decisions based off of current economic conditions.
Great. Thanks. And just Bill, great to hear your voice. Thanks for those thanks for the answers.
Steve, thank you. Thank you for your nice notes to me. I really appreciate it. Thank you very much.
Thank you. Our next question comes from the line of James Thalhofer from BMO Capital Markets. Your line is now open.
Thanks for the time guys and good morning.
Good morning. I was trying to get off mute.
It's okay. Just two real quick questions. One is, I know you previously stated you conduct reviews on a regular basis,
but in
your prior evaluation of the corporate structure, has this process included the retention of outside advisors to help you work through the process or is this kind of the next level of review this time around?
No, I think we were very public in 2017. We used outside advisors and we did a very, very thorough evaluation and we looked at the free cash flow coming off the Genco. And at that point, it was accretive to be able to reduce debt, be able to put equity into the utilities and also support a reasonable dividend policy. So we've kept close advisors as we've looked through this in the past, not only on business structure, but assets also. It's nothing that's been insular to the company.
It's always been with advice from outside.
And just one last question, I guess, just thinking, I guess, about cost allocation, as you undergo the review of the potential separation, is there any initial guidance, I guess, you could give us on how you're thinking about the magnitude of shared services overall across the company and how potentially that falls into the regulated and ex gen buckets and thoughts on how you sort of mitigate that as if you were to move forward, I guess?
It's too early to go there. I will tell you that we have to be very sensitive to what falls back on the utilities and what the Genco can manage. And so some of the cost savings that you've seen in this quarterly update is us accelerating that type of focus. Not going too far, but the Genco has done a lot. The business services organization is accelerating some stuff on technology contracts and other things that would mitigate those costs when split.
One thing about competitive integrated, you get to use a Massachusetts modified model to spread the costs around. That's a revenue generated formula. We know if or when we do a split that that goes away. And so we have to figure out how do we keep the financials right, keep the employee benefits programs in all the databases. I mean, you can go through that list of all the complex things that we have to do.
But we do understand that the regulators are not going to want to see an increase in costs because we split the company. And the owners of the Genco are going to want to make sure that they're the shareholders of the Genco are going to want to make sure that we're the most efficient. So we're working through that now, but we don't have a number yet.
Okay. I appreciate that. And just on Slide 36, you talked about roughly about $200,000,000 of the $250,000,000 on the cost savings sort of this year or coming at the ExGen level. Should we think about that as being a decent run rate going forward? Or how much of that do you think you can retain as we move into 2021 to 2022?
I'll let Joe jump in on that. There's travel, there's some other smaller things that we're not doing right now. But Joe, you want to take that?
Yes. Thank you, Chris. And good morning, Jim. This year, we had a goal of $250,000,000 of O and M cost savings across the enterprise and we're going to overachieve that by about $100,000,000 to $125,000,000 is our expectation. We're working through that right now to your question about how much of that is repeatable in the future.
We're in the throes of analyzing that. To Chris' point, we've learned a lot here in the last almost 8 months where we've been working remotely. We've had savings on travel and entertainment. We've had consulting dollar savings, training savings. We've looked at almost everything.
And I think there will be things that fall to the bottom line and we're going through that now. We would expect to provide you an update on that on our Q4 call, but there will be things that bleed through. We're just not ready to commit to how much of that is run rate in the future.
Okay, great. I appreciate that. Thanks for the time.
Thank you. Our next question comes from the line of Jeremy Tonet from JPMorgan. Your line is now open.
Hi, good morning. Good
morning. I just wanted to speak more on the strategic review. And could you speak more to the financial considerations here? And namely, would ExGen require a bunch of equity to separate from the business, if that's something you could share any details there? And how should we think about the funding needs growth prospects at Exelon's Utilities under an independent scenario without the support from ExGen cash flows?
Well, there's still a lot of work going on right now. I don't think we have an anticipation of that. We're still trying to figure out what level of the ratings that we keep. But Dan, do you want to take it?
Yes. Thanks, Chris. I mean, Jeremy, I guess it's a good question. Right now, I think it's probably a little early to start making calls around balance sheet and capital allocation decisions. You could imagine amongst all the factors we're considering with this review, looking at the credit metrics, working with the agencies, thinking through that is going to be an aspect, thinking about how ExGen would use the free cash flow that's been funding the utilities to be part of it, thinking about how the utilities can fund their growth, both with their internally generated and retained cash flows, but also with other sources of funding will all go into the decision.
But those are a number of factors will go into our analysis over the coming months.
That's very helpful. Thanks. And just wondering if you're in a position to share any feedback that you've received in Illinois with response to the retirement announcements that you put out recently?
There's some disappointment as you can imagine from the communities. There's disappointment from employees and these are not the 1st nuclear plants we've had to shut down. Some will say that we'll make enough money already, we should not shut them down, but that's just not the way businesses work. And so you have to work through the reaction. The 2 major constituents that are going to feel the pain here with us shutting these units down because we're losing so much money are the employees and the communities.
If you look at the taxes and what we provide in the community as far as employment and commerce, it's not easy. And so you can imagine those communities are trying to figure out what they can do to support us staying, keeping those points open. But I haven't heard a lot from the legislative side And I'll let Kathleen or Bill jump in on that side.
Yes, Chris, I can jump in. I mean, as you know, the legislature is not in session. So there has been continued work on potential clean energy legislation through the Governor's working group and similar efforts on both the Senate side and the House side. But until the legislature is back in session, we won't have a sense of where that's going. But I agree with you that the impact both on the employees and the communities around the plants as well as the sort of broader communities in Illinois are watching this because to the extent these plants shut down, what will happen is fossil plants will ramp up and that will affect communities around the state that are already struggling with air pollution and the effects of COVID.
So, a lot of folks are watching it for sure.
Got it. Understood. And if I could just ask one last one here. How do you see proposed multi year plans impacting your return to 9% to 10% ROE target and the sustainability of maintaining that range?
Yes, I'll let Calvin answer that one. We've had a couple punches in the gut this year that brought us back down with stones and some other things. But Calvin, you want to cover that?
Absolutely, Chris, and good morning. What I would say is that our whole process and working with our regulators in our jurisdictions around multiyear plans was geared to really create a foundation for long term growth and also giving transparency and accountability to our customers on how this was going. So it is our commitment that we are going to remain in that 9% to 10%, but it's going to be done in a way where it's transparent to our customers and we're able to invest in our system for just to continue to operate a safe and reliable system. So that is the commitment. That is what we're discussing and we are on course to meet that obligation as you've heard in Maryland and now in DC with both of our utilities in Maryland and in D.
C. And we already have very constructive environments in our other jurisdictions. So we're moving forward with that.
Got it. That's great. Thanks. That's it for me.
Thank you. Our next question comes from the line of Julien Dumoulin Smith from Bank of America. Your line is now open.
Hey, good morning team. Thank
you. So if I can pick up where Jeremy left off a little bit, can you talk about the balance sheet, especially under any prospects of the spin here? Just want to hear clearly from you all how you're thinking about it. The rating agencies have talked broadly about ExGen being an investment grade entity. If I can ask you this way, how committed are you to IG metrics under a spin?
I know that you've kind of alluded
to this earlier in the
call, but I just want
to be extra clear about this. And then subsequently, it seems that in past periods, one of the calculations here has been the implications to the retail business. Can you talk about that side of the equation, under any strategic shift?
Joe and Jim, you want to tag team that one?
Yes. I think, Chris, the answer to Julian's question around how committed we are to investment grade, we take our strong balance sheet and our strong investment grade ratings that we have today, obviously, very seriously. As you mentioned, we're still in the process of evaluating what the spin would look like and all the ramifications of that. And that includes impacts to all the stakeholders you mentioned, the rating agencies being one of those and how it would impact the rating of a Genco that's standalone. But at this point, it's too early to commit to anything along those lines.
And with that, I'll turn it over to Jim to talk about the retail business.
Yes, sure. Thanks, Joe. And Julien, I guess, likewise, we're working through over the next period of time over the few months, we're going to work with the finance team to understand and how we can continue to optimize our business. Our customer serving business is really the large portion of our overall earnings capability for that we bring to the Genco and cash flow capability that we bring to the Genco. We're committed to that.
We want to keep that going and we'll work through the structures and the product structures that we need to maintain and to continue to serve those customers and then optimize the management in all the way through the spot market of managing the load and the generation output. So I think we'll make sure the impacts are such a way that we can maintain that focus on the customer and keep our products going and the growth that we see in that business.
Sorry, a further kind of clarification if it is. Chris, on carbon and the subject of how that might ultimately translate back to your portfolio here. How do you think the election could impact that? Clearly recognizing states rights and a lot of these EPA programs ultimately end up before the state regulators implement one way or another. Given that context, how do you think about carbon today as potentially implemented in Illinois eventually?
So Ian, what we're trying to do is work at the state level. We have had little traction at the federal level and it's very polarizing as you know. Elected, it's still going to be a polarizing issue. So working it through the states and then through the markets because you've got the cross state leakages is where we've been focused. We'll have to see what happens tomorrow and what happens in the House and the Senate, the legislative body where they want to go.
We hope they do it as a technology neutral approach versus what some sides of the House and the Senate have gone at technologies versus outcomes. But we'll have to see. We're still going to fight at the state level and the market level to make sure that we get the right valuation for our assets. We are the largest non carbon producing entity with no remunerations for those assets. So, but like I said earlier, it's nice for editorial or an editor or a politician to say we're looking for a bailout.
We're looking to be able to compete with the other non carbon that people have decided to provide a payment, a valuation for that low carbon output. But when you look at the largest non carbon emitting source in the country and the largest non carbon emitting company in the country and they're competing against other resources that are getting compensated for the value of that, it's just frustrating. And so but, pick up the paper tomorrow and somebody will write that Exelon is looking for a bailout. We don't care about a bailout. We just want to compete.
If we don't compete, we'll shut the units down.
Understood. Quite clear. Thanks. Thanks, Chris and team.
Thanks.
Thank you. Our next question comes from the line of Durgesh Chopra from Evercore. Your line is now open.
Hey guys, thanks for including me. Maybe just one quick one on the quarter and then I want to go back to the strategic review. Just on the quarter, you show this projected cash flow slide with a 2020 balance. The balance is significantly lower like $400,000,000 lower versus the Q2 call and your guidance is up. So just wondering what drives that?
Yes, Chris, I can take that.
Take that, Joe.
Yes. So good morning, Durgesh. There's a couple of things going on. Our free cash flow from our operations across the enterprise were up for the quarter. But we did see because of that number 1, we had an assumption of kind of less requirement for working capital needs.
And then more importantly, we had some movement in cash flow on other activity related to Exelon Generation and there were just a number of small factors that type of normal type quarter activity that moved the cash flow for the quarter, even though the earnings were up pretty materially versus the range we've given last quarter.
Okay, that's helpful. Understood. And just really quickly, Chris, you mentioned FRR not a gating factor. Maybe just to the extent that you can, could you procedurally talk about the next steps here? And if there's a timeline that internally you guys are working on to get this strategic review over?
Yes. I can tell you that, although the FRR and the legislation is critical for the communities and the employees, we have to make our business decisions. I think we're going through the review right now and trying to evaluate the complications of the potential separation, but we wouldn't use that as the gating factor. So once we get through the very complicated review, we'd like to provide a whole lot more color on the Q4 call, Not guaranteeing we're done or saying we'd be done by then, but that will be the view of where we think we're heading. Dan, I don't know if you want to say anything.
Dan, I don't know if you want to say anything else.
No, Chris, I think you've covered it.
All
right. Okay, guys. Thanks so much. Great quarter.
Thanks.
Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Chris Crane for closing remarks.
Yes. I just want to thank everybody for joining the call. It's a busy day. Elections going on, all kinds of concern about stability in the country. And so for us to be able to share your time, it's appreciated.
I really want to thank the employees for their commitment and dedication. We've had a lot of stuff going on this year, not only the COVID, the storms and the things that they've had to work through. And I hope that you and your families are safe and healthy. And with that, I'll close the call.