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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by and welcome to the Exelon Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions]
I would now like to turn the conference over to one of our speakers today, Dan Eggers, Senior Vice President, Corporate Finance. Sir, please go ahead.
Thank you, Michelle. Good morning, everyone and thank you for joining our fourth quarter 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 Officer. They're joined by other members of Exelon's senior management team will be available to answer your questions following our prepared remarks.
We issued our earnings release and separation announcement release this morning along with the presentation, all of which can be found in the Investor Relations section of Exelon's website. The earnings and separation announcement 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 today's 8-Ks and Exelon's other SEC filings for discussions of risk factors and other factors, including uncertainties surrounding the planned separation 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 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 and good morning, everybody. We have a lot to talk about this morning. So Joe and I will then try to go through it and allow adequate time for questions. Some of the stuff we have to talk about is bad on the recent events in Texas, to put some light on that, but we have some great other subjects to talk about our strong performance in 2020, the results there and the future path for our business.
I'll start with Texas. The experienced unprecedented sustained cold temperatures, as we know impacted the energy system in the state, along with severely impacting the people who live there. As noted in last week's 8-K, we had operational issues with our plants due to the extreme weather. They only periodically were available when the price is hit and/or maintained at the administrative cap of $9,000.
Our preliminary estimate is and this is preliminary, of the impact of this event across our portfolio is $750 million to $950 million pre-tax or $560 million to $710 million post-tax. At this point, the range is wide. It includes our best estimate for load obligations, ancillary charges and bad debt, it will take some time to refine this estimate. The data we normally, comes to us is on a lag from ERCOT with recently PUCT actions that data has been further delayed and continued uncertainty around any future actions the PUCT or others may take.
We expect it to provide a better update no later than the first quarter earnings call. This loss is unacceptable to us. We are mitigating it through business updates, including first quarterly favorability, mostly one-time cost reductions and deferral of non-essential maintenance, which Joe will cover in further detail.
We have today found updates and offsets that are expected to reduce our net impact to $0.20 per share at the midpoint of our loss estimates, which is reflected in our earnings guidance. These mitigating efforts are expected to reduce the cash impact to $200 million. As you know, last week's events have raised many questions about Texas market design and associated risks. And this has not been a new conversation. It's been one that's been around for a while. And we hope that through this that the proper actions can be taken on the design. As a result, we are evaluating all our options with respect to our ERCOT business.
Moving on to good news. Our 2020 operational and financial performance was strong. Our utilities maintained excellent operations not only in the face of the pandemic, but an extremely punishing storm year, derecho was hurricanes and one day we had 13 tornadoes in the ComEd service territory.
The power of our utility platform paid off for us this year. The mutual assistance across the fleet helped achieve record restoration speeds for both ComEd and PECO. Each utility delivered excellent reliability, top desk outage frequency and top quartile outage duration. This performance was reflected in our Customer Satisfaction scores with all the utilities receiving their best on record scores in first quartile in customer satisfaction.
Strong operations led to constructive regulatory results as we saw in the outcome of three rate cases across our jurisdictions in 2020. In December, The Maryland PSC approved BGE's first ever multi-year plan, enabling investment in reliability, we're expecting orders for multi-year plans at both Pepco DC and Pepco Maryland. This is allowing for timely recovery whilst supporting jobs in the economy in DC and Maryland.
Turning to Slide 7, nuclear had another very good year, generating 150 terawatt hours of zero-emitting power, avoiding - $78 million metric tonnes of carbon dioxide. The capacity factor was 95.4%, second only to last year's performance in fleet history. The nuclear group completed 12 refueling outages in fewer days planned, despite the rigorous pandemic protections. Our relationships with our retail customers continue to remain strong with 79% customer renewal rate, average customer duration of more than six years and power contracts of 21 months on average.
Slide 8, the financial results. Excellent operations and robust cost led to our strong financial results as you see on the slide. The pandemic reduced our demand for electricity, particularly at Constellation, which created financial headwinds for us. We've reduced our earnings guidance on the first quarter call based on what we knew at the time, and we kept looking for ways to improve our earnings outlet throughout the year.
We delivered on $400 million of savings, $150 million more than announced, which brought us well within our original earning guidance range. And then gains from the Constellation Technology Ventures portfolio brought us above the midpoint of our range guidance. We earned $2.01 on the GAAP basis and $3.22 on a non-GAAP basis.
Turning to Slide 10, this morning's announcement is really a very good strategic move for us. With our board, we've completed or concluded the separation of our regulated utilities in the competitive businesses is the best interest of all stakeholders, and are moving forward with that decision. So separation, it establishes two best-in-class standalone companies are high growth, high quality, a 100% regulated utility in America's leading clean energy company, producing the most clean energy paired with the best and largest customer-facing business in the country.
It better positions each business within its peer set, and it will support business strategies tailored to the distinct business investment profiles and meeting unique customer needs. The same operational expertise, customer focus and financial discipline that you expect from this management team will continue to underpin the value proposition of each company.
On Slide 11, the separation of the spin out of the generation business to our existing Exelon shareholders. The regulatory business, which is being termed the RemainCo shares the traits of a high quality, best-in-class utility, strong above earnings growth rate of 6% to 8%. Diversified rate base across 7 constructive jurisdictions with almost 100% of our rate base growth covered by alternative rate recovery mechanisms. Best-in-class operations and an attractive ESG attributes provide platforms to enable a transition to a clean energy economy without owning the generation.
The SpinCo, GenCo it's entitled as SpinCo for this, will be America's clean energy leader will continue to produce electricity that is over 90% carbon free, provide 11% of the clean energy in the country. And with no coal-fired generation and emissions profiles - our emissions profiles are significantly below the 1.5 degrees C targets. Delivering solutions for our large customer-facing platform in the country. And we anticipate having an investment grade rating on that balance sheet.
The transition, going to Slide 12, Joe will get in more details around the strategy and the specifics of these two great companies. But let me hit on some of the key transaction considerations. The spin is designed to be a tax-free distribution of the SpinCo shares to the existing shareholders of Exelon. We've worked hard to close by the end of the year, which provides execution benefits around a clean calendar year transition for the split. But regulatory approvals could potentially take longer.
We have several required approvals with long lead time items being the NRC, New York Public Service Commission. We have good plans for each of these approvals, and we'll be making the necessary files in the very near-term. We maintain an open dialogue with three credit agencies and anticipate both businesses remaining investment grade under various scenarios. Our preliminary work on this energy gives us confidence that they will be able to at least offset them at both companies.
Turning to the dividend, the Board has approved the dividend at $1.53 for 2021, which is holding it flat to last year. RemainCo expects to target a 60% payout in line with best-in-class high growth peers and will grow its dividend consistent with earnings. The SpinCo will focus on the combination of debt pay down to support our credit metrics and return capital to our shareholders and continue to invest in clean energy solutions.
Resolution of the Illinois Legislative Session and capacity auction results in June, along with a number of other factors will have a bearing on the allocation of this strategy. From a funding perspective, we estimate that Remain Co will need around $1 billion of new equity capital through 2024 investment horizon. This could change depending on variations of factors that we expect to play out over the course of the year.
The EPS bands that Joe will show you for the Remain Co already incorporate the potential future equity needs.
I'm now going to turn the call over to Joe to talk more about the two business strategies and the outlook for 2021.
Thank you, Chris and good morning, everyone. I will try to build on Chris's remarks by providing more detail about the two standalone businesses, and then we'll discuss our 2021 guidance. I'll start with RemainCo on Slide 14.
Our utilities will continue to be a premium business within the sector and share the characteristics of other high quality utilities. They operate in constructive regulatory jurisdictions, with nearly 100% of rate base growth recovered through alternative recovery mechanisms. We will continue to meet our commitments to our customers through bill affordability and best-in-class operations.
We will maintain a keen focus on our ESG initiatives, including clean energy and diversity, equity and inclusion. And we'll continue to pursue a balanced and disciplined financial policy underpinned by a strong balance sheet. All of this will allow us to deliver on industry-leading rate base and earnings growth built on strong returns on equity, growing the RemainCo business model well into the future.
If you turn to Slide 15, we show RemainCo's growth outlook. We have a robust investment plan across our utilities to continue to improve reliability and resiliency, enhance the service experience for our customers and prepare for a clean energy future. In 2021, we plan to invest nearly $6.6 billion and a total of $27 billion over the next four years. Since our last capital investment disclosure, we've identified more than $500 million in additional investment needs across our system that will provide further benefits for our customers and communities.
We are planning to grow our rate base by 7.6% annually - to $58.8 billion, adding nearly $15 billion to rate base by 2024. Our rate base growth is improved by 30 basis points since last year. And as a reminder, our capital forecast reflects only identified projects that we expect to recover through our normal rate filings and other recovery mechanisms. I will also point out that the largest project in our plan is less than 1% of our capital spend from 2021 to 2024, avoiding concentration risk with any particular project.
Our earnings per share outlook remains strong at 6% to 8% growth, compared to last year's update, this growth reflects updates to our rate base forecasts and our assumptions around funding RemainCo's growth would get and the $1 billion equity issuance through 2024 that Chris mentioned. We are confident this growth extends beyond 2024, I would note that 2025 will further benefit from rate case timing as you think about your long-term modeling. We deliver on this strong growth while maintaining a focus on affordability, which is paramount to successful utility. We will continue to manage our costs and support energy efficiency programs to keep bill inflation in check, even as we make these investments that benefit our customers.
Now turning to Slide 16, RemainCo is a 100% fully regulated transmission and distribution utility with no generation. It is diversified across 7 regulatory jurisdictions, with no one jurisdiction representing the majority of the rate base. We have worked with stakeholders in our jurisdictions to establish recovery mechanisms that allow us to prudently and efficiently invest in critical infrastructure for the benefit of our customers, while generating an appropriate return on capital.
Nearly 100% of our rate base growth will be covered by alternative mechanisms by the end of our planning period. These mechanisms include multi-year plans in Maryland and DC, formula rates for both transmission and distribution, capital and other trackers as well as forward-looking test years. We see the combination of being a fully regulated T&D utility, with geographic diversity and constructive regulatory designs as a clear differentiator among our utility peers.
Turning to Slide 17, Chris covered our 2020 operations earlier, but I wanted to highlight our operations over time, which consistently outperform the sector average, bringing tangible benefits to our customers.
Moving to Slide 18, environmental, social and governance or ESG values have been at the core of our business since Exelon's founding. We have been committed to doing what is right for all our stakeholders, and that will not change, specifically RemainCo is committed to working within our state's regulators and communities to make investments that help them achieve their environmental and clean energy goals.
Continuing to support our diverse employees, customers and communities and create a workforce that reflects our community, and operate responsibly and transparently, maintaining the high standards of corporate governance. ESG will continue to be an integral part of RemainCo's strategy as a standalone company.
Moving to SpinCo on Slide 20, SpinCo will be the largest supplier of clean energy and sustainable solutions to its customers. It produces 12%, or one out of every nine megawatt hours of carbon free electricity in the United States. SpinCo is an essential partner to businesses and federal, state and local governments that are setting carbon reduction goals and seeking long term solutions to the climate crisis. SpinCo's clean generation fleet is paired with one of the largest customer-facing platforms with the leading share in the C&I market where we continue to have very high customer renew and retention rates. It is also the best operator of nuclear power plants in the country.
As Chris mentioned, we're in ongoing conversations with rating agencies and anticipate that SpinCo will remain investment grade. It will continue to have a disciplined financial policy focused on optimizing cash flows to support the balance sheet, invest in clean energy solutions and return value to shareholders.
On Slide 21, you can see how SpinCo's clean generation fleet stacks up against others. SpinCo is and will be the leading clean energy producer in the United States. It does not own coal-fired generation and 90% of its output is emissions free. As a result, SpinCo produces nearly double the clean energy of the next leading provider and more than 8 times to 17 times the clean energy of its IPP peers.
It also has the lowest emissions intensity, nearly fivefold less intensive than the next generator, and more than 13 times to 15 times less carbon intensive than the other IPPs. These attributes are a clear advantage for SpinCo as the Biden administration committed to 100% zero-carbon electricity sector by 2035 to address the climate crisis.
Turning to Slide 22, each of SpinCo's states have or are looking to set ambitious emission reductions for clean energy goals. SpinCo's generation is essential to helping states meet their goals in an affordable manner. SpinCo provides a significant amount of the clean energy in the states where it operates. In Illinois and Maryland, it provides merely all of the clean electricity in the state. Losing any of these assets would be a significant step backward for each state in meeting its goals, while also creating higher costs for customers and significant economic hardship for host communities. The company will continue to be a leading advocate for clean energy policies aimed at preserving and growing clean energy to combat the climate crisis.
SpinCo's clean energy leadership extends beyond the power generation fleet. As you can see on Slide 23, our Constellation business has also been a leader in developing and providing clean energy and sustainability solutions for our customers. The desire of our customers to positively impact the environment is real and the Constellation business leads the charge through new products and strategic investments to help our customers. Not only have these efforts been economically beneficial with solid margins, they've also yielded strong customer retention rates and opened up additional revenue opportunities.
One example of this is our core product. Constellation serves as an intermediary between the renewable developer and the customer, filling a niche where multiple off takes are needed for 150 megawatt to 250 megawatt sized projects and customers may have varying demands for term and deal structure. It allows Constellation to provide a customized solution for our customers.
Moving to Slide 24, it shows the operational performance of generation over time compared to the industry. Generation remains the best operator of nuclear power plants in the United States, with industry-leading capacity factors of approximately 94% or better and industry-leading refueling outage days at least 10 days better than the industry average every year.
Turning to our customer-facing business on Slide 25, Constellations retail business is strong, it is steady, repeatable and with stable margins. Customer retention rates have averaged 77% over the last five years with that average contract terms of 25 months and customer duration of more than six years. Constellation is successful at acquiring new customers with a win rate of 29%. We have the largest C&I customer base and that remains key to our strategy.
First C&I customers have higher load factors compared to residential customers and are less exposed to seasonal weather fluctuations. Second CNI customers allow us to achieve scale that cannot be done with residential customers. And finally, although the gross margins may be higher on residential customers, these margins do not account for the cost to acquire these customers, which are higher than C&I.
Turning to Slide 26, there are uncertainties that will impact SpinCo's future, such as legislation in Illinois, the next PJM auction and potential federal carbon legislation. Regardless of those outcomes, SpinCo will continue to focus on its strong investment-grade rated balance sheet supported by stable free cash flows, which we see in the different scenarios we are currently considering.
Exelon generation has a strong record of cost management, with announced savings of more than $1.1 billion since 2015 and that cost discipline will not change. We will continue to seek fair compensation for the zero-carbon attributes, while maintaining the discipline to retire on economic assets and opportunistically monetize others. We will provide a more detailed capital allocation strategy, including debt reduction, return of capital to shareholders and growth later this year, when we have more clarity on these policy and auction outcomes. That said, we are confident that our disciplined approach will keep SpinCo an investment-grade rated business regardless of those outcomes.
Finally, I'll conclude with our 2021 earnings guidance on Slide 28. We are providing 2021 adjusted operating earnings guidance of $2.60 to $3 per share, which incorporates the midpoint of the range for the severe weather impacts offset by the opportunities that Chris discussed. Our disclosures including O&M, CapEx and gross margin reflect the mitigation opportunities we have identified and factored into this guidance.
Thank you. And now, I'll turn the call back to Chris for his closing remarks.
Thanks, Joe. Turning to Slide 29, I want to discuss our key focus areas for 2021. Obviously, we will be working on preparations to separate the businesses, including the regulatory approvals that we are confident we will obtain. That is the work of relatively a small group of our team members, most of the company will continue to focus on delivering operational excellence across our businesses.
The operating - operating the grid reliably and safely, supporting our customers and communities during the pandemic and everyday providing zero-carbon energy will meet or exceed our financial commitments delivering earnings within our guidance range and maintain a strong balance sheet. We'll continue our work to mitigate the impact of ERCOT losses and maximize the earnings and cash flow.
At the utilities, we will prudently and effectively deploy $6.6 billion of capital to benefit the customers meet the state's energy policy goals. We will work with our regulators to ensure timely recovery on these investments. We'll continue to advocate for clean energy climate policies, with the new administration Congress and the states to put our country on a path of meeting the carbon reduction goals.
In Illinois, stakeholders continue discussion on clean energy legislation. The Governor has called for passing an energy bill this session that protects our nuclear fleet, grows renewable energy and supports customers and job creation. We expect the legislation - legislative process to ramp up in the coming weeks and months. We will continue to work with all interested parties on legislation that will achieve the state's clean energy goals and a power system dependability, while protecting our customers from higher bills, dirtier air in our communities from the loss of the economic engines that our nuclear plants are. To be a partner and an ally to our communities we serve, including following through on our work we have underway on social justice, racial equity and restoring civil discourse.
Thank you, and I'll open the call up for questions.
Thank you. [Operator Instructions] Our first question comes from the line of Stephen Byrd with Morgan Stanley. Your line is open. Please go ahead.
Hey, good morning.
Good morning, Stephen.
Thanks for the thorough update on a lot of topics. I wanted to talk about your Constellation Technology Venture investment portfolio I think you laid that out well on Slide 45. You know I've noticed there quite a few of these entities are public entities now, as you know, with fairly significant market caps. It is challenging to determine kind of the aggregate value that you all have generated here often, you know, share counts are not available. And I know you can't disclose that on an individual company basis. But I wondered if you could maybe first just talk at a high level at you know, what is the approximate magnitude of a value of those public entity states that you have? And then over time, could this be a potential offset to the equity needs that you have?
So Stephen, good morning, it's Joe. I can't tell you that you know, are those entities contributed $0.14 to earnings in 2020. We have included an expectation of value in our '21 forecast. You know along those assumptions you - we have assumptions of what the IPO schedules would look like.
Obviously, for competitive reasons, I can't say a lot more than that. And as you know, these will move around day-to-day until they get to IPO and also till we get to a point if we consider liquidation. But we have included some value in our '21 forecast.
Understood, Joe. And is it possible over time, you know, I know you don't want to commit to sell in any particular company. But you know, it looks like the magnitude could be significant compared to the $1 billion of equity you need? Is it a potential offset in the future? Or have you ruled that out? How do you think about kind of the longer-term path here?
Yeah. Those are two very distinct things, when you look at the $1 billion, $1 billion of equity is needed at our RemainCo. And it matches to the growth plans, the capital allocation plan and our target metrics we're shooting for. You know, we'll see where these investments move through time, and we'll make the necessary decisions on what we want to do with liquidation you know, as we see value, but at this point, they're not linked.
Okay, well understood. And maybe just last one for me, just as you think about ExGen and sort of the leverage levels. I think you've laid this out clearly, but I just wanted to maybe explore a little bit further, how do you think about sort of target ratios you're thinking about there? And then also you did provide a discussion of capital allocation. I just wondered if you could just add a little bit as you think about sort of ranking the different uses of capital at ExGen, if you could just expand on that a little bit?
Yeah, Stephen, we, as you know, we have a long history of investment grade at Exelon Generation. We have had preliminary conversations with the agencies and we've shared data with them, it's been very productive. You know, you've heard both Chris and I say in our prepared remarks, that we have a continued commitment to investment grade with the SpinCo. And the first use of the free cash flow will be to manage the balance sheet and pay down debt. You know, we believe investment grade has value to the business, and also to completing the transaction. And given the strength of the balance sheet, we expected warrants to be investment grade, even when it's fine.
Very good. Thanks. I'll pass it over to others. Thank you.
Thank you. And our next question comes from the line of Steve Fleishman with Wolfe Research. Your line is open. Please go ahead.
Hey, good morning.
Hey, Steve.
Good morning.
Thanks. So just a couple of clarifications. Is it fair to say that the financing plan, the equity plan you've laid out incorporates the impacts of the Texas events that occurred and the cash flow that from that there was no change from that?
Yes, it does. Steve it's Joe, good morning. It does.
And then just one other clarification there. I think, Chris at the end of your comments you said the $1 billion in the plan to 24 could change some depending. Could you just give a little more color on that?
Yeah, I would like to give color. But you know, we did link some of this to Texas and it's early on in our actions. We want to make sure that we're giving a picture of what it potentially could be, but we'll be working on it. Joe?
Yeah, I think there, Steve, just examples of things that could change. It would be you know, we talked about $500 million of incremental capital investment at our utilities year-over-year in the four-year horizon, that would obviously have an impact. You know, ComEd currently is under a formula rate the ties to treasuries, treasuries move around, you know, regulatory settlements could change from assumption. So there are factors that will move it, but when we look at our plan as laid out, and we look at the metrics and all, you know, right now we see $1 billion of equity need -
Okay -
Company at the rates -
Okay, so it's more just the normal course stuff at any utility.
Normal course business activity -
Yes. Yeah, yeah. Okay. And then the, just on the dividend. If you take that payout, times the utility guidance, you're - you have a slightly lower dividend than the current one, but it doesn't take much dividend from ExGen to kind of make it even. So just, I don't know how important that is in the scheme of your decision-making. But just maybe any comment on that?
You know, it's really early on that one as we go through the planning process, understand what we'll be prioritizing at the GenCo for debt reduction or alternate investments we'll have to see on that and to talk about the RemainCo is definitely early in the planning process, we have to look at all sources and uses of cash. And do that throughout the year before we give a suggestion to the Board on the long-term.
Okay. And then my last question is just maybe for Chris, a high level between the Biden administration, there's on the nuclear future between what happened in Texas, the Biden administration coming in, the comments of the Governor of Illinois like - so far, just how are you overall feeling about the ability to get some credit for nuclear to stay open, then maybe six months ago?
You know, we - we've had a cloud in Illinois, and that has slowed the process of the discussion as some look at ComEd and the nuclear plants being one, and working to separate that, but also explaining not only the environmental benefits, but the community and the economic benefits that they serve along with the reliability. You know, in all of our jurisdictions that we have nuclear plants, I think that recognition is strong or becoming stronger. The preliminary conversations that Kathleen and her team are having with the administration and the Congress are positive.
You know, it's, to say that that you can see a carbon tax in the future, the eminent future, still a lot of ground to plow there, but continuing to work on some other mechanisms that her team has been engaged with on the legislative side and briefing on the administrative side, I do feel from a year ago to now we're making progress.
Great, thank you very much.
Thank you. And our next question comes from the line of Julien Dumoulin-Smith with Bank of America. Your line is open. Please go ahead.
Hey, good morning, team. Thanks for the time. Perhaps just wanted to follow-up here on the confidence in executing this transaction. Clearly, New York prior approvals with Entergy in previous attempts, obviously drove some challenges in the past. I'll leave it open ended. I'm curious, what are the preliminary conversations in New York and NRC looking like? I've recognized that you're directly addressing some of those early concerns with investment grade balance sheet here. But if you can speak to it more broadly, I would appreciate whatever context you can provide. Certainly seems - if I can read between the lines that you're already talking about providing a capital allocation update here. So certainly seems like that's a positive indication.
Julien, this is Bill and thank you for the question. We have had conversations with New York and we intend to file our approval request immediately after the announcement. This is a very, very different situation from the Entergy situation where they went in with a spin off that would be non-investment grade. We have given New York a good idea and a good understanding of how we think the financial stability of the SpinCo would be, and it's a very, very different situation. We've also had a long and relatively strong relationship with New York since this expert passed. So we are confident that we will get through New York, it's going to be a process, obviously, and there'll be some negotiations. But the initial signs are good. And while there is no timeline on New York, as you know, we would expect to be able to complete this in New York within a year. And we think that conversations are productive and continue - excuse me, to be that way.
Excellent. Just a couple of clarifications. EDF put that's reflected, I presume in this outlook and approval process, and then separately, the minimum FFO to debt targets that you're talking about here. Can you elaborate at all? I know it's early on both sides of the equation.
The answer to your first question is, we've made an assumption of EDF put in this analysis. The second one we have had preliminary conversations with the agencies. It's you know, it's too soon for us to begin commenting on what targets and metrics you know would look like but we are confident that both entities will be strong investment grade rating companies.
Got it. Okay, fair enough. Best of luck.
Thanks.
Thank you. And our next question comes from the line of Shah Pourreza with Guggenheim Partners. Your line is open. Please go ahead.
Hey, good morning, guys.
Hey, Shah.
So just focusing on the credit side. Do you sort of expect there to be sort of any parental guarantees between the RemainCo and the SpinCo upon separation? And curious, how do you sort of get the agencies comfortable with the business risk profile, despite sort of having IG metrics? I mean, this has been a little bit of an uphill climb with some of your IPP peers?
Yeah, so I think, Shah to the question of parental guarantees that we don't expect any parental guarantees being held at RemainCo for the benefit of SpinCo. I think, to your agency question. You know, there's a number of ways to think about that, right. We continue to look at ways to shore up the cash flows in the business, you looked at the, you know, the ZEC payments, capacity payments, the strength of our Constellation business, the strength of our Nuclear operations were strong investment grade rating.
Now, I think, you know, we continually honor that commitment. We think there's value in it, our value return policy and our capital allocation at SpinCo. First and foremost, we'll start with debt reduction with the use of free cash flow. So I think all of those things go into the dialogue with the agencies to ensure that, you know, we continue as an investment grade entity.
Got it. And then, so I know you obviously, the key is that you're mitigating or offsetting some of the dissynergies or all of dissynergies from the transaction that's announced today. Can you just maybe elaborate how you expect to mitigate dissynergies? And how do we sort of thinking about the $7.4 billion the HoldCo debt that's going to be allocated between the two?
So the debt will remain, the HoldCo debt will remain with the parent with RemainCo. When you talk about dissynergies, there are opportunities to reduce costs when you look at governance models, you look at, you know, the use of technology and some of the other external things we spend money on. We're going to challenge ourselves like we do each year to determine how we can continue reduce that, but we are confident when you go through those buckets that we can offset any dissynergies.
Okay, perfect. And then just lastly, I know, Chris, you highlighted sort of, you know, reevaluating the ERCOT fleet like Colorado Bend and Wolf Hollow? Do you sort of expect a transaction or strategy there prior to the Spin or so how do we sort of think about the Texas fleet in light of the ExGen spec?
Yeah, the first step is working with the other stakeholders on what happens and what's the future design of the Texas market? Do they lean towards a reliability standard that takes into consideration capacity tested for, which has not been the view of the market design in Texas, there's been a lot written on this over the years that we're heading in this direction is a very unfortunate event?
But we have to know first a market design. The second thing is we have to look at the design and the root cause on our specific units. And the issues that we had anywhere from metallurgical issues to pressure issues to instrument issues. We had taken some action after the Super Bowl event a couple of years ago. But you don't get compensated to do what we've done in other jurisdictions with hardening the plants that have not only energies but capacity payments that allow you to make those investments.
So you know, we have to look at it, we want to be a reliable provider. We want to participate in a market that's designed to not only protect the consumers, the cost element, the reliability element, but allow us to make the investments and operate our plants safely and reliably.
Terrific. Thank you, guys. Congrats today.
Thank you. And our next question comes from the line of Durgesh Chopra with Evercore ISI. Your line is open. Please go ahead.
Hey, good morning team. Thanks for taking my question. Joe, just - good morning. Just quick, I want to be clear on dividends, just in terms of when we're thinking about pro forma dividend to shareholders. Are we - should we be modeling them lower? Or are you suggesting that there could be a dividend at the SpinCo? Just -
What we -
Let me -
Right, sorry.
No, that's it.
Okay. Yeah, what we've said is, you know, we've aligned the utility payout at 60% of EBS - EPS it'll grow in line with our earnings growth. And, you know, we believe that compares to other high growth and high quality utilities. We haven't made a determination on the capital allocation plan at SpinCo for some of the reasons that we've talked about in our prepared remarks.
And you know, the first and foremost, we're going to continue to pay down debt there to maintain the strength of the balance sheet, because we think that an investment grade rating is important. And then beyond that we'll determine how we return capital to the shareholders. And we expect to have, you know, those decisions made through time here, we're just not ready to commit to that at this point, given some of the uncertainty.
Understood, okay. Okay. So guys from GenCo basically goes to pay down debt, and then the balance, you may administrate dividend or sort of buy back shares or do other, you know, other ways of giving it back to shareholders?
I wouldn't say it that black and white, I would say we have to make a determination on what our capital allocation policy is. And we'll do that through time as some of these other things are resolved. But there's been no final determination.
Understood. Okay. Thanks. And then just maybe can I quickly get your thoughts on you mentioned the federal carbon legislation? So what sort of are you expecting there and perhaps in the timeline?
Yeah, I'll let Kathleen to pile on them.
Yeah, thanks for the question. I mean, you know, obviously, we were heartened to see the administration set the carbon free power sector goal by 2035. And we know that there are number of steps that are to come, including, as you mentioned, potential for climate legislation.
But you know, I would keep my eye on the administration needs to set an NDC for the US a Nationally Determined Contribution to match up to the new commitment to the Paris target, we do expect that to be more aggressive than in the past. And that we'll sort of set the tone for what Congress takes up.
But I think the nearest term thing to look to is the push for an infrastructure package. There are a number of business and labor and other interests pushing the administration to move forward on a piece of legislation that itself could make progress on climate. So separate from a pure climate Bill, and infrastructure bill, that included tax incentives for clean energy development, electric vehicle storage, climate resilient infrastructure, is sort of the first thing to look out for. And then I think once that gets done, you know, we'll see the discussions wrap up around what the future sort of National Climate Policy is going to look like, as you know, the administration has already expressed support for a national clean energy standard, that counts nuclear as clean.
And so that, that clearly will be on the table, but there will also be discussions about a carbon tax dividend approach and with, you know, the growing public support for national action, you know, we, as Chris said, are working with folks in Washington to make sure that, you know, the proper design is included in the sense that we need something that is going to be cognizant of the customer impact, but also aggressive enough to address the challenge of the climate crisis.
The last thing I'd say, I guess, is that while those are all extremely positive developments, they do take time, legislation in Washington will take some time to enact and then it will take time to implement. So that's why our focus does remain at the state level on moving forward with legislation that will support the state's climate goals, air pollution reduction, electrification of the economy and job creation and equity, so that we can make progress now, while the federal discussions continue.
Understood, thanks for the color. Thanks for time, guys. Appreciate it.
Thank you. And our next question comes from the line of Michael Lapides with Goldman Sachs. Your line is open. Please go ahead.
Hey, guys. Thank you for taking my question. And congrats on today's announcement. Lots of interesting stuff going on. Real quick, just curious how you're thinking about really the broader risk to run the retail business, not just Texas, but anywhere you do it, and then how we should think about the potential for power price volatility, especially given a significant amount of retired baseload generation over the last 5 to 10 years, how that can impact you in other regions, where you're much bigger than you are in Texas and retail. Trying to think about, you know, it's not the first time we've had price spikes, we had them in January of 2014 and January 2018 in New England, there have been other retailers. Just curious about how you protect yourself from the risk of a, Texas like events happening in one of your bigger markets.
The one thing is, you have to differentiate between the market designs. Texas is far different than PJM. The interconnectability and availability of power through that Eastern interconnect is strong. We have taken on steps in other markets to ensure that we have adequate capacity that can weather such events, weather events.
But you know, you take in an isolated market, where you do not have the ability to import, cover your load. You have a price cap at significantly high, and you essentially lose your sites. It is not something you can hedge for at this time in ERCOT. And that's what we have to work on. But our hedging strategy and our ability to have our customer-facing products in our retail C&I and Residential business, as many risk focuses on that, and we continue to work as the markets evolve. So we're not looking at it like this is an event everywhere across the country, as long as we keep focusing on sound market designs, understanding capacity requirements and the investments required by the generators to prevent such volatility. But our hedging strategy is the key to that.
Got it, okay. And then a follow-up on SpinCo. How should we think about, I mean, you've got an RPM auction coming up this May? How should we think about, you know, potential changes in RPM outcomes relative to the, you know, to the last auction which was almost two years ago. And what it means for the financial structure, the capital structure for kind of ExGen as a new entity separate from consolidated Exelon?
So that's a pretty broad question and there's a bunch of questions in there. I think, I'll let Joe start with it and then see where we go for the rest of it with Kathleen and -
Michael, the one thing I would say is, and we made this comment in our prepared remarks, we looked at the SpinCo business under a range of different scenarios. And those scenarios ultimately take into account, you know, changes in cash flow assumptions, and how we would manage the business accordingly.
I think you've seen us through time, you know, we would be very prudent, financially with a lot of discipline, right, we've used alternative tools like project financing, we've retired assets when they were on economic and we couldn't get paid for them. We've sold assets that the market has put a higher premium on than ours. But we don't look at just one point estimate or we have to make sure we understand how shocks would impact our, you know, the balance sheet and the free cash flow of the company. And we continue to look at that and you know, your example of capacity outcomes would tie into that.
Got it. Thank you, guys. Much appreciated.
Thank you. And our next question comes from the line of Jonathan Arnold with Vertical Research. Your line is open. Please go ahead.
Hey, good morning, guys. And thank you for taking my question.
Hi, Jonathan.
Hi. I want to just clarify one thing on the corporate segment drag that you have say in your '21 guidance. It looks as though that is mostly allocated to RemainCo just as we think about transitioning forward, is that correct? Or is a piece of that sort of not coming - will a piece of that go away with the Spin?
Yeah, that is, you are correct. It's mostly allocated to RemainCo.
Okay. So that was one thing. And then just as I look at the RemainCo's earnings trajectory I mean obviously you're reiterating the 6% to 8%. But a good bit of that seems to be the step up in '21 from 2020, so, then it's kind of flatter further out, and obviously have the equity in there. But that doesn't look like that's huge. So just curious what's kind of tempering that flow further out when you actually raised the CapEx, et cetera?
Yeah, so Jonathan 6% to 8% is a long-term target for us. As you could imagine, you know, given the size and scale of our business, there's going to be some oscillation in a given period of time. When you think about rate case timing and then would be one that changes it. So if you were to carry this through to '25, you would see strong growth, just given some of the timing of our rate cases.
I would also say, you know, the work we're doing at the utilities under Calvin Butler's leadership is to make sure that we're reducing lag, right, we're investing for the benefit of our consumers and improving reliability and the customer experience. But we're also trying to make sure that we reduce the regulatory lag. And we've seen that with things like the multi-year rate plan in Maryland and DC, for example, but there are going to be some years where it moves around just given timing of rate cases and other things.
Okay, good enough. And just maybe one other thing on timing. You've obviously talked about these offsets to the Texas hit. Well how should we think about those in terms of how they show up through the year? And is the Q1 going to be - take obviously, the negative thing Q1, but does it sort of take most of the year to get back to that negative 20 net. Or would it become quicker than that?
Yeah, no, though, it will take time to flush through the year. And, you know, we're looking at these in a number of buckets, we have the ability to defer non-essential maintenance. There are some one-time cost savings, which will monetize throughout the year. And then there are some revenue enhancement opportunities, which also will happen throughout the year. But there's a number of different levers that we're using.
There's a very focused team that's overseeing this, working with individual businesses on making sure that they can commit to what we believe that these goals are, that come up with this savings range, and will continue to challenge from the corporate financial organization, other areas on where we can affect some dampening of the effects of ERCOT.
Right, thank you, Chris.
Thank you. And this does conclude today's question-and-answer session. And I would like to turn the conference back over to Mr. Chris Crane for any further remarks.
I'd just like to thank everybody for joining today. You know we had a lot to go through today. As we were planning for this with the Board, we did not anticipate the ERCOT event to the extent that it played through, creates a little bit of complication. But it's nothing that the team is not up to try to work through the challenges. So we'll continue to update you on the calls or if something happens. In the meantime, when we think is worthy, Dan and his team, Emily will be reaching out to folks just to make sure we're in sync and you know where we're going. So with that, be safe and thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.