Exelon Earnings: Pending Rate Case Decision in Illinois Key to Setting Regulatory Tone

We are reaffirming our $42 per share fair value estimate after Exelon EXC reported third-quarter adjusted earnings per share of $0.67, down from $0.75 in the same year-ago period. Our narrow moat remains unchanged.

Management narrowed 2023 full-year EPS guidance to $2.32 to $2.40, from $2.30 to $2.42. Exelon’s long-term 6% to 8% annual earnings growth target through 2026 remains unchanged, with management expecting to be at the midpoint or higher. We expect Exelon to achieve the midpoint, supported by the company’s $31 billion of capital investments through 2026. We expect the utility to find additional investment opportunities in its updated capital investment plan.

In Illinois, the Administrative Law Judge recommended just 9.28% allowed return on equity with a 50% equity layer, well below the 10.5% allowed return on equity, or ROE, that Exelon requested in the first year of the proposed multiyear rate plan beginning in 2024. Previously, commission staff recommended 8.9%.

While the commission will take into consideration the full record of the case, should the commission adopt either recommendation it would be one of the lowest allowed ROEs in the sector and set a poor tone for the regulatory environment under recent legislation that revamped state utility regulation. We incorporate a 9.6% allowed ROE in our forecast. A 30-basis-point reduction in allowed ROE at ComEd would lower our fair value by about $1 per share. A final order is expected by mid-December.

Exelon continues regulatory proceedings across its other subsidiaries. Key decisions at ACE and BGE subsidiaries are expected by year-end. Cases at DPL and Pepco are expected to be resolved by mid next year. We continue to expect constructive outcomes in the company’s regulatory proceedings.

Earnings in the quarter were affected by unfavorable weather, storm expenses, and higher interest expenses. Partially offsetting these negatives was higher allowed revenue.