艾索倫電力 (EXC) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Pam and I will be your conference operator today. At this time I would like to welcome everyone to the Exelon first-quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) We ask that each participant limit themselves to one question per person. Thank you.

It is now my pleasure to turn the floor over to your host, JaCee Burnes, Director of Investor Relations. Ma'am, you may begin your conference.

Thank you, Pam. Good morning and welcome to Exelon's first-quarter 2007 earnings review and conference call update. Thank you for joining us today. We issued our earnings release this morning. If you haven't received it, our release is available on the Exelon website at www.exeloncorp.com. Or you can call Diane Sullivan at 312-394-5738 and she will fax or e-mail the release to you.

This call is being recorded and will be available through May 9, by dialing 877-519-4471. The international call-in number is 973-341-3080. The confirmation code is 8629052. In addition, the call will be archived on the Exelon website.

Before we begin today's discussion, let me remind you that the earnings release and other matters we discuss in today's call contain forward-looking statements and estimates that are subject to various risks and uncertainties. Please refer to our SEC filings for discussions of factors that may cause results to differ from management's projections, forecast and expectations.

In our release and during this call, we will discuss adjusted non-GAAP operating earnings that excludes earnings impact of mark-to-market adjustments from economic hedging activities; investments in synthetic fuel producing facilities; certain cost associated with the terminated merger with PSEG for 2006 only; significant impairments of intangible assets including goodwill; significant changes in decommissioning obligation estimates; severance and severance related charges for 2006 only; and other unusual items including any future changes to GAAP.

We believe these adjusted operating earnings are representative of the underlying operational results of the company. In today's earnings release we provided a reconciliation between reported GAAP earnings and adjusted non-GAAP operating earnings.

With me today are John Rowe, our Chairman, President and CEO; John Young, Exelon's Executive Vice President Finance and Markets and a Chief Financial Officer; and other members of Exelon's and ComEd's senior management team who will be available to answer your questions.

Today's call will focus on first-quarter 2007 financial and operational results, our outlook on the remainder of 2007 and an update on key issues facing the company. We have scheduled one hour for this call. We will spend about 30 minutes on prepared remarks and use the remaining time for Q&A. In order to affectively manage this call, we'd appreciated it if you would limit yourself to only one question.

I will now turn the call over to John Young, who will begin with a discussion on Exelon's financial results.

Thank you, JaCee. Good morning everyone. Exelon announced first-quarter 2007 adjusted non-GAAP operating earnings of $722 million or $1.07 per diluted share, a significant increase from the first quarter of 2006 operating earnings of $420 million or $0.62 per diluted share. On a GAAP basis, Exelon reported consolidated earnings of $691 million or $1.02 per share for the first quarter of 2007. The main difference between GAAP and non-GAAP operating earnings during the quarter was a $0.10 mark-to-market loss primarily from Exelon Generation's economic hedging activities.

For a complete reconciliation of GAAP and non-GAAP earnings, please see page 6 of the tables that accompany the earnings release. Before I discuss the earnings drivers by individual operating company, and I want to highlight an important milestone in our business, the expected change in Exelon's composition of earnings.

Beginning January 1 of this year, Exelon became predominately a Generation company with ComEd completing this transition to a wires-only business. ComEd now has a distribution component of value under state regulatory jurisdiction and a transmission component of value under FERC jurisdiction. PECO's transition will occur in 2011. Going forward, Exelon Generation will be the primary contributor of earnings and of value for Exelon.

Turning now to the earnings drivers, Exelon's strong performance for the quarter was driven by increased earnings at Exelon Generation and PECO offset by an expected decrease at ComEd. Exelon Generation contributed $0.91 of operating earnings per diluted Exelon share for the first quarter of 2007 compared to $0.43 for the same period in 2006. The major drivers of Generation's operating earnings growth were higher wholesale margin as a result of the end of the ComEd PPA; contractual price increase associated with the PECO PPA; the outstanding performance of our nuclear fleet which resulted in increased generation output for the quarter; and the PJM billing settlement with PPL.

Generation also benefited from decreased O&M as a result of fewer nuclear refueling outages which more than offset labor related inflation. This inflation in labor cost was anticipated and included in the guidance we provided earlier this year.

This quarter we have some unique aspects [to it at] Generation. While our load- following risk has been reduced in the Midwest, Generation still carries load following exposure in the Mid-Atlantic associated with the PECO PPA. During January, Philadelphia experienced extremely warm weather resulting in lower loads and lower market prices. Therefore, Generation sold excess power at market prices lower than the PPA price with PECO.

During February, the extremely cold temperatures in PECO's record loads, Generation's cost to serve was higher than the PECO PPA price. Simply put. extreme temperatures, either way, have an unfavorable impact on Generation's financial performance. However, during this first quarter, the unfavorability was more than offset by the impacts of increased nuclear output and the PPL settlement.

In the first quarter of 2007, ComEd contributed $0.01 per Exelon share compared to $0.09 during the same period for 2006. ComEd's decreased earnings was fully expected and was due to the impact of the end of the nine-year regulatory transition period in Illinois. ComEd also experienced higher O&M expense primarily related to wages and benefits, further reduced earnings for the quarter. These are the unfavorable drivers that ComEd will partially offset by favorable weather, load growth and an increase in revenues associated with ComEd's distribution case that was concluded in December of 2006.

As expected, ComEd's earnings for the quarter were weak due to continued regulatory lag or inability to recover its current year costs. As a first step toward regulatory recovery, ComEd filed a transmission rate case with FERC on March 1 and plans to file a distribution case based on the 2006 test year with the ICC late in the second quarter of this year. ComEd's financial viability and its ability to deliver reliable service are dependent on being able to recover its costs through fair and reasonable rate making. Compared to the prior year, weather had about a $0.01 per share favorable impact on the earnings of ComEd in the first quarter.

I will now wrap up the discussion of quarterly earnings with PECO. PECO's contribution to operating earnings for the first quarter of 2007 was $0.19 per share compared to $0.14 in 2006. The increase in PECO's earnings for the quarter was driven by the effects of favorable weather and load growth as compared to the last year and PECO's portion of the PJM settlement with PPL. These factors were partially offset by the scheduled increase of PECO's CTC amortization.

Weather was about a $0.03 per share favorable to PECO's earnings in the first quarter of 2007 compared to the prior year. In both Pennsylvania and Illinois, we experienced warmer than normal January, an extremely cold February and normal weather during March. The end result was weather normal quarter for earnings in both PECO and ComEd.

Please refer to the tables that accompany the earnings release for additional detail regarding our first-quarter results.

Now turning to an outlook for 2007. We are reaffirming Exelon's non-GAAP operating earnings and GAAP earnings guidance ranges for 2007 at $4.00 to $4.30 per share and $4.10 to $4.40 per share, respectively. We are also reaffirming the operating earnings guidance for each of the operating companies. These ranges are included in the earnings release.

Both Exelon's operating earnings and GAAP earnings guidance are based on the assumption of normal weather for the remainder of the year and exclude any impact of the possible outcome of settlement discussions in Illinois beyond the $44 million that ComEd has announced in a rate relief program for its customers this year.

The major driver of operating earnings for the balance of 2007 for Exelon Generation, ComEd and PECO are essentially the same as we outlined in EPS guidance waterfall charts that were filed with an 8-K on March 14, 2007. Also remind you that beginning in 2007, Exelon earnings per share reflect a change in our quarterly earnings profile which will result in a slightly different distribution than in prior years. This earnings distribution will be more equally distributed quarter to quarter than it has been in the past due to several factors, including the end of ComEd's PPA with Exelon Generation.

Refer to our release for the quarterly distribution ranges for the balance of the year. Based on the midpoint of the guidance ranges we provided you for 2007, we expect Exelon Generation to account for about 80% of Exelon's operating earnings with the balance coming from PECO and ComEd.

Turning now to a discussion about the markets. Since we have shifted to even more of a market based business, we plan to provide you with additional insight into the commodity markets and we'll deliver routine updates on our hedged position. As part of our earnings release package, we included a market snapshot showing commodity price movements for the calendar year 2008 and corresponding changes in market implied heat rates. This slide also highlights the results in the RPM auction which I will discuss in a moment.

Crude oil and natural gas prices were relatively stable over the last quarter but did take a dip in early January. It is important to note that even with the above average temperatures in January and high amounts of natural gas storage, gas price stayed above $6 per million. Forward -- power markets for calendar year 2008 trended with natural gas. We saw a relatively narrow range of movement in the around the clock forward prices in PJM West and PJM NiHub. Market implied heat rates in these regions were flat over the quarter due to consistent moves in power and natural gas prices.

As we have done in the past, we continued to utilize put options as a part of our near-term hedging strategy and shift the allocation of these puts between natural gas and power based on movements in the forward market price, or forward market implied heat rate.

For 2007, we are over 95% financially hedged and we are toward the upper end of the ranges we previously provided you for 2008 and '09. We plan to introduce targets for 2010 sometimes in the third quarter.

Let's discuss the RPM results. Early this month PJM concluded the first auction under the new capacity pricing -- capacity market design called the Reliability Pricing Model. RPM provides a valuable transparent price signal to the market and will compensate generators and demand response providers for investment in long-term reliability in PJM to customers' benefits.

This new capacity design provides a better signal to the market of where and when capacity is needed and better enables resource owners to plan on a forward-looking basis. In addition to incentivizing new generation, RPM is designed to retain existing generation if needed for reliability purposes. The results of this first RPM auction for capacity during the 12 months from June 1, 2007 to May 31, 2008 were, for Eastern MAAC, $197.67 per megawatt day; for Southwestern MAAC, $188.54 per megawatt day; and for rest of market, $40.80 per megawatt day.

Exelon's generation located within the PJM footprint was bid into this auction and the cleared amounts will receive the resulting locational clearing prices. It is important to note that the payments based on these results will be offset by forward sales and bilateral contracts made against Exelon's generation portfolio prior to the RPM auction, including the PECO PPA, sales to ComEd through the -- and sales to ComEd through the Illinois auction.

Most but not all of our capacity in Eastern MAAC is committed to serve the PECO load and will not benefited this year from these capacity prices. However, our uncommitted capacity in the Midwest will receive the rest of market capacity price beginning in June. Generation will also receive compensation for capacity transfer rights which partially offsets the cost of capacity that will be used to serve the PECO load obligation in Eastern MAAC.

While the RPM auction will have a favorable impact on Generation's 2007 earnings, the resulting earnings are still expected to fall within our previously provided guidance. Furthermore, we believe it is too early in the year to change our earnings guidance; therefore, we are keeping guidance the same as originally disclosed.

While the earnings impact for 2007 is limited, given Generation's current contracts and forward sales commitments, the positive earnings impact will increase as these contracts roll off. At the end of the Pennsylvania transition period in 2011, Exelon Generation will receive the full benefit of associated -- a full benefit associated with the market value of capacity. We will provide you with our open or unhedged EBITDA later this summer.

Given our large low cost, low emissions, exceptionally well-run nuclear fleet, Exelon is in a unique, competitive position to be compensated for improving market fundamentals.

In closing, let me reiterate the basic themes of Exelon's value proposition that we have been telling you for some time. As has been the case since the formation of Exelon, we continue to deliver strong financial and operating performance. We have a uniquely positioned generation business that will -- that we expect will drive continued strong earnings growth through 2011, growth that will be driven by improving market fundamentals, the expiration of the PECO PPA and the impact of future carbon regulation.

We are managing the transition of competitive markets in Pennsylvania. We are executing the regulatory recovery plan in Illinois that is intended to put ComEd on a path toward returns -- or appropriate returns and solid credit metrics. We have financial policies that are aligned for the changing composition of our earnings. And last but not least, we have an increasingly strong balance sheet and remain committed to returning substantial cash to shareholders through our new value return policy while maintaining appropriate financial flexibility to take advantage of opportunities as they may arise.

We are currently evaluating the exact amount and timing of the 2007 share repurchase and will update you on our specific actions during the third quarter. Of course any share repurchase program is subject to the approval of the Exelon Board of Directors.

I look forward to seeing many of you in the upcoming months and will now turn the call over to John Rowe.

Thanks, John. Good morning everyone. I'd like to quickly add my perspective to the first-quarter operating and financial results, discuss the climate change issue a bit, and then discuss the implications for competition in the utility regulation.

As John has told you and the press release spells out, we had a very strong first quarter excluding any cost from legislation or settlement in Illinois with year-over-year operating earnings up from $0.62 in the first quarter of 2006 to $1.07 in the first quarter of this year. Some will be quick to attribute our results to the end of the Illinois rate freeze; others will be quicker to criticize us for that. That is of course part of the story, but the remainder of the story is our continued focus on the basics of this business, improving operating performance, disciplined financial management and sound approaches to regulation.

Prices in Illinois have returned to something approaching the national average and about what they were ten years ago when we started this pilgrimage. Our operating and financial performance continues to be anything but average.

In the nuclear area, Chris Crane and Chip Pardee, and their team continued to drive genuine excellence. Their record 96.4% capacity factor for the quarter compares to 91% a year ago and had a significant contribution to these earnings. Chris and his team achieved these superior results while maintaining a terrific safety record including employee safety.

In the fossil area, Mark Schiavoni and his team continued to extract exceptional performance from our fossil and Hydro fleets. They achieved a 92.8% availability factor for our fossil units and 99.1% equivalent availability for our Hydro units, comparing to 93% and 97% in the first quarter of '06.

Ian McLean and Ken Cornew and the Power Team continued to convert operating performance into commercial success. Power Team hedged and optimized our portfolio to assist Genco in delivering the growth and profitability that we had the pleasure of reporting to you this morning.

Our delivery companies also performed very strongly. Despite a stretch of bitter cold in February that resulted in a record winter peak of 16,207 megawatts, ComEd's non-storm outage declined in the first quarter. ComEd's long-term reliability measurements continue to move in the right direction. Since 1998, outage frequency has been reduced by one-third and outage duration by nearly one-half.

PECO's system and operations also performed well particularly during February when its peak reached 6,835 megawatts which was only 3 megawatts short of its all-time winter peak. PECO electric service reliability was sharply improved over the same period a year ago partly due to a relatively storm free winter.

PECO's average frequency and interruptions was improved by 50% while the average duration of outage was reduced by 28%. Customers responded favorably to expanded consumer education and marketing programs to help them manage energy costs as indicated by our survey data.

PECO also was the first utility in the state of Pennsylvania to begin fulfilling its requirements under the Pennsylvania Alternative Energy Portfolio Standards. PECO recently purchased the equivalent of 240 megawatts of alternative energy credits for five years subject to approval by the Pennsylvania PUC(inaudible).

As a result of our continued financial and operating performance, you have again rewarded us by making us the most highly valued company in the industry. We all recognize that this increase in our stock price reflects fundamental economic drivers. John Young described them in more detail. But I think our stock's performance also reflects the investment community's increasing awareness of the climate changes.

The scientific evidence that human activity is running the planet has gone from convincing to compelling. The most recent scientific report issued by the United Nations Foundation has dispelled any lingering doubt. Climate change is real. It is pervasive and the time to begin acting is now.

Both public opinion and the body politic are responding with increasing urgency. The Supreme Court's recent decision affirming EPA's authority to regulate carbon as a pollutant within the meaning of the Clean Air Act may accelerate congressional action. There has been a flurry of activity in both Houses and while we are still some distance from actual consensus, the question of climate legislation has shifted from "if" to "when".

Congressional action is likely sometime in the next two or three years. It may even come as early as 2008. In this regard, I commend to you the recently updated recommendations of the self entitled National Commission on Energy Policy which I co-chair. Over the past five years, this bipartisan, environmental academic and business group has been trying to provide a voice both for action and moderation in this debate.

I see increased investor interest reflected not only in the value of our nuclear fleet but in investment opportunities more generally. Addressing climate change will be one of the next great global industries both in challenge and in opportunity. It will have profound consequences not just for environment and economic sustainability but also for national security.

Many of you on this call have begun to call attention to both this challenge and its opportunity. Frankly there is more that we can do in your own interest and in the nation's. In my mind there is an obvious link between our ability to successfully address climate change and the use of competitive forces in the electricity market.

Tom Friedman made this point beautifully in the recent article in the New York Times Magazine. The only way were going to get immediate innovations in energy-saving appliances, like building materials as well as non-carbon emitting power plants and fuels, and still hold energy costs to an acceptable level is through the working of free markets. That is truly in all sectors of the economy including the utility sector.

As you know there is now an increasingly strident debate in Washington and across the country about the benefits of wholesale competition in the electric utility industry. We see it most immediately in Illinois but the issue has profound implications across the country and not just for Exelon's market value. The Energy Information Administration estimates that the utility industry is the source of almost one-third of the current carbon emissions in this country. If we are to successfully address this issue, the utility industry will need to invest many billions of dollars in the years to come in new sources of low carbon generation. That cannot occur if states regulate with a heads we win, tails you lose mentality. We cannot invest, you will not invest, if the industry is continually subject to the lower of cost or market.

Personally I believe and Exelon is totally committed to the proposition that organized wholesale markets are the best way to bring about the benefits of competition. Wholesale competition in PJM and other markets has delivered dramatic operating and performance improvements and dramatic customer savings.

The outstanding performance of our nuclear fleet is one compelling example. In the past ten years we have effectively doubled the low carbon generating output of our Illinois plants without building a single plant. Furthermore, large customers are shopping and residential customers are experiencing the benefits of wholesale competition which is being passed along to them through FERC and ICC approved auction process. Even in those regions that resist the development of organized markets, utilities need assurance that they will recover their investment.

I have equally grave concern that any current regulatory model whether it be rate based, integrated resource management or in a competitive model itself can be totally relied on in periods of rising costs. As a nation we have become addicted to cheap fossil fuels in our homes, our businesses and highways. If that is to change, we need to spur needed innovation and investment and we will have to be prepared to pay for it. The truth is we will pay more for it if we do it through disorder than if we do it in an orderly applications (inaudible).

So I urge those of you who are and who represent investors to get involved in these competitive debates. Exelon has initiated a new national effort to support wholesale competition. Betsy Moler is heading that effort for us. I urge you to talk to you -- how you can work on this. It's important not only for your investment in us; it's important to see that the nation deals with these challenges.

Now let me say a brief word about the state of things in Illinois. As many of you know late last week the Senate passed a rate freeze bill that includes only Ameren. This happened after a variety of procedural maneuvers that have been well described in the press. The bill now goes back to the House where it may be passed or it may die or where it may be amended to include ComEd. If the House were to amend the bill, it would then go back to the Senate where the Senate would have to consider taking action on the amendment.

We do not know what the House will do. We do not know what the Senate will do. And then any bill would have to be signed by the Governor to become law. Frank Clark, the ComEd Chairman, is with us this morning and he can answer more specific questions. But I wish to remind you that even if there should be adverse state legislation that would not end the matter. We would seek to have any rate refreeze or roll back legislation invalidated in court. Our lawyers believe we have very substantial constitutional arguments with which to do so.

However, we will remain active in the political process, open to genuinely constructive settlements, precisely because all litigation involves risks and we cannot guarantee to you that a court will adopt our argument.

If rate freeze legislation were to pass and if it were not to be adjoined, there is a high likelihood that ComEd would be forced to enter bankruptcy. That would have attendant consequences to the Exelon balance sheet, for Exelon Generation's market for significant portions of its generation and in due course, the ComEd's capital expenditures and other programs. There remains also a possibility of other forms of legislation detrimental to the Exelon Company. Our 10-Q describes these matters in more detail.

Last night John Young told me that he gets to tell you all the good news and it's my job to remind everybody of the risks. We have created a great deal of value in Exelon. We have done it by facing our risks squarely, by facing our challenges squarely, and we have done it by constantly telling you what both our risks are and our opportunities. And we will continue to make certain that we do both. We believe we can continue to create significant value in Exelon. But our success itself brings challenges. We urge you to take both our opportunities and the challenges of our success seriously.

We will now take your questions.

(OPERATOR INSTRUCTIONS) Greg Gordon, Citigroup.

Thanks. Good morning.

Good morning, Greg.

When we look at the -- by the way I do only have one question but it is in 27 parts. When we look at the capacity market pricing that we are seeing, I'm presuming that it is in fact higher than what you envisioned when you laid out your short- and long-term forecast in your December analyst meeting. If in fact that is true, how do we think about that in terms of increasing the dollar amount of the shareholder value return estimate and how you think about managing your balance sheet. There's obviously been a heated debate amongst the investment community over why you carry such a lean balance sheet and with capacity values rising, you should have a larger shareholder value return potential and should be that much more comfortable in how you gear the balance sheet. Could you comment on that please?

Greg, we're going to -- obviously the RPM auction that just occurred and the time period that it sets prices has some impact to our near-term earnings, not a tremendous amount because of the lack of open capacity positions that we have because of our obligations that we are already entered into with various PPAs and forward sales -- PECO, ComEd and others.

But on a longer-term basis and I think those auctions, there's two more auctions this year to get the second and the third year of that out and we will revisit as we do every year our -- the entire view for a five-year period. All that will be taken into account. That is one of the reasons why we will kind of announce in the third quarter what the near-term result of our value return policy is and then we will kind of give you a better idea as to where that may take us in that five-year period similar to what we did for you at the end of last year.

But assuming there is not a steep backwardation in the results from the next two tranches of auctions, these numbers are in fact higher than what was envisioned in the initial December forecast, correct?

Yes, sir.

Thank you.

John Kiani, Deutsche Bank.

Good morning.

Good morning, John.

What are you all seeing kind of a little bit longer-term and perhaps what is your view as well on off peak power pricing in the Midwest and in PJM? Especially giving consideration to the growing contango in the Eastern PRB coal markets and some heat rate increase expectations as well?

Ian, do you want to address that?

Yes. The off-peak prices, you picked an interesting topic, they have been moving higher recently. I think it is a combination of that people look at the coal prices and the risks associated there and also that gas is coming on the margin more often. So we have seen a nice move upwards in those prices in the past couple of months. And you don't see the corresponding price rise in the other hours so they kind of move in with more velocity than the rest of the price curve.

So, then, is it safe to assume if that trend continues that once you're existing hedges roll off, they will be better realized 7 by 24 price because the off peak pricing is better and that differential, that spread is narrower?

Yes, I would say that is absolutely correct.

Okay and then one more quick question if I may. John, from a leverage perspective, kind of touching on the subject that Greg brought up, what do you think is the optimal debt to EBITDA or turns of leverage we should think about in thinking about the optimal capital structure for your company? I mean obviously there are different drivers that are going to move your cash flows in different directions but generally speaking, when you look to eventually monetize a lot of the excess balance sheet capacity for shareholders, how should we think about the more optimal capital structure? And based on the current gas price environment as well?

Since that was you third question, we are not going to answer that. But, obviously we gave an indication of that in December. We will give another indication of that when we revise our plan going forward. The balance sheets of the two distribution companies we have a target there that we are headed towards. We have been FFO to debt kind of range that we are trying to get solidly in the BBB+ area for the corporation. And those are the metrics I would use right now absent that is the ones we have -- that is the ones we've announced. We are not changing those on this call. If we revise any of that on a forward-looking basis, that would be later in the third quarter that we talk about that.

Got it. Thank you very much.

Thank you. Hugh Wynne, Sanford Bernstein.

I had a question regarding your nuclear fuel expense. You all amortize approximately $380 million of nuclear fuel annually. And my question is given the run-up in the uranium price and given the fact that your existing stock of nuclear fuel will deplete I assume over the next four or five years, what is the level of fuel cost or amortization of nuclear fuel that we should be anticipating as current stocks of fuel are replaced at the prices prevailing today in the market?

Hugh, we did actually provide a slide that I'm looking at in one of our prior 8-Ks and I will talk from it. I think you've seen it but I've got some additional information for you.

First of all, our physical position is that we are effectively hedged through 2010 and significantly hedged in 2011 as well. So, both from a physical and financial perspective, our -- we have pretty good price certainty through that timeframe. The sensitivities in 2011 and this is just kind of to give you an idea -- a $50 per pound increase in what our average cost would be for the replacement in 2011 that we don't have hedged would decrease earnings by about a $10 million amount. Okay?

So even -- now that is five years from now -- we are not that sensitive to movement in uranium prices at that point. The same kind of thing we have about half that impact for $10 of the enrichment price. I think it goes up to $10 per SWU. That is about a $5 million impact. We depreciate our nuclear fuel I believe over a six-year period. So the cost impacts of any price spikes in a five- or six-year period because both of the depreciation schedule and because of the amount we are already physically hedged against doesn't impact us tremendously. So prices would have to stay up for a significant time period for that to have a big cost increase for us.

I guess -- thank you very much, but I guess what I was trying to get at was beyond the maturity of those hedges in the environment that we see in the market today, should we be anticipating that this amortization expense doubles or goes up by 50% or whatever once these hedges have rolled off and you renewed your stock at market prices, assuming today's prices?

The assumption of today's prices is something that I couldn't have seen for 2014, '15. So I haven't done that math. It's pretty far in the future and we're doing a lot of work underway to try to ensure ourselves against that kind of price spike in the general uranium and enrichment markets. So I couldn't answer that.

Okay, thank you very much.

Thank you. Vic Khaitan, Deutsche Asset Management.

Good morning, Vic.

Good morning. Thank you, everybody. John, you mentioned there is significant value still at the Company, and I agree with that. But the bigger overhang remains this issue about settling this Illinois issue. So could you elaborate or Frank Clark could say something about where the possibilities are and whether there is a movement from the other side, from the politician side towards settlement?

Let me kick it off, Vic, and then I will ask Frank to pick it up. At the present time, the Senate president has taken the position that rate freeze legislation is just a bad idea. The Senate minority leader and some of the people who supported the rate freeze bill in the Senate have said they really don't think rate freeze is a very good idea. They would like to initiate some compromise discussion. There are a few people in the House who have said that, too.

To date, the only person who is in some ways in a position to bring that about, the Speaker of the House, has not indicated an interest in a serious settlement negotiation. Vic, you know me well enough to know that I hate things that are binary. Having all or nothing issues is a most unattractive thing.

So we are holding the ground that they deregulated our generation, that you all have paid for it and it is yours. And I believe if we have to vindicate that in the courts, I believe we will succeed. Indeed, it's a funny loop to loop in Springfield because some people vote for freeze legislation knowing that it's likely to be invalidated and thinking that gives them a free vote. So it is very hard to know where anyone wants to come out. As long as we aren't sacrificing the principle that frankly, what's yours is yours.

You know, we have dozens of ideas on what we think would be good settlement ground. And we will continue to think like that, but at the moment anything we put on the table would be just bidding against ourselves. Ann Pramaggiore, who works with Frank, worked for most of the past year and a half on settlement ideas. So that is my picture of the situation.

The Speaker has said on several occasions that he regrets that he deregulated the Generation. Well I think if he had more information on the real economics of the business, he would see that his consumers still won by what he did but it's obviously that our investors won too and that creates the envy factor. Frank, would you like to add to that?

I would only say this, that all of the political leaders, that would include the Senate president, that would include the Speaker and the two Minority Leaders as well as the sponsor of the bill that you've been referring to, Senator Forby, has in one way or another all indicated that this issue needs to be resolved. And most recently even the Speaker was quoted as saying that he would like to see that "a statewide solution".

What we can interpret as we see -- have said it is not a judgment that there is a desire to see that this issue come to a head, but on the other hand, no one has come to us with any type of a process that will lead to a reasonable settlement to date. So -- but we continue to wait. As John said, continuing to come forward, with our own proposals that keeps us bidding against ourselves and that is not a particularly constructive thing to do.

But the position of the Senate has remained very strong and that creates an environment unto which ultimately I would hope that some kind of a settlement could come about. In the interim we are out very aggressively talking about the ComEd plan, offering a series of assistance to targeted groups totaling over three years -- $64 million. And we expect that to continue to provide for an environment that would hopefully lead to an ultimate solution.

Okay, thank you.

Thank you. Ladies and gentlemen, we ask that you please limit your question to one question per person in order to allow equal time for all participants to pose questions. Thank you.

Jonathan Arnold, Merrill Lynch.

Good morning. A question for John. John, could you talk a little about your sense of the consolidation environment and the Company's perspective on M&A and potentially involving the generation business at some point?

Sure. We continue to believe that consolidation must occur. And that as long as you do it out of dollars and cents and not out of ego, there are real business opportunities in consolidation. We've also tried twice and had two black eyes, which proves to us if we didn't know it anyway, that the environment isn't as easy for consolidation as it was five or six years ago.

I think the best opportunities are now in the Generation sector. The trick is finding something you don't have to overpay for and finding something in an environment where it is politically acceptable to do so. I mean personally I believe the whole industry has something positive at stake in the TXU matter. I think it will be beneficial if that goes on to conclusion.

But the reason I think the consolidation is ultimately so important is the scale of investments that are required. If you were back five years ago or so, a pulverized coal plant could still be built because carbon wasn't such a big issue. The investments on what it cost were probably somewhere between $1000 and $1600 or $1700 a kilowatt. Today those costs would be somewhere between $2000 and $2500 per kilowatt. I've seen estimates for nuclear plants all over the place but most of them would be between $2500 and $4000 a kilowatt.

It takes big companies to make substantial increments to capacity in that kind of a market. It takes big companies to do it especially if you are in a competitive marketplace but frankly it takes a lot of balance sheet to do it in a rate-based environment too. This nation needs new nuclear plants badly. It needs, if we are going to deal effectively with the carbon challenge to have the coal with carbon capture and sequestration cycle work. Personally I think that will be even more expensive than a nuclear fuel site.

There will continue to be more money spent on renewables. So far it has not been my experience they are cheap except for landfill methane. So, we need to have a generation sector that can make the kind of businesses a low carbon, more energy independent economy require. And that requires folks at least as big as we are. And I think you will see more consolidations brought about to do it.

But we all remember Ed Tirello's famous forecast. We all know it didn't quite work that way and I think they will continue to happen sort of by fits and starts. There will be opportunities but only for the patient and careful.

Thank you.

Paul Ridzon, KeyBank Capital Markets.

Can you give some flavor as to what the major stumbling block was in getting a settlement ahead of last Friday's legislation? We were all kind of I guess cautiously optimistic that the talks were progressing and it was really just a question of dollars. And just if you could describe what broke down and what that means about the eventual possibilities of achieving something?

This is Frank Clark. I don't know all the reasons that it did not occur. When we went down there a couple of weeks ago with the anticipation that we would announce a settlement proposal that included all of the Illinois utilities, whether it would be ComEd and the Illinois Ameren companies. That announcement never came forth. I do not think it was necessarily a case of dollars. I think it was specifically a case of the Senate sponsor of the bill, Senator Forby, ultimately concluding that in fact there was a political (technical difficulty) to have a rate freeze vote notwithstanding a settlement package that probably, not probably but absolutely, provided greater and immediate relief for consumers. I hope, although I don't know this, that ultimately that view will prevail and the leadership in the House will look to providing real and immediate relief as opposed to the political upside of having gotten a rate freeze vote.

Thank you.

Paul Patterson, Glenrock Associates.

Hi, how are you?

Good.

I was wondering if you -- you mentioned sort of two binary outcomes. You are mentioning a large amount of CapEx and EPS growth coming out of ComEd. On the other hand, you guys are mentioning potential for bankruptcy. And I was wondering if you could maybe potentially shift more of the CapEx or if you are thinking about shifting more of the CapEx out of ComEd into some other Exelon venture when you have these kind of binary outcomes? Do you know what I'm saying? As opposed to the outlook that you guys currently have for having ComEd driving so much of the CapEx and EPS growth going forward in the next few years.

Well, we think about it all the time. Bear in mind the worst day of my life at Exelon Company which was the Friday in 1999 when the Mayor of Chicago ate my liver out on television for service problems in the city. ComEd needs this capital. It is a fact that if the state will not treat it fairly over time as a regulated buyer's company, there will come a time when it can't continue to invest at the rate it currently is. But my philosophy is don't play chicken with the capital program and to some extent, the more ComEd is forced to be separate, it is really Frank and the ComEd Board that will make that decision not me.

So I think you are right in reading tea leaves that if people want other people want to play chicken with ComEd, at some point its Board won't have a lot of choice. But we are not going to play with it at Exelon simply as a matter of discretionary capital. We've taken the position that ComEd meets its obligations and goes from that. Frank, would you like to add to that?

Only to reiterate what John just said. When we looked at our capital budget and the expenditures for those necessary programs, our reliability is first and foremost that as long as we have the financial ability to do it, we will meet our obligations and we expect to turn to the regulatory process in the state of Illinois and recover our prudently incurred costs. If the state for whatever the reasons ultimately does not allow us to do that and the implications are what they are, whether it leads to insolvency over some period of time or a reduction in our ability to meet our service obligations. So I don't -- it is my judgment the state would not want to see that occur and I expect to receive the appropriate regulatory treatment over a period of time.

Let me just add to that. ComEd thought, Exelon thought that the initial order of the commission in ComEd's last delivery case was quite unfair. But ComEd required a request for consideration and while it didn't get everything it thinks it ought to have got, the commission showed more than a little courage in its reconsideration decision. The Illinois Commission has shown great courage and integrity in its dealing with ComEd's power procurement obligation. We don't advise backing down on our public service obligation when you've got a commission that is trying very hard to meet its obligation.

Thank you.

Michael Lapides, Goldman Sachs.

Hi, I really have a question that is probably directed best toward Ian. Ian, when looking at the PJM capacity market auction pricing for rest of pool, so kind of that $1.20 per kilowatt month, pricing level. When you think kind of long-term meaning next five to ten years directionally and kind of when do you expect that difference between East and West to begin converging more? Is that a five- or seven-year process? Is that a ten- to twenty-year process? Just trying to get your viewpoint on when that major difference between the close $6.00 a kilowatt month and the $1.20 a kilowatt month really tightens?

If you look at the forward market, you see that narrowing already to more like $50 a couple of years out although that assumes the MAAC prices will be a lot lower than they cleared. So the market is showing that. But you know when we look at the fundamentals in the Midwest and the fundamentals in the East, there is going to be a big premium in the East for a long time until somebody builds a lot more generation in the East. Then there is plenty of metal in the ground in the Midwest. A lot of it is nuclear, a lot of it is coal. So it is relatively cheaper than the gas in the East. So, we expect that delta to be there for the foreseeable future.

Is it safe to assume that in the Midwest that every year as demand grows unless new coal plants are being built, gas will become more and more on the margin over time so the impact on power prices will obviously be a bit steeper as gas becomes more on the margin?

Yes, that is what our modeling shows that gas comes on the margin relatively slowly though but it does become on the margin more and more as a function of time until somebody builds.

Great. Thank you, Ian.

Thank you. I'm sorry, we do not have time for any further questions. I'd like to turn the floor back over to management for closing remarks.

I think we've done our best to wrap it up. We believe we had a very good quarter particularly some of the things done in nuclear and Power Team. We'd love to be able to say we have the Illinois situation behind us but we don't. As I've said before, the real source of the Illinois issue is the very success that we've had. We will keep working on it. We will keep our eyes open for practical settlements. We won't forget who the Generation belongs to.

Thank you.

Thank you. And this does conclude today's Exelon Corporation's first-quarter 2007 earnings release conference call. You may now disconnect your lines and have a pleasant day.

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