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Exelon Corporation (NYSE:EXC)

Q1 2007 Earnings Call

April 25, 2007 10:00 am ET

Executives

JaCee Burnes - Director of IR

John Young - EVP of Finance and Markets, CFO

John Rowe - Chairman and CEO

Frank Clark - Chairman and CEO, ComEd

Ian McLean - President, Exelon Power Team; EVP, Exelon Corporation

Analysts

Greg Gordon - Citigroup

John Kiani - Deutsche Bank

Hugh Wynne - Sanford Bernstein

Vic Khaitan - Deutsche Asset Management

Jonathan Arnold - Merrill Lynch

Paul Patterson - Glenrock Associates

Michael Lapides - Goldman Sachs

Presentation

Operator

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). Thank you.

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

JaCee Burnes

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, the release is available on the Exelon website, at www.exeloncorp.com, or you can call [Dianne 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 the 9th 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 discussed 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 discussion of factors that may cause results to differ from management's projections, forecasts and expectations.

In our release and during this call, we will discuss adjusted non-GAAP operating earnings that exclude the earnings impact of mark-to-market adjustments from economic hedging activity; investments in synthetic fuel-producing facilities; certain costs 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've 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 Chief Financial Officer; and other members of Exelon 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 an hour for this call. We will spend about 30 minutes on prepared remarks and use the remaining time for Q&A. In order to effectively manage this call, we would appreciate it if you would limit yourself to only question.

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

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John Young

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 six of the table of our company earnings release.

Before I discuss the earnings drivers by individual operating company, 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 phenomenally a generation company with ComEd completing this transition to a wired-only business. ComEd now has a distribution component of value under state regulatory jurisdictions, and the transmission component of value, under FERC jurisdictions. PECO's transition will occur in 2011. Going forward, Exelon Generation will be the primary contributor of value for Exelon.

Turning now to the earnings drivers. Exelon's strong performance for the quarter was driven by increased earnings in 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 the $0.43 for the same period in 2006. Major drivers of generation's operating earnings growth were higher wholesale margins as a result of the end of the ComEd PPA, contractual price increases associated with the PECO PPA, the outstanding performance of our nuclear fleet, which resulted an 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 costs was anticipated and included in the guidance we provided earlier this year.

This quarter, it had some unique aspects through Generation. Although our load-following risk has been reduced in the Midwest, Generation still trends 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, when the PPA price were peaked.

During February, the extremely cold (inaudible) peaked and PECO's record levels. Generation's cost-to-serve was higher than the PECO PPA price. Extreme temperatures in either way, had 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 in the PPL zone.

In the first quarter of 2007, ComEd contributed a penny per Exelon share, compared to the $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 a nine-year regulatory transition period in Illinois. ComEd also experienced higher O&M expense primarily related to wages and benefits, which further reduced earnings for the quarter.

These are the favorable 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 for long-term recovery, ComEd filed a transmission rate case with FERC on March 1st with plans to file on a distribution case, based on the 2006 [tests] with the ICC late in the second quarter of this year.

ComEd's financial liability, and its ability to deliver reliable service are dependent on being able to recover its costs in a fair and a reasonable rate. Compared to the prior year, where we had about a penny per share favorable impact on 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 from 2006. The increase in PECO's earnings for the quarter was driven by the effects of favorable weather and low 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 in PECO's CTC (inaudible).

Weather was about a $0.03 per share favorable for 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 and extremely cold February and normal weather during March. The end result was weather normal quarter for earnings at both PECO and ComEd. Please refer to the table that accompanies the earnings release for additional detail regarding our first quarter results.

Now, turning to the outlook for 2007. We are reaffirming Exelon's non-GAAP operating earnings and GAAP earnings guidance ranges for 2007 at $4 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 rate case program for its customers this year.

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 within 8-K on March 14, 2007.

I'll also remind you that beginning in 2007 Exelon earnings per share reflects 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 above 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 the market based business, we plan to provide you with additional insight into the commodity markets and will deliver routine updates on our hedge 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 marketing (inaudible). 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 was [informed] that even with the above average trends in January and high amounts of natural gas storage, gas price stayed about a $6 per gallon.

For power markets for calendar year 2008, trended with natural gas. We saw relatively narrow range of movement and the around-the-clock oil prices in PJMWEST 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 continue to utilize all options as a part of our near-term hedging strategy. And chip the allocation of the splits between natural gas and power based on movements in the forward market price. Our forward market implied heat rates.

For 2007 we are over 95% financially hedged. And we are towards the upper end of the ranges we previously provided you for 2008 and 2009. We plan to introduce targets for 2010 sometime in the third quarter.

Let's discuss the RPM results. Early this month PJM concluded the first option under the new capacity market design called the Reliability Pricing Model. RPM provided the valuable transparent pricing rules for the market, and it will compensate generators and demand response providers for investment in long-term reliability in PJM, as customer's benefit.

This new capacity design provides a better signal to the market of where and when capacity is needed. And it 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 the rest of the market $40.80 per megawatt day.

Exelon's Generation located within the PJM footprint was bid into this auction. And declared amounts will receive the resulting locational clearing price. It is important to note that 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, and sales to ComEd through the Illinois auction.

Most, but not all of our capacity in Eastern MAAC has been committed to serve the PECO load and will not benefit this year from these capacity prices. However, our uncommitted capacity in the Midwest will receive the rest of the market capacity price beginning in June. Generation will also receive compensation for capacity transfer rates, 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 we 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 a whole benefit associated with the market value of capacity. We'll 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 markets on the most.

In closing, let me reiterate the basic things 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 we expect will drive continued strong earnings growth through 2011. Growth that will be driven by improving market fundamentals, the exploration of the PECO PPA, and the impact of future carbon regulation.

We are managing to transition the 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 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 we'll 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 see many of you in the upcoming months and will now turn the call over to John Rowe.

John Rowe

Thanks John. Good morning everyone. I would like to quickly add my perspective to the first quarter operating and financial results, discuss the climate change issue a bit, and then discuss its implication for competition including regulation. As John has told you in the press release. We had a very strong first quarter excluding any costs 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 case, others will be quicker to criticize it 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 where they were 10 years ago, and we have guarded this strong image. Our operating and financial performance continues to be anything, but average.

In the nuclear area, Chris Crane, Jeff Burdick and their team continue to (inaudible) genuine Exelon. 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 a superior result, while maintaining a terrific safety record including the employee safety.

In the fossil area Mark Schiavoni and his team continue to extract exceptional performance from our fossil and hydro fleet. They achieved a 92.8% availability factor for our fossil unit and 99.1% equivalent availability for our hydro unit, comparing to 93% and 97% in the third quarter of '06.

In [oil, Kevin Corneau] with the power team continue to convert operating performance in the commercial success. Our team hedged and optimized our portfolio to assist Genco in delivering the growth and profitability that we have the pleasure of reporting these.

Our delivery companies also performed very strongly. Despite a stretch of bitter cold in February that resulted in a record winter peak of 15, 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 6835 megawatts, which was only a 3 megawatt 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 of interruption was improved by 50%, while the average duration of outage was reduced by 28%.

Customers responded favorably to its abundant consumer education and marketing programs, to help them manage energy costs as indicated by our survey tests. PECO also was the first utility in the state of Pennsylvania to begin fulfilling its requirements under the Pennsylvania alternative energy portfolio standard. PECO recently purchased the equivalent of 240 megawatt of alternative energy credits for five years, subject to approval by the Pennsylvania PUC.

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 driver, John Young described them in more detail. But I think our stock performance also reflects the investment and is increasing awareness of the climate changes.

The scientific evidence that human activity is warming the planet, is long convincing, compelling. The most recent scientific report issued by the United Nation Foundation has dispelled any lingering doubt. Climate change is real, it is evasive and the time to begin the acting is now. Both public opinion and the body politics 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 slurry of activity in both houses and while we are still some distance from actual consensus. The question of climate legislation has shifted from its [width].

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 will 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 day.

I see increased investor interest reflected not only in the value of our nuclear fleet, but in investment opportunities more generally. Addressing climate change, we'll be one of the next great global industries, both in challenge and in opportunity. It'll 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 opportunities. Frankly, there is more that we can do in your own interest and in the nation.

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 we are going to get immediate innovations in energy saving appliances, light 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 market. That is truly in all sectors of the economy including the utility sector.

As you know, there is now an increasingly striving debate in Washington and across the country about the benefits of wholesale competition in the electric utilities. We see it most immediately in Illinois but the issue has profound implication across the country, and not just for Exelon's market value.

The Energy Information Administration estimates that the utility industry is the source and almost a third of the current carbon emissions in this country. If we are to successfully address this issue, the utility industry will need to issue, the utility industry will need to invest many billions of dollars in the years to come in new courses of low-carbon generation. That has not occurred, if states regulate with a 'heads we win, tails you loose' mentality.

We cannot invest; you will not invest, if the industry is continually subject to the lowering cost-to-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 fleets is one compelling example.

In the past 10 years, we have effectively doubled the low-carbon generating (inaudible) for the Illinois plants, without building a single plant.

Furthermore, large customers are shopping and residential customers are experiencing the benefits of the wholesale competition, which is being cancelled along PJM 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 investments. I have equally grave concern that any current regulatory model, whether it would be rate case, integrated resource management or the competitive model itself, will 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 our highways. If that is to change, we need to burden at innovation and investment, and we will have to be prepared to pay for it. The truth is you will pay more for it, if we do it through disorder, than if we do it the orderly application system.

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 for its wholesaler competition. Elizabeth Moler is heading that effort for us. I urge you, talk to you, that how you can work on that. It's important not only for your investment in us, it's important to see if 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 [EMER]. This has 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, where 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 just signed by the governor to become a law. Frank Clark, the ComEd Chairman is here this morning, and he can answer more specific questions on that.

And I wish to remind you that even if there should be adverse state legislations that would not end the battle. We would seek to have any rate-refreeze or rollback legislations invalidated in court. Our lawyers believe we have very substantial constitutional arguments, with which to do so.

However, we would remain active in the political process, open to genuinely constructive settlements, precisely because all litigations are involved with it. And we can not guarantee to you that the 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 the tending consequences to the Exelon balance sheet or Exelon Generation's market for significant portions of this generation. And in due course to ComEd's capital expenditures and other programs. There remains also a possibility, that other forms of legislation are detrimental for the Exelon Company. Our 10-Q describes these matters in more detail.

Now last night John Young, told me that he gets to tell you all the good news and it's my job to remind everybody to do it. We have created a great deal of value in Exelon. We have done it by facing our risks clearly, by facing our challenges clearly, and we have done it by constantly telling you where both our risks are and are opportunities. I will continue to make statements that we control.

We believe, we can continue to create significant value in Exelon. But our success itself brings challenges. We encourage you to take both our opportunities and the challenges of our success group.

We will now take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will pause for just a moment to compile the Q&A roster. Thank you. Your first question is coming from Greg Gordon with Citigroup.

Greg Gordon - Citigroup

Thanks, good morning.

John Rowe

Good morning Greg.

John Young

Good morning.

Greg Gordon - Citigroup

By the way I do will may have one question, but it is in 27 parts. When we look at the capacity markets pricing, that we are seeing, I am 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's 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 be able to 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?

John Young

Hey Greg, obviously the RPM auction that just occurred in 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've already entered into with various PPA's in forward sales. PECO, ComEd and others.

But on a longer term basis and I think there is two more auctions this year to get the second or third year of that out. And we will revisit as we do every year. The entire view for a five year period, all of that will be taken into account. That’s one of the reasons why we will be announcing in the third quarter, what the near-term result of our value return policy is and then we’ll 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 in the last year.

Greg Gordon - Citigroup

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 than the initial December forecast, correct?

John Young

Yes.

Greg Gordon - Citigroup

Thank you.

Operator

Thank you. Your next question is coming from John Kiani with Deutsche Bank.

John Kiani - Deutsche Bank

Good morning

John Rowe

Good morning, John.

John Kiani - Deutsche Bank

What are you all seeing, kind of a little bit longer-term and perhaps what's 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?

John Rowe

Ian, do you want to address that?

Ian McLean

Yeah. The off-peak prices, you picked an interesting topic. They have been moving higher recently. I think it's a combination of the coal prices and the risks associated, and then also the gas is coming on the margin more often. So, we have seen a nice move up within those prices in the past couple of months. And you don't see the corresponding price rise in the other [areas], so they kind of move in with more velocity than the rest of the price curve.

John Kiani - Deutsche Bank

So then it is safe to assume, as that trend continues, that once your existing hedges roll-off, there will be a better realized 7/24 price because the off-peak pricing is better and that differential of that spread is narrower?

Ian McLean

Yeah. I would say that's absolutely correct.

John Kiani - Deutsche Bank

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 returns on leverage we should think about, and 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?

John Young

Since that was your third question, we are not going answer that. But, obviously we gave an indication of that in December. We'll 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 an FFO in that kind of range that we are trying to get solidly in the BBB plus area for the corporation. And those are the metrics I would use right now. That's the ones we have, that's the one we've announced. We are not changing those on this call. And if we revise any of that on a forward looking basis that would be later in the third quarter, when we talk about that.

John Kiani - Deutsche Bank

Got it. Thank you very much.

Operator

Thank you. Your next question is coming from you Hugh Wynne with Sanford Bernstein.

Hugh Wynne - Sanford Bernstein

Good morning. I had a question regarding your nuclear fuel expense. You 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 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?

John Young

Okay Hugh. We did actually provide a slide that I am looking at, one of our prior 8-Ks and tell apart 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, we have pretty good price certainty through that timeframe. The sensitivities in 2011, and this is just trying to give you an idea, a $50 increase in what our average costs would be, with the replacement in 2011 that we don't have hedged, would decrease earnings by about a $10 million amount.

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

Hugh Wynne - Sanford Bernstein

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. When is it rolled off and the need to stock at market prices assuming today's prices?

John Young

The assumption of the base prices is something that I couldn’t assume for 2014, 2015. So, I haven’t done that math. It's pretty far in the future and we are doing a lot of work underway to try to restore ourselves against that kind of price spike in the general uranium enrichment markets. So I couldn’t answer to that.

Hugh Wynne - Sanford Bernstein

Okay. Thank you very much.

Operator

Thank you. Your next question is coming from Vic Khaitan with Deutsche Asset Management.

John Rowe

Good morning Vic.

Vic Khaitan - Deutsche Asset Management

Good morning. Thank you everybody. John you've 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?

John Rowe

Let me kick it off Vic and then I’ll ask Frank to kick it up. At the present time, that [Senate] 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. They have said they really don't think rate-freeze is a very good idea. They would like to initiate some compromise discussions. There are few people in the House who said that too.

To-date the only person who is in some ways in a position to bring that in the House, is 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 the most unattractive thing.

So, we are holding the ground that they deregulated our generation. But you all paid for it and it's yours. And I believe if we have to vindicate that is the course, I believe we will succeed. It's a funny loop-the-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's very hard to know where anyone wants to come out. As long as we are sacrificing the principal that's frankly what's yours is yours. We have dozens of ideas on what we think would be good settlement drafts. We will continue to think like that. But at the moment, anything we put on the table would be just leaving against ourselves. And probably during the works with (inaudible), worked for most of the past year and a half, on settlement idea. That's my picture of this situation; the speaker had said on several occasions that he regrets that he deregulated the generation. I think if he has more information on the real economics of the business he would see that his consumers still went by what he did. Now, it's obviously that our investors went too and that creates the NV factor. Frank, would you like to add to that.

Frank Clark

I would only say about this that all of the closed bills, that would include Presidents, that would include speaker and (inaudible) as well as the posture of the bill that is currently kind of (inaudible), has in one way or another all indicative that this issue needs to be resolved. And most recently, if you heard the speaker, it was quoted saying that he was actually seeing that (inaudible) state resolution. But in turn of it as we see, and its my judgment that there is a desire to the vision of AS. But on the other hand, none has come to us with any type of a project that relate to our settlement to-date. So, they will be continuing to wait, as John said, continuing to come forward, they are almost over as you said, (inaudible) themselves, and that's not a truly [Bad Audio]. And that creates a desire, under which ultimately I would hope that sometimes as a settlement because they would come about in the interim, we are out very aggressively talking about the ComEd plan also a series of assistance of targeted groups totaling over three years in $4 million. And we expect that to continue to provide for an environment, that's a hopeless [new office].

Vic Khaitan - Deutsche Asset Management

Okay. Thank you.

Operator

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 post questions. Thank you.

Your next question is coming from Jonathan Arnold with Merrill Lynch.

Jonathan Arnold - Merrill Lynch

Good morning.

John Young

Hi, Jonathan.

Jonathan Arnold - Merrill Lynch

Question for John. John could you talk a little about your sense of the consolidation environment and the company's prospective on M&A potentially involving the Generation business at some point?

John Rowe

Sure. We continue to believe that consolidation must occur. And as long as you do it out of dollars and cents and not out of ego, they are real business opportunities in consolidation. We've also tried twice and -- to achieve which proves to us that we didn't know it anyway that the environment isn't as easy for a 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 over pay for and finding something in an environment where it's politically acceptable to do so. I mean personally I believe the whole industry has something positively at stake in the [THQ] 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 the investments that are required. I mean if you were back five years ago or so, a polarized coal plant could still be built because carbon wasn't such a big issue. The investments on what it costs were probably somewhere between $1,600 to $1,700 per kilowatt. Today those costs would be somewhere between $2,000 and $2,500 per kilowatt.

I have seen estimates for a nuclear plant all over the place but most of them would be between $2,500 and $4,000 per kilowatt. It takes big companies to make substantial improvements in capacity in that kind of a market. It takes big companies to do it especially if you are in a competitive market place. 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. In need if it's going to deal effectively with the carbon challenge to have the coal with carbon capture and the gasification cycle work. Personally, I think that will be even more expensive than a nuclear fuel plant.

There will continue to be more money spent on renewable. So far it's not been my experience to achieve 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 required. 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 famous forecast. We all know it didn't quite work that way. And I think they will continue to happen supported by systems start. There will be opportunity, but only for the patient, so be careful.

Jonathan Arnold - Merrill Lynch

Thank you.

Operator

Thank you. Your next question is coming from Paul Ridzon from KeyBanc Capital Markets.

Paul Ridzon - KeyBanc Capital Markets

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

Frank Clark

This is Frank Clark. I don't know all the reasons that it did not occur only. When we went a couple of weeks ago, it's the patient that we would had announced, some of those, we don't are utilities, whether it would be ComEd and the Illinois companies. That announcement never came forward. I do not think it was certainly a case of dollars. I think it was typically a case of the faster of the bill, ultimately losing that and expect for the merger. And the rate freeze flow that was starting (inaudible) that probably absolutely provided, so greater and immediate relief soon. I hope I have got a notice that are familiar with that view (inaudible) in the house, we will look onto provide a real and immediate relief as opposed to the clinical upside of that in [April].

Paul Ridzon - KeyBanc Capital Markets

Thank you.

Operator

Thank you. Your next question is coming from Paul Patterson with Glenrock Associates.

John Rowe

Hi Paul.

Paul Patterson - Glenrock Associates

Hi, how are you? I was wondering you mentioned that two binary outcomes, you 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 may be potentially shift more of the CapEx or if you're thinking about shifting more of the CapEx out of ComEd into some other Exelon venture. When you have these kind of binary outcomes, 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 next few years?

John Rowe

We think about it all the time. Bear in mind the worst day of my life was at Exelon Company, which was the Friday in 1999 when near Chicago, ate my liver out on television to a fair response in the city. ComEd needs this capital. It is a fact that if the state will not treat it fairly overtime as a regulated wire company, there will come a time when it can't continue to reverse that the rate it currently is. But in my philosophy is don't play chicken with the capital program and to some extent the more ComEd is forced to be separate, it's really Frank and the ComEd Board that will make that decision, not me. So, I think your variety in leading TV is that if 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 the matter of discretionary capital. We've taken the position that ComEd meets its obligation and close from that. Frank, would you like to add to that?

Frank Clark

All right, sir. We reiterate what John just said. When we looked at our capital budget and its expenditures so those are necessary program, our reliability as first and foremost and as long as to have the financial goals to meet our obligations and we expect comparing to the regulatory process [to state] of '09 and we cover our totally incurred cost. For whatever the reason, possibly does not allow us to do that in obligations or where they are, whether at least it probably over some period of time or a reduction in our ability to meet our service obligations, but I don't. And it's not just a statement, I want to see that occur and I expect to receive a profitable regulatory treatment over period of time.

John Young

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

Paul Patterson - Glenrock Associates

Thank you.

Operator

Sir, your next question is coming from Michael Lapides with Goldman Sachs.

Michael Lapides - Goldman Sachs

Hi, I really have a question that's probably directed best towards Ian. Ian, when looking at the PJM capacity market auction pricing, for Rest-of-Pool, so kind of that $1.20 per kW a month pricing level. When do you think the 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 view point on when that major difference between close to $6 a kW month and above $20 a kW month really tightens?

John Young

If you look at the forward market, you see that narrowing already, to more like 50 bucks a couple of years out, although that assumes the MAAC prices will be a lot lower when they cleared and see either market showing that. But, 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's nuclear, a lot of it's coal. So, it's relatively cheaper than the gas in the East. So, we expect that it won't will be there for the foreseeable future.

Michael Lapides - Goldman Sachs

And is it safe to assume that in the Midwest that every year demand grows how much new coal plants being built? Gas will become more and more on the margin overtime, so the impact on power prices will obviously be a bit steeper as gas becomes more on the margin?

Ian McLean

Yes, that’s 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.

Michael Lapides - Goldman Sachs

Right.

Michael Lapides - Goldman Sachs

Great, thank you Ian.

Operator

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.

John Rowe

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 teams. We loved 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 had. We'll keep working on it. We will keep our eyes open for practical settlement. We won't forget who the generation belongs to. Thank you.

Operator

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

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