Exelon Corp. Q4 2007 Earnings Call Transcript

| About: Exelon Corporation (EXC)

Exelon Corporation (NYSE:EXC)

Q4 FY07 Earnings Call

January 23, 2007, 11:00 AM ET

Executives

Chaka Patterson - VP, IR

Matthew F. Hilzinger - Sr. VP and Corporate Controller

Ian P. McLean - President, Exelon Power Team and EVP, Exelon Corporation

John W. Rowe - Chairman, President and CEO

Michael R. Metzner - VP, IR and Shareholder Services

Analysts

John Kiani - Deutsche Bank

Hugh Wynne - Sanford Bernstein

Daniele Seitz - Dahlman Rose

Jonathan Arnold - Merrill Lynch

Rudy Tolentino - Morgan Stanley

Paul Patterson - Glenrock Associates

Daniel Eggers - Credit Suisse

Paul Ridzon - Keybanc Capital Markets

Operator

Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Excelon Fourth 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 to your host, Mr. Chaka Patterson, Vice President of Investor Relations. Sir, you may begin your conference.

Chaka Patterson - Vice President, Investor Relations

Thank you. Good morning. Welcome to Excelon's fourth quarter and year-end 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 Excelon website at www.exceloncorp.com, or you can call Dolores Nivea [ph] at 312-394-5222 and she will fax or e-mail the release to you.

This call is being recorded, and will be available through February 6th by dialing 800-642-1687. The international call-in number is 706-645-9291. The confirmation code is 29883087. In addition, the call will be archived on the Excelon website.

Before we begin today's discussion, let me remind you that the earnings release and other matters we 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 discussions of factors that may cause results to differ from management's projections, forecasts, and expectations.

In our press release and during this call, we will discuss adjusted non-GAAP operating earnings that exclude the earnings impact of certain charges and credits. These charges and credits are identified within our reconciliations of GAAP to adjusted non-GAAP operating earnings from pages seven and eight of the earnings release tables posted to our website and filed on Form 8-K with the SEC this morning. We believe these adjusted operating earnings are representative of the underlying operational results of the company.

With me today are John Rowe, Excelon's Chairman, President and CEO; Ian McLean, Excelon Executive Vice President and President of Power Team; Matthew Hilzinger, Excelon's Senior Vice President and Corporate Controller; and other members of Exelon's senior management team and members of the senior management teams of the Generation company, ComEd, and PECO, who'll be available to answer your questions.

We have scheduled one hour for this call. We will spend about 40 minutes on prepared remarks, focus on fourth quarter and full-year 2007 financial operating results, our outlook for 2008 financial results, an update on markets, and Exelon's commitment to sustainable value. We'll 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 one question.

I will not turn the call over to Matt Hilzinger, Exelon's Corporate Controller, who will discuss our 2007 financial results.

Matthew F. Hilzinger - Senior Vice President and Corporate Controller

Thank you, Chaka. Good morning, everyone. As part of or earnings release package that we issued this morning, we included slides that I will refer to during my remarks. I will first cover Exelon's fourth quarter and full-year 2007 results before moving to the operating results of Exelon Generation, ComEd and PECO. I'll conclude with our financial outlook for 2008, which was covered in detail at our investor conference in December.

Starting with slide three and as highlighted in the materials we released this morning, Exelon achieved strong fourth quarter and full-year 2007 operating and financial results. Exelon announced fourth quarter 2007 adjusted non-GAAP operating earnings of $677 million or $1.02 per share, a 42% increase from fourth quarter 2006 operating earnings of $487 million or $0.72 per diluted share.

Consistent with the first three quarters of the year, Exelon's strong performance in the fourth quarter was driven primarily by increased earnings at Exelon Generation, which were partially offset by the expected decrease in ComEd's earnings. PECO's earnings for the… during the quarter were also down slightly when compared to last year.

Moving to full-year results, Exelon's 2007 operating earnings were $4.32 per diluted share, a 34% increase over 2006 operating earnings of $3.22 per share and just above the high end of our 2007 operating earnings range of $4.15 to $4.30 per share.

Exelon reported consolidated GAAP earnings of $562 million or $0.84 per share for the fourth quarter of 2007, and GAAP earnings of approximately $2.7 billion or $4.05 per share for the full-year 2007. For a complete reconciliation of GAAP and non-GAAP operating earnings, please refer to the tables that accompany the earnings release.

I will now turn to the results of each of the operating companies, starting with Exelon Generation. As seen on slide four, Exelon Generation contributed $0.78 of operating earnings for Exelon's share for the fourth quarter of 2007 compared to 38% for the same period in 2006.

The major driver of Generation's operating earnings during the quarter was higher wholesale margins as a result of favorable portfolio and market conditions, including higher realized market prices, the end of the below-market PPA with ComEd and the contractual price increase associated with the PECO PPA. Generation's fourth quarter results also reflect the gains realized due to a rebalancing of the investments in its nuclear decommissioning price. These benefits were partially offset by inflationary pressures and nuclear plant development costs associated with generations, construction, and operating license application for a possible new nuclear plant in Texas. In the fourth quarter, Generation made a reservation for a long lead large forgings and component fabrication for two next-generation nuclear reactors. This reservation’s was to preserve the option to build a new nuclear plant should we decide to do so in the future.

For the full-year 2007, Exelon Generation contributed $3.45 of operating earnings per Exelon share, an 84% increase over its 2006 contribution of $1.88 per share. The increase in Generation's year-over-year earnings is largely driven by wholesale… higher wholesale margins with the significant drivers that I mentioned for the quarter telling the story for the year as well.

Turning now to ComEd on slide five, in the fourth quarter of 2007 ComEd contributed $0.13 of operating earnings per Exelon share compared to $0.17 during the same period of 2006. ComEd's decrease in earnings was expected and was due primarily to the impact of the end of the regulatory transition period in Illinois. ComEd also reported higher operating and maintenance costs, including an increase in reserves for uncollectible accounts due to the impacts of increased customer rates in 2007 and ComEd's suspension of disconnecting customers during a portion of the year. Also, ComEd experienced higher labor costs, primarily due to inflation. On the upside, ComEd benefited from an increase in revenues associated with its distribution rate case that was concluded in December 2006, an increase in revenues associated with the company's 2007 transmission rate case, and favorable weather during the quarters compared to 2006.

For the full-year 2007, ComEd contributed $0.30 of operating earnings per Exelon share. A 62% decrease over 2006 operating earnings of $0.78 per share. The decrease in year-over-year earnings is largely due to the impact at higher cost of pure power, partially offset by higher transmission revenues.

Turning now to PECO on slide six, PECO's contribution to operating earnings for the fourth quarter of 2007 was $0.17 per Exelon share compared to $0.18 during the same period of 2006. PECO's fourth quarter earnings were lower due to the scheduled increase in PECO's CTC amortization and higher operating and maintenance expenses, including higher expense for uncollectible accounts partially offset by favorable weather and low growth during the quarters compared to 2006. PECO's fourth quarter 2006 results had reflected a tax benefit from the settlement of a research and development tax credit fund.

For the full year of 2007, PECO contributed $0.75 of operating earnings per Exelon share, a 12% increase over 2006 operating earnings of $0.67 per share. The year-over-year increase at PECO was largely driven by higher electric delivery volume due to favorable weather and core growth partially offset by higher CTC amortization as expected.

I will briefly mention two other fourth quarter highlights not covered in my discussion of the operating company results. First, we established the Exelon Foundation with an endowment of $50 million. The Exelon Foundation will focus primarily on environmental and educational grants. You will learn more about the foundation and its mission later in the first quarter. Second, in the fourth quarter Exelon and the Internal Revenue Service agreed to apply industry-wide guidelines as the basis for settling a potential dispute regarding the amount of indirect overhead cost required to be capitalized for tax purposes. The agreement, which is expected to be finalized in 2008, was favorable to Exelon's consolidated fourth quarter results. As you will see in the tables included within today's earnings release, the settlement contributed positively to the fourth quarter earnings [inaudible], while having a negative impact on the earnings of Generation. Please refer to the tables that accompany the earnings release for additional detail regarding our fourth quarter and full-year 2007 results including a full reconciliation of our fourth quarter and full-year reported GAAP earnings and adjusted non-GAAP operating items.

Now, I will briefly recap our 2008 outlook for the consolidated company. Turning to slide seven, we are reaffirming Exelon’s non-GAAP operating earnings guidance for 2008 at $4 to $4.40 per share and Exelon's GAAP guidance range for 2008 at $3.70 to $4.10 per share. Both Exelon's operating earnings and GAAP earnings guidance are based on the assumption of normal weather for 2008 and a full $361 million revenue increase related to ComEd’s current distribution rate case effective October 1, 2008. We expect first quarter 2008 operating earnings to represent 21% to 24% of Exelon's total 2008 operating earnings. You can find additional information including a bridge from 2007 results to expected contributions to 2008 earnings for Exelon Generation, ComEd, and PECO in slides eight, nine, and ten of our earnings call materials. In our earnings release, we have provided much more detail regarding our financial and operational results.

And with that, I will turn the call over to Ian McLean.

Ian P. McLean - President, Exelon Power Team and Executive Vice President, Exelon Corporation

Thanks, and good morning, everybody. Fortunately, the story I'll tell you makes a lot better reading than my stock portfolio right now, and I hope it is... hope yours is doing better than mine too. I'll make some comments about the fourth quarter market performance and provide my observations about what is currently happening in the market.

If you note... please note on slides 11 and 12 that were issued as part of earnings release package, we did include a market snapshot showing commodity price movements for calendar 2008 and 2009 and the corresponding changes in implied market heat rates. The story is following years of steady upward price growth, gas prices have found a more stable range this past year. In PJM, we saw a forward heat rate expand in the second half of the year, which is a sign of the market experiencing tighter supply demand fundamentals as well as changes in the relationship between oil and gas.

In ERCOT, the forward market heat rates declined throughout last year, but began to rise again in December. We believe this is due in part to the market anticipating a refinement in the ERCOT ancillary service procurement process, which took effect on January the 1st, 2008 for responsive reserves, and that is resulting in market prices, more reflective of the generation that is actually being dispatched. So far this year, we’re continuing to see stable prices in the forward gas in our markets and we anticipate further heat rate expansion. The composition of our portfolio should allow us to see the positive benefit of any further heat rate expansion in our unhedged position in the further out-years.

Now turning to RPM, I'd like to make a brief comment about the upcoming auction. In the second and third quarter earnings calls, we provided you with the RPM clearing prices and commentary on our position relative to these clearing prices. 2010, 2011 auction just began on January the 21st and the clearing prices have not yet been posted. So I won't offer any more comments on that. But looking forward to the 2011 and 2012 auctions that will incur in May, we're hopeful that PJM will make a filing with FERC to increase the cost of new entry [inaudible] know as CON [ph]. There has been a lot of dialog in the PJM stakeholder process regarding the appropriate level of CON, but as of this moment, there is currently no certainty about what CON value will be in place for the May auction.

As I said in the December investor conference, what has been under discussion in the stakeholder process of PJM was a CON value of approximately 290 megawatts a day. We believe that this is… $290 per megawatt day. We believe that this is important to have a CON values set at an appropriate level to achieve the desired result of attracting new build in the region, and the value of approximately $290 may not be sufficient to incent new peaking units, but it may support other unit types and is certainly a movement in the right direction.

In terms of our hedge position, I'd just like to give you some date around that. Our financial hedge ranges through 2010 are; for 2008, 90% to 98%; target for 2009 is 70% to 90%; and 50% to 70% for 2010. But I told you in December that we ended the year at the mid point of our target range of the rate, the upper end of the target financial range for 2009, and above the range for 2010. The ComEd financial swap is the main factor of our being above the range in 2010. Generally speaking, however, these hedge ranges are designed to align with Excelon's cash flow requirements while allowing us to participate in the upside of favorable market conditions.

I’d just like to end with a reminder that Excelon is in a unique position to benefit from improved power market fundamentals driven by rising capacity values and higher heat rates, and that's due to our large low cost, low emission, and exceptionally well run nuclear fleet.

And now, I'd like hand the floor back to Mr. Rowe.

John W. Rowe - Chairman, President and Chief Executive Officer

Thank you Ian. Good morning, everyone. I have a cold, so if I am croaking it is not depression over the state of the financial market, it’s just what’s in my chest and I apologize. I will of course add my own gloss on the fourth quarter results and '07 performance.

I want to say a few words about the current economic environment, and I want to begin by commenting on John Young's departure to become Chief Executive Officer of Energy Future Holdings. As you all know, John was a significant contributor here at Exelon and we will miss him. We wish him best. Frankly, I also take pride in the fact that an aggressive outfit like that wants one of our people to run it. But what I really want to comment on is… was stimulated by a couple of articles around succession issues here at Excelon. We don't have and aren't' haunted by a succession issue.

First, I plan to be here at least several more years. Second, we have a deep bench. You will see that as we announce the succession to John in this position. If I were for some reason hit by the proverbial bus, beer truck, or some other kind of truck, which is what's always used for the emergency discussion in Board meetings, we have several people who could step in on a temporary and perhaps on a permanent basis. Third, as we go through the course of this year and early next, if my Board decides to look outside for a successor, there will be no shortage of highly qualified applicants. I simply have the very best job in the electricity business and you would be surprised how many people have found excuses to jingle my phone since John's renouncement.

So the real point I want to make is that Board and I regularly discuss succession, pardon me. Those discussions will be accelerated sometime this year and next. We don't need to do some kind of M&A transaction to solve a succession issue. There is only one criterion around here for transactions, that is value creation for our shareholders and our customers.

As to replacing John, I have made my recommendations to our Governance Committee. It will meet on the next Monday, and I expect that at Tuesday's Board meeting we will announce how we are restaffing and restructuring our finance department. But let me say that between Matt Hilzinger and Michael Metzner, we have a great deal of quality in our finance department. You've gotten to know some of these people already and you will get to know more of them in the near future.

Turning to the results, it is hard for me to display the proper air of jubilation in the kind of stock market we are in, but even a basset hound has to howl once in a while and we had the kind of year that we should be truly ecstatic about. For the seventh consecutive year, we improved both our operating earnings and our operating performance. Over the past seven years, our operating earnings have increased on average of about $0.12 per year and our dividend has increased on average of about 13% per year.

If you want to look at our GAAP earnings, we turned in total earnings of $2.7 billion compared to about $1.6 billion in the prior year. I believe we not only had our best year ever, but probably one of the best in the entire history of the electricity industry and I'm terribly proud of what our team has done and what our unique set of assets are positioned to do.

Consistent with our value return policy, we both raised the dividend form $1.76 to $2 per share in December and last year we announced two separate share repurchases, one for $1.25 billion in September and another one for $500 million in December. We anticipate completing the $1.25 billion repurchase in February and we'll execute the $500 million share repurchase shortly thereafter. I've asked Mr. Metzner why he isn't doing it today, but he says we can't while we are finishing the $1.25 billion. And so you haven't given us this wonderful opportunity. As we indicated at our Investor Conference in December, we expect to have cash available this year for additional buybacks beyond what we have already approved, and of course any additional share repurchase requires Board approval.

Exelon's financial success rests upon three things, all are essential, its operating performance, its financial discipline, and its package of legal and regulatory skills. We watch all three of these drivers all of the time, and 2007 showed how well we can do that.

Starting with our nuclear performance, in 2007 Chris Crane and his nuclear team achieved an average capacity factor of 94.5%, an all-time record for this company and our fifth consecutive year above 93%. It's only three years ago we were telling you all that Chris would be a fine successor to Oliver Kingsley in the nuclear program. I think in those three years Chris has become almost the senior statesmen of the nuclear industry and we're very proud of what he has done. The industry average capacity factor for last year was approximately 90% compared to our 94.5% with the previous fleet. Exelon's generating units produced 955,000-megawatt hours more than the previous record established in 2006. Safety and environmental performance at Exelon nuclear also improved, with the plants reporting their lowest industrial exited rate and lowest number of unplanned automatic shutdowns ever.

But our success is not just a matter of good leadership, although Chris has given that. It's not just a matter of hard work, although lots of people in nuclear give that. It's also a matter of continued investment. We’ve put over $400 million a year in non-fuel investment into our nuclear fleet since the year 2000. We have upgraded our fleet by more than 1100 megawatts, with approximately 200 megawatts more in the works over the next few years. We are working hard to complete the license renewal of Oyster Creek. We have also begun work on a combined construction and operating license application for a potential nuclear plant in Victoria County, Texas. Of course, our decision to actually build that facility is still ways off and depends on many things, including very largely federal funding of the loan guarantees included in the 2005 Energy Policy Act.

Mark Schiavoni and his team continued to operate our fossil plant's economic [inaudible] safety. Mark's team also operates our Conowingo Hydroelectric Station in Maryland and the Fairless Hills Station in Pennsylvania. In the last 20... in the last two years, we brought an additional 24 megawatts online at Conowingo bringing its total capacity to 572 megawatts. Fairless Hills in turn is the second largest landfill gas energy generation facility in the country. Fairless captures methane and uses it to generate electricity. In the last five years, capacity at Fairless Hills has increased more than 40%. Of course, with landfill methane that is not a huge number of megawatts.

Our best-in-class nuclear fleet and our growing portfolio of renewable energy has made Exelon one of the largest low carbon electricity generators in the United States. Our power team lead by Ian McLean, whom you have already heard some, delivered another distinguished performance in turning our operations into commercial success. They also successfully managed our participation in the PJM RPM auction and will continue to do so in 2008. Ian, Gen Kornwoo [ph] and Joe Dominguez [ph] negotiated the finals swap... financial swap contract with ComEd as part of the settlement agreement in the State of Illinois. This contract protects the value of the generation by allowing ExGen to continue to sell its output into a competitive marketplace. Because the financial swap only provides base load energy, it gives us a great energy hedge while leaving the capacity available to bid into the RPM auctions. As you recall, the settlement agreement also went into Generation tax and reduce the uncertainty around the conditions for ICC approval for transaction such as reorganizations and mergers.

ComEd's reliability performance for the year, both for duration and frequency outage, was at or right around target due to an unusually high number of storms for the year. ComEd's handling of a major storm in August [inaudible] got over 600,000 customers was genuinely exceptional. In all, ComEd returned service to approximately 634,000 customers within five days, bringing back 75% of those affected in one day and 90% within 48 hours. Said ICC Chairman [inaudible], I think they did a wonderful job. As you know, we don't hear those words in Illinois a lot. ComEd successfully weathered one of the most severe regulatory and legislative storms that I have seen in my 24 years running electric utilities. And after over two years of conflict last quarter ComEd reached a comprehensive rate lease settlement with the State of Illinois. While it was costly, the settlement at last resolved many of the issues arising from a hint of the transition period in Illinois, while protecting the vital interests of the company, its shareholders, and our customers.

ComEd filed a distribution rate case with the ICC in October, made an energy efficiency filing in November, and reached a very favorable transmission rate settlement with the FERC. ComEd is engaged on all fronts and is beginning down its road to financial recovery. Frank Clark, Anne Pramaggiore, and John Castello all deserve enormous credit for what has been accomplished at ComEd. In Pennsylvania, Dennis O'Brien, Lisa Crutchfield, and their colleagues are delivering good returns, improving their delivery performance and coping with a new set of challenges in that jurisdiction.

PECO's year-end reliability numbers were better than target and its outage frequency results in the City of Philadelphia reaching at all time best. PECO successfully managed a very warm summer, including an extreme heat wave in August. It also experienced nine of its top 15 peak days this summer without significant incidents.

Earlier this year, Governor Rendell announced the far-reaching Energy Independence Initiative to address the impact of rate transitions in Pennsylvania on customers and to establish Pennsylvania as a leader in the use of low-carbon energy technologies. The Governor's initiative made little progress during the regular legislative session. So in September, he called a special session to take up the matter again. Now, more than 60 bills have been introduced. Many of these would advance conservation and total load management, which we support subject to economic limitations. Others will impose unacceptable rate caps for taxes on our Generation business. It now appears that the legislature will have to take up these issues again in the session that started last week. I remain confident that Dennis and Lisa will find a workable resolution, one that provides transitional relief for customers, but preserves competition and continues to move Pennsylvania forward on a low-carbon agenda.

Now, after one swallow of water I want to address the recent decline in our share price. As you all know even better than we do, stocks are down sharply across the board. The Dow Industrials are down about 10% so far this year. Exelon with a number of our peers was strong early in January, but has surely not been spared the pain in the last week. Our shares are now also down about 10% year-to-date. Of course, no company and no stock is 100% safe in a market where there are increasing concerns about a deep economic slowdown. But Exelon's financials, its operation, its market fundamentals, and its competitive positions are stronger than they have ever been.

As Ian discussed, our generation is nearly completely hedged this year and partly hedged in 2009 and 2010. Forward natural gas prices, upon which so much of the electricity market rests, out through 2011 have only increased since we last spoke with you in December. Forward markets’ implied heat rates as Ian discussed and capacity prices in PJM are up as well, reflecting continuing tightening in reserve margins. Carbon remains a front and center issue both in Washington and on the campaign trail, and at least some of our presidential candidates are competing as to how far they can go.

Our operations, both in generation and T&D are in the best shape they've ever been. The delivery companies are the most reliable, they have been in a long time, and our nuclear fleet continues to set records for productivity. As the most cost advantaged energy source available, our nuclear fleet is passable under almost every conceivable set of market conditions.

Finally, our financing condition is stronger that it has ever been. We have ample liquidity and ample access to short and long-term capital at reasonable prices to both maintain and to grow this business. In short, I believe that Excelon is extraordinary well positioned even in this uncertain market and economic environment.

We will now take your questions.

Question and Answer

Operator

[Operator Instructions]. Our first question is coming from John Kiani from Deutsche Bank. Please go ahead.

John Kiani - Deutsche Bank

John, I know you already made some comments on M&A with respect to succession planning in your opening remarks, but in the past I think you have highlighted certain regions that you may want more exposure to. Can you give us your latest thoughts on this please?

John W. Rowe - Chairman, President and Chief Executive Officer

Sure, but they don't changed much. I mean... I think we learned our lesson in PJM East where [inaudible] being there as we can afford to be, that's also true in the Illinois area. There may be some attractive opportunities in PJM West, but that remains to be seen. Obviously, we're interested in parts of the areas to the south of PJM and interested in areas to the west. You all got your speculations as to who we're talking to. I’ve sat around at an EEI meeting not long ago and it was hard to identify anybody I haven't talked to at one time or the other.

A key thing from our point of view is we're always interested, we're always careful, and it's always about value. We just... we look at our model and we don't see anybody equally well positioned. So a deal really has to make sense on a whole lot of factors or we're just not going to do one and we're not going to identify… the surest way to make certain we couldn't do something would be to identify a preferred alternative in a call like this. There are lots of companies out there that makes sense under certain price conditions. There is no company that makes sense under any price condition, and so we will just go forward in our usual hard-boiled way. But I have never flinched on the proposition that this industry needs to consolidate. You take our estimated numbers for a two-unit nuclear project in Texas, they're about the same size as the total equity on our balance sheet. When you look at other companies, the challenge of building projects like that is even larger. So the need to have real scale to deal with the decisions of the future remains obvious. It's also something that one can only get in very careful negotiations. If it turns out that there is nothing available in the next several years, then what might work will be is either pick one of my colleagues from inside or do a search outside and find a successor to me when the time is right. It's not one of our... our constant attention is what can we do and will it bring real value to Exelon. I at my 24th anniversary on January 9 running utilities, I was about valuing year one and I am still about valuing year 25, and pretty soon I hope you believe me.

John Kiani - Deutsche Bank

Thanks for the comments, John.

Chaka Patterson - Vice President, Investor Relations

Next question please.

Operator

Our next question is coming from Hugh Wynne from Sanford Bernstein.

John W. Rowe - Chairman, President and Chief Executive Officer

Hi, Hugh.

Hugh Wynne - Sanford Bernstein

Hi. I have a question for Ian. I was wondering whether in your view the FERC's approval of Duquesne’s withdraw from PJM could have a material impact on capacity prices going forward, and also whether that might trigger further withdrawals by distribution companies? I know even the ICC and Illinois has expressed some doubt about the value of the PJM capacity market to its customers.

Ian P. McLean - President, Exelon Power Team and Executive Vice President, Exelon Corporation

I think that FERC handled it in the right way, which was that Duquesne legally can't leave the PJM footprint and join another RTO if they so desire, but they have to step up to any obligations they currently have on their capacity pricing. We were happy with that outcome because we think it preserves the integrity of the market that people can't walk away from obligations. I don't foresee any particular change in the pricing as a result of that. And in terms of probably the last thing from a regulatory standpoint, there is a tension because there are people who feel RPM is an unnecessary payment and you can pick which side of that fence you want to be on. But the fact is, if you listen to [inaudible], which I know you did, the heat rates are starting to rise and new generation meets to get built and that signal needs to be there in one form or another whether you call it a high energy price or energy plus RPM, however you do it. We happen to think RPM works well, but it's an ongoing debate and probably always will be an ongoing debate, but I think the integrity of the market is intact as a result of FERC's decision.

Hugh Wynne - Sanford Bernstein

All right. Thank you.

Operator

Our next question is coming from Daniele Seitz from Dahlman Rose. Please go ahead.

Daniele Seitz - Dahlman Rose

Okay. Share repurchases for this year, this is not included in your guidance I am assuming?

John W. Rowe - Chairman, President and Chief Executive Officer

We couldn't here the beginning of you comment, Daniele.

Daniele Seitz - Dahlman Rose

So sorry, share repurchases, you mentioned that you will have sufficient cash to really consider another repurchase of shares, and I was wondering if this was included in your guidance or not included or possibly partially included?

John W. Rowe - Chairman, President and Chief Executive Officer

I think the answer is it was not, isn't it Mike. Additional repurchases?

Michael R. Metzner - Vice President, Investor Relations and Shareholder Services

Well, the range between 400 to 440 has the impact of the 1.25 billion that we're in process of executing, the $500 billion announced and some impact for an estimate of what we don't have approval for yet, but we have a placeholder in for '08 any additional buybacks. But just to note, that these aren't big cents per share numbers because it has to be offset by the financing cost. So we're talking about a few pennies, Daniele.

Operator

Our next question is coming from Jonathan Arnold from Merrill Lynch. Please go ahead.

John W. Rowe - Chairman, President and Chief Executive Officer

Hi, Jonathan.

Jonathan Arnold - Merrill Lynch

Good morning. I just wanted ask a question about the item you had for the gains in the nuclear decommissioning funds. Last quarter we had… I guess it was a change in the liability that was called as a special item and this was related I think to changing the investment strategy specifically on AmerGen. So does it... is that... are all your funds now aligned on the same strategy or are there other gains or losses that might be caused by the other funds outside of the AmerGen funds? How should we just think about that item in the context of your guidance for this year and going forward?

Matthew F. Hilzinger - Senior Vice President and Corporate Controller

You're right on the third quarter, the ARO, which is the decommissioning obligation connected with the plant. That was the income in the third quarter, and we traditionally go through that annually and so you'll see that… each year we kind of go through and do that decommissioning study from a liability standpoint. Michael Metzner and his team goes through… each year he takes a look at the asset liability study, and given the probability of the license extensions and the excess funds that we have, we felt that it was appropriate to go through and rebalance those funds from less equity to more fixed income, and that's what we did. We'll continue to do that on a periodic basis, and that was actually done in December. And I think we did something similar to that a few years ago. But Mike, I don't know if you wanted to add anything to that.

Michael R. Metzner - Vice President, Investor Relations and Shareholder Services

No, I think... that 's exactly right. This is a pretty big reallocation from equity and fixed in the decommissioning trust as we reassess the economic life and regulatory life of those plans. And the trusts are in pretty good shape, so it may tend to begin allocate more of that to safer investments, actually it looked like pretty good timing. So that is what that is about.

Jonathan Arnold - Merrill Lynch

But that was specific to AmerGen I think.

Michael R. Metzner - Vice President, Investor Relations and Shareholder Services

Yes. That's right. The AmerGen is a carpet that gets bubbled up to the consolidated numbers. That's right.

Jonathan Arnold - Merrill Lynch

Okay. Thank you.

Chaka Patterson - Vice President, Investor Relations

Next question please.

Operator

Our next question is coming from Rudy Tolentino from Morgan Stanley. Please go ahead.

John W. Rowe - Chairman, President and Chief Executive Officer

Good morning.

Rudy Tolentino - Morgan Stanley

Expedited review of any reorganization or transaction relation to ComEd, since you brought that up what is your plan for pursuing that and what milestones should we be looking for?

John W. Rowe - Chairman, President and Chief Executive Officer

We think about it all the time. I think the answer you'll get is the same you got in December. Obviously, one factor that is very important to us is that whether ComEd is treated in our view fairly in the forthcoming rate case decision, that's probably the biggest single milestone. But the real point is we watch things like Entergy’s spin-off of its nuclear plants in other jurisdictions. We talked to investor banker... investment bankers about the potential value of separation. If we continue not to find a convincing case to separate, we continue to think that there is value in having these companies together. If we get to the point where there is unequivocal reasons to believe that the retail companies can't be treated fairly under that umbrella, then of course we will have to make the other decision, but we do not see that at the present time.

Operator

[Operator Instructions]. Our next question is coming from Paul Patterson from Glenrock Associates. Please go ahead.

John W. Rowe - Chairman, President and Chief Executive Officer

Good morning, Paul.

Paul Patterson - Glenrock Associates

Good morning, guys. With the... just a follow-up on Jonathan's question, and just sort of a further on some of these items. With respect to the unrealized gains and losses on nuclear decommissioning trust funds, it looks like you guys are going to be excluding that going forward from operating earnings and it looks to me like it was included in operating this quarter, just sort of get a feel for how we should going forward look at that?

And also, in terms of the favorable income tax benefit from a change in I think the method of capitalizing overhead costs, could you just explain what that is and how that might impact earnings going forward, how we should model that instead of shadow contributions? What we should sort of expecting with respect to that going forward?

Matthew F. Hilzinger - Senior Vice President and Corporate Controller

Yes, let me start on the decommissioning funds. We have... right now we do include unrealized losses in our income statement. Unrealized gains are not allowed under GAAP. However, with the adoption of 159 in January we are going to be able to… in fact we are going to elect to include both unrealized gains and unrealized losses in our income statement, but we go to treat it like a mark-to-market because it's really timing and any realized gains or losses or what will include in operating earnings. So we're going to just put everything below the line that’s unrealized and let that float much like the mark-to-market that you see in the energy side. So with respect to--.

John W. Rowe - Chairman, President and Chief Executive Officer

In other words both sides will be in GAAP.

Paul Patterson - Glenrock Associates

Both sides will be in GAAP?

John W. Rowe - Chairman, President and Chief Executive Officer

And both sides will be on unrealized, both sides will be out of operating… unrealized, both sides will be in operating, and unrealized will be in GAAP.

Matthew F. Hilzinger - Senior Vice President and Corporate Controller

That's correct. I'd be happy to walk through that with anybody after this call. With respect to the overhead cost, it’s really a one-time event based on some years… I think it was 2001 through 2005, it’s a one-time event with the settlement. So the $0.06 is really something that you ought to just think about as a one-time item. There will be a little bit of a P&L in the out-years, but it really shouldn't be much and there will be up a moderate amount of our cash that we would expect to receive as part of this, but it is probably about $130 million and that will come in over the next year or two. Paul, does that answer your question?

Unidentified Company Representative

The treatment foundation--.

Matthew F. Hilzinger - Senior Vice President and Corporate Controller

The treatment of the foundation, we did treat foundations as operating earnings because that is very consistent with how we treat all contributions. So we treat all contributions through operating and so we treated this as operating as well. It's hard to say whether in the future we will have another contribution or endowment to the foundation, but we thought it was best and most consistent to include this in operating earnings.

John W. Rowe - Chairman, President and Chief Executive Officer

Let me just make one comment to put this in context, Paul. If you recall, back in December at the conference we said… we reaffirmed our guidance of 415 to 430. We said we’d come in at the high end of that, maybe even through that by a couple of pennies. It really related to some timing of items out of '08 and into '07, and the biggest of those was this change in methodology around overhead and that tax item. So that shifted, I don't know $0.05 or $0.06 from ’08 to '07, which is partly why we came… which is why we came through that high end of the guidance.

The foundation, negative $0.05, and they realized gains from the rebalancing in AmerGen essentially offset each other. They are both in operating, but they essentially offset each other. So the story really here is that we were helped by the timing of this item, but we are also reaffirming '08 numbers because of... it's very, very early in the year to do anything there and we're comfortable with the range that we put out there. Next question.

Operator

Our next question is coming from Dan Eggers. Please go ahead.

Daniel Eggers - Credit Suisse

Good morning. Just with some of the concerns about the economic slowdown and Washington's focus on steamless packages and that sort of thing, John I wonder you could share what you’re hearing and kind of your thoughts on what the distraction could mean by way of getting money for loan guarantees on the nuclear development side of the business and also if that may slow any sort of momentum for carbon policy?

John W. Rowe - Chairman, President and Chief Executive Officer

I think those are two very different answers. As you know, in the [inaudible], additional funds were authorized for the loan guarantee program, some people called it the Senate’s thank you gift to Senator Domenici for years of service. So it has been one shot that I think is now pretty solid. But it has to be thought that how much funding there will be for this loan program is very much up in the air as we look forward not only because of the stimulus package in the economy but because of the pending presidential elections. So I don't really think we're going to have any thing we can take to the bank, that's a funny phrase in this economy, on that until sometime in mid-2009.

Now here is the way we have coped with that at Exelon. Our Board is authorized a $100 billion to be spent on our nuclear project through sometime in mid-to-late 2009. We did that so we could work on the licenses. We did that so we could get a place in line on forgings in Japan and that sort of thing. So we're writing nearly all of those expenditures off as we don’t… in other words we're trying to take the very conservative approach that we just don't know until we get into 2009. Now I'm am also Chairman of the Nuclear Energy Institute this year and I can assure you that NEI has at the very top of its agenda getting those loan guaranteed program funded, but frankly your guess is as good as mine in the current political environment.

Now carbon I think is an altogether different matter. I think the potential for carbon legislation only increases. Whether it’s 2009 or 2010, I can't say. I just said 2009… Betsy Moler who knows better says that nothing much happens in the first year of a new administration. She has been there, I haven't, but there is so much evidence and so much passion around this topic that to me is inconceivable there won’t be legislation. The real question in my mind is not whether there will be legislation, it's what they do in the early year. There is almost sure to be legislation with some very dramatic 30-years goal and 50-year goal. The issue is, will they enact the legislation in a way that creates orderly markets in carbon abatement allowance prices starting as soon as possible. We at Exelon favor for all sorts of reasons that the new program should start as early as possible, that it should start with some kind of cost containment mechanism so that prices don't go whackers in the early years, but that it should start with a definitive track because we think the ultimate cost of a change here is going to be somewhere between $50 and $100 a ton and we don't think cost at that level should be imposed by the economy in the early years, but we think you have two have an orderly progression that gets fuel cost on that as well.

Now I heard Roger Altman [ph] who was in the Bill Clinton Treasury Department speak at EEI the other day. He said, either major democratic candidate will likely impose… propose a legislation that is more severe than Levermann Warner [ph] and not less. So I don't think you're going to see Congress backing away from the need for carbon legislation. The issue is how soon the legislation takes effect and how orderly is the market it creates on the road to dealing with this very expensive problem.

Daniel Eggers - Credit Suisse

Thank you.

John W. Rowe - Chairman, President and Chief Executive Officer

So you got a very different answer out of two questions.

Chaka Patterson - Vice President, Investor Relations

Next question please.

Operator

Our final question is coming from Paul Ridzon from Keybanc. Please go ahead.

John W. Rowe - Chairman, President and Chief Executive Officer

Hi, Paul.

Paul Ridzon - Keybanc Capital Markets

Most of my questions are just... I think I heard you say that the CFO position is now a two-horse race, is that of two internal candidates, is that fair?

John W. Rowe - Chairman, President and Chief Executive Officer

That's not fair. I... you heard me say I've made my recommendations to the Governance Committee. I expect it to act on them on Monday, and on Tuesday I expect the Board to make its selection from the proposals I've made. And I anticipate that they will agree with my recommendations. Incident… the two people you call horses in a race are both keepers, this is not a claiming stage. Matt and Mike are very, very important people in our long-term future and as long as I am around here they will both have roses to wear around their neck, I’m not sure they look good in roses.

Now, just to go back, I don't see how we could have had a better 2007. Whether it's the operating front, or financial front, or the legal and political front, honest to god I don't think any utility ever had a better year. Now, we've told you in December that our expectations for 2008 are relatively flat, that's the reality. I've looked at some forecast integrated with 15% growth expectation in the recession with annual rate cases, let’s not kid ourselves. I just don't believe there is a utility out there whose fundamentals are better than ours for 2008 based on the reasons we’ve put earlier in the statement. And we are working very hard on every way we know how to get your the best possible results in 2008. That's really what we do about here, and we haven't stopped being committed to it. Thank you so much.

Chaka Patterson - Vice President, Investor Relations

Thank you, operator.

Operator

This concludes today's Exelon fourth quarter earnings release conference call. You may now disconnect.

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