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Exelon Corp. (NYSE:EXC)

Q2 FY08 Earnings Call

July 23, 2008, 11:30 AM ET

Executives

Chaka Patterson - VP, IR

John W. Rowe - Chairman, President and CEO

Matthew F. Hilzinger - Sr. VP and CFO

Ian P. McLean - EVP, Finance and Markets

Kenneth Cornew - Sr. VP; President, Power Team

Christopher M. Crane - EVP and COO

Elizabeth Anne Moler - EVP, Government and Environmental Affairs and Public Polic

Analysts

John Kiani - Deutsche Bank Securities

Greg Gordon - Citigroup

Hugh Wynne - Sanford Bernstein

Jonathan Arnold - Merrill Lynch

Daniel Eggers - Credit Suisse

Anthony Cordell - Jefferies

Zack Shriver - Ducan Capital

Operator

Good morning. My name is Shauvana, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Exelon Corporation Second Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's 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, Mr. Chaka Patterson. Sir you may begin your conference.

Chaka Patterson - Vice President, Investor Relations

Thank you. Good morning. Welcome to Exelon second quarter 2008 earnings review and conference call update. Thank you for joining us today. We issued our earnings release this morning. If you haven't receive it, the release is available on the Exelon website at www.exeloncorp.com or you can call Dolores Munguia at 312-394-5222 and she will fax or email the release to you.

Before we begin today's discussion, let me remind you that the earnings release and other matters we discussed in today's call contains forward-looking statements and estimates that are subject to various risks and uncertainties, as well as adjusted non-GAAP operating earnings. Please refer to today's 8-K and our other SEC filings for discussions of factors that may cause results to differ from management's projections, forecasts and expectations, and for reconciliation of operating earnings to GAAP earnings.

Leading the call today are John Rowe, Exelon's Chairman, President and CEO, and Matthew Hilzinger, Exelon's Senior Vice President and Chief Financial Officer. They are joined by other members of Exelon's Senior Management team, who will be available to answer your questions. We have scheduled 50 minutes for this call. Please limit yourself to one question.

With that, I will now turn the call over to John Rowe, Exelon's CEO.

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

Thank you, Chaka. As you saw from our earnings release this morning, we had a very strong second quarter with both operating and GAAP earnings at $1.13 a share, compared to $1.03 for the second quarter of 2007. Our earnings in the second quarter make up, for the higher level of planned and unplanned nuclear outage days that we experienced in the first quarter, and we discussed those outages at that time.

The second quarter puts us squarely on track with respect to our earnings for the year. We are comfortably reaffirming our operating earnings guidance for 2008 of $4 to $4.40 a share, and our GAAP earnings guidance range of $3.70 to $4.10 a share. Second quarter makes us very confident of where we are in that range.

Turning to Slide 3 on your deck. We achieved these second quarter results precisely because we are sticking on plan and implementing our, protect and growth strategy. This is not a strategy for a quarter or even for a year. It's what we were doing last year and it's what we will be doing next year. We are aimed at long-term value, as we have been since our formation.

Starting on the left hand side of this page, the first and foremost thing that we do is to deliver superior operating performance. In the second quarter, Chris Crane and his team achieved a nuclear capacity factor out 95.8% and that performance drives the profits we have delivered to you. We achieved a commercial availability of 92.8% at our fossil fleet and nuclear availability factor of 94.4%, at our hydro fleet.

We kept the lights on under difficult conditions. With seven storms June 2008, marks the busiest storm month in a decade. Frank Clark, Barry Mitchell and the ComEd team, should be very proud of the speed with which ComEd cruise completed restoration efforts in June. I remember right they had something like 700,000 customers out in different storms over the period of the month.

ComEd also completed its West Loop Project, a more than $300 million project which converted a large part of the city's electric transmission system from a “hub and spoke” to a network model, and thereby substantially reduces the likelihood of significant losses of power downtown and in Chicago neighborhoods. PECO did not have as many storms, but it had one very violent storm last month that caused damage and affected about 200,000 PECO customers.

PECO crews restored service to more than half of the customers within the first 10 hours. PECO also completed its critical infrastructure projects to insure meet select PECO electric demand during the summer and PECO has been handling very high temperatures in Philadelphia over the last week and doing it very well indeed.

As you all know the value of Exelon depends on our ability to protect competitive markets and to make those markets worth. By competitive markets we mean markets in which generators like Exelon Generation receives market prices for electricity, markets which come to plays an economy value on carbon emissions to ensure a reduction in greenhouse gases.

Markets where all power suppliers receive equal and fair treatment and markets, where electric generators are able to recover the investments they make to meet future energy needs. Our competitive markets allow us to deliver substantial value now and will allow us to increase that value in 2011 and subsequent years, when PECO goes to market as well.

Let me remind you of our earnings profile between now and then. We are a commodity price driven company and we are a company that tries to hedge on a period several years forward. As you recall, we had a significant increase in earnings from 2006 to 2007 as our Midwest fleet transition to market prices and we enjoyed an extraordinary nuclear performance.

In 2008 and 2009, we are almost fully hedged. There is both good news and bad news in that. The good news of course is that the recent fall off in prices does not affect our earnings very much in this two year period. The bad news is of course that we didn't benefit as much in the very short-term from the rise in prices in the few months to proceed that. That's what a good hedging policy does.

As a result, you can expect our near-term earnings to be relatively flat. We are expecting to benefit from rising power prices, both energy and capacity in 2010, where we are less hedged and in 211, where we are largely unhedged. As a result, we expect a significant earnings increase in 2011, driven by higher market prices for our generation, the transition to market in Pennsylvania and continued progress in achieving a fair return at ComEd.

We remain committed to building healthy self sustaining delivery companies. As you know PECO has been doing well. ComEd has had inadequate earnings. We started the process of fixing that a year ago. ComEd filed the ST case last fall; on July 10 the ALJ issued a proposed order. This proposed order represents suggested findings for the commission. We do not know what, to what extent the commission may adopt the original stipulation, we reached with the commissions staff or to what extent it will defer to the ALJ order.

The proposed order recommended a revenue requirement increase of $218 million compared to ComEd's revised request of $345 million and a return on equity of 10.3%. The proposed orders supported ComEd's original filing to include pro forma capital additions in rate case. The inclusion of pro forma capital additions and rate base is important for managing regulatory lag and for continuing to lay the groundwork for future testier.

In addition, the ALJs were supportive of the capital structure proposed by ComEd and did not propose large write-offs rate base. We are however still of the belief that a number of more like the stipulated amount with the staff better reflects the record and the ComEd team continues to pursue that result. In reaching the proposed order, the ALJs evaluated the individual positions of ComEd's case as opposed to broadly accepting this stipulation.

ComEd has the opportunity to share its views on the ALJ's proposed order and is briefed some exceptions, which it will file tomorrow. We expect to receive the ICC's final order by September 15th. The result in this case should represent progress to our deal in ComEd we still do not know how much progress it will be.

Turning to Pennsylvania, PECO has been engaged in discussions with the other utilities, the General Assembly and the Rendell administration, about Pennsylvania's energy policy and the transition to market based wholesale rates. We continue to look forward to these discussions when the General Assembly returns in September and we will be working with the Governor's office and with legislative leaders. In the interim, PECO expects to file its energy procurement program.

Moving to the growth side of the map, we have reinforced our commitment to setting the industry standard for low-carbon energy generation and delivery with our recently announced low-carbon energy plant, Exelon 2020: A Low-Carbon Roadmap. I am very proud of this document because it shows the most efficient ways to meet carbon requirements. It lays out a set of guidelines for Exelon to take cost efficient steps to do this, and I believe it will create additional earnings opportunities for the company.

Exelon 2020 represents what I believe to be the first comprehensive plant in the utility industry to reduce, offset or displace more than 15 million metrics tons of greenhouse gas emissions by 2020. That is more than our total annual carbon footprint and is equivalent to taking nearly 3 million cars off the highway. We will reach this goal in three ways; reducing or offsetting our own carbon footprints, helping our customers and the communities we serve reduce their greenhouse gas emissions, and offering more low-carbon electricity in the marketplace.

I would like to be very clear, as we said in the press release. It is very important that Exelon not be simply a price taker on its nuclear fleet. It's very important to you, our shareholders that we'll be out there helping to solve up problems of our community and this is the plan to do just like that. We currently estimate that the total cost to implement the potential greenhouse gas abatement initiative described in this plan, live over the 12 years in something in excess of $10 billion.

About 80% to 85% of that cost would be initiatives such as nuclear power upgrades, natural gas plants and renewable generation. The remaining 15% to 20% is largely associated with measures to offset emissions and to help our customers, things like the ComEd energy efficiency programs. These estimates do not include the cost associated with the new nuclear plant if we decided to go on. Actual expenditures will depend on both quality development and our project-by-project economic decisions.

We are keeping the rigor we'll try to develop for a long time as we look at these projects. Our cash for discretionary investments continue to include the IRR Analysis, you all come to expect and an evaluation of alternative uses of capital including share buybacks. I would like to be very clear, our value return policy remains fully in force. This plan does not change the commitment we made to you about value return. Our Protect and Grow strategy has served the company and our investors, very well. I'm absolutely certain it will continue to do so.

Whereas, we look at the quarter we have just finished, it is very strong quarter and positions us very nicely for the whole year. I have to say that we watch as anyone would, what happens in the market this morning. It's obvious, that something here is worrying you and if you will ask questions about it, we'll do our best to answer them because we see this is as a very good quarter and a very good first half. And we see 2008 as being another very good year for Exelon.

I'll now turn the call over to Matt Hilzinger.

Matthew F. Hilzinger - Senior Vice President and Chief Financial Officer

Thank you, John. Good morning everyone. We have provided a significant amount of detail regarding our results in our earnings release in the accompanying tables. Therefore, I'll spend my time this morning discussing the results for the quarter, in addition to providing updates on power markets, our hedging strategy and Exelon's financial strength.

Starting with our current quarter results on Slide 4, we reported operating earnings of a $1.13 per share in the second quarter of 2008, compared to $1.03 in the second quarter of 2007. The quarter-over-quarter increase reflects in increase in earnings at Exelon Generation partially offset by decrease in PECO earnings. ComEd results were also down slightly quarter-over-quarter. Let me cover these in more detail.

Turning to Slide 5, you'll see that the key drivers for Exelon Generation's quarter-over-quarter higher operating earnings. As John mentioned, Generation had a greater, had a great quarter from an operational perspective. In terms of plant refueling outage days, Generation had 40 days in the second quarter of 2008 as compared to 55 days in the second quarter of 2007.

Non-refueling outages days were down by 15 days quarter-over-quarter, as we had only three in the second quarter of this year as compared to 18 in the second quarter of last year. In addition, the average margins realized by our Generation output were close to $5 per megawatt hour higher on average in the second quarter of 2008, as compared to the second quarter of 2007.

Generation's second quarter 2008 also reflects income from proprietary trading activities of $0.07 per share compared to $0.03 last year. These trading results were driven by certain long option positions within our trading portfolio that were acquired years ago.

During the quarter we realized income from some of these options as current market conditions allowed us to capitalize on our position. From a risk management standpoint, these option positions have limited downside risk and extend for several more years.

Future income from these options is solely dependent on future market conditions. Given the volatility in the marketplace, future income around these option positions is highly uncertain. And let me remind you that our proprietary trading activities have not and should not be a significant earnings driver for Generation on an annual basis. We have very tight risk management policy and practices around these activities.

Generation's results also reflect income of about $0.04 per share associated with the legal settlement of uranium supply contract in default heading back to 2006. In terms of securing a reliable supply of uranium for a nuclear fleet, this particular contract was small relative to Generation's overall uranium supply mix. We do not anticipate additional defaults of uranium supply contracts going forward.

In general, the number of buyers and sellers of uranium is limited, making the relationships between large buyers and sellers very strategic partnerships. We are not aware of any other uranium supplier defaults since 2006. The risk of future default of other uranium supply contracts is also mitigated by recent declines in the spot price of uranium, which is currently at about $63 per pound compared to the peak levels of $130 per pound in 2007.

Turning now to Slide 6. I will discuss two items that have been the subject of much interest likely: heat rates and our risk management and hedging practices. As you can see from the graphs on slide 6 and 7, which are current through July 18, 2008 for heat rate to decline from their recent highs in December of 2007. With sharp increases in gas prices through the end of June and power prices rising at a slower rate, market-implied heat rates were driven lower during the first half of the year. In July, heat rates have been relatively flat, while natural gas prices have declined.

First, we are seeing a tightening of liquidity in the power markets. This could be caused by couple of factors: the fall-off from the recent tightening of capital markets has caused financial institutions to reduce their participation and power trading. And the lack of defined procurement structures for distribution companies in some states has reduced the amount of power trading in the other years.

Second, implied for heat rates are being influenced by what is happening in the spot market. In 2007, when the spot heat rates increased over prior years, forward heat rates followed suit. In 2008, spot heat rates have fallen and forward heat rates have followed the downward trend. It is important to remember, however, that our large nuclear generation portfolio is more leveraged the power prices than heat rates.

Looking at Slide 6, forward power prices at PJM West Hub are higher on a year-to-date basis for both 2009 and 2010. 2009 forward power prices at Ni-Hub are slightly higher than the beginning of year levels, whereas 2010 forward prices have retreated below beginning of year levels, which can be attributed to many of the reasons I discussed that are driving the market implied heat rates lower year-to-date.

In addition, two weeks ago the U.S. DC Circuit Court of Appeals vacated the Bush administration's Clean Air Interstate Rule, which I will refer to as the CAIR rule. Following the Court's ruling, activity in NOx and SO2 trading markets diminished dramatically and forward off-peak prices in Ni-Hub have recently been pressed lower.

Uncertainty around regulating emissions will persist until avenues for rehearing of the Court's opinion and perhaps a petition with the U.S. Supreme Court are pursued and exhausted. In the near term, the uncertainty will be reflected in off-peak power prices. In our view the longer-term reality is that some from of NOx and SO2 regulation will no doubt occur either through an EPA regulatory proceeding and/or Congressional action.

Power prices should eventually move to reflect the cost to compliance. In the short term, our hedging program protects us against these downward movements in prices. Based upon current market prices, we do not expect the Circuit Court's decision to vacate the CAIR rule to have a material impact to our earnings in 2008 or 2009.

Let me take a little bit of time and expand on our hedging practices. As I have described before, our financial hedging targets are derived from an integrated planning process that allows us to have secured cash flows in order to meet our operating needs, capital investment needs, debt service and dividend commitments for a period of time on its market volatility. Our hedging program is integrated within our operations and it is how we manage the business.

For 2008, we around 96% financially hedged. For 2009, our target is to be between 70% and 90% financially hedged, and we are at very top end of that range. Given that we are at 96% hedged in 2008 and at the top end of our hedging range for 2009, we do not expect the benefit substantially from higher power prices or to suffer from lower power prices in the near-term. We would expect to benefit from higher power prices in 2010 and to a much greater extent 2011 because our portfolio is largely un-hedged in that year.

Turning to ComEd, you've already heard from John, on the status of ComEd's distribution rate case. So I'll briefly touch on ComEd's results for the second quarter. On Slide 8, you will see the key drivers of ComEd's quarter-over-quarter results, with the most significant drivers being increased transmission revenues partially offset by higher storm costs.

Turning now to PECO, on Slide 9, you will see the key drivers of PECO's quarter-over-quarter decline in operating earnings, including the scheduled increase in PECO's CTC amortization. PECO's results were also driven lower quarter-over-quarter, due to higher levels of expense for uncollectible accounts, principally related to residential customers.

The additional expense reflects an increasing risk of uncollectible accounts evidence by changes in the aging of PECO's accounts receivable book balances and customer account charge-offs. In part, this is a result of a suspension of collection activities during our billing system conversion project. We have also seen a growth in low-income customer assistance programs which results in the eventual forgiveness of certain outstanding account balances.

We are not pleased with the increased levels of write-offs associated with the agency and also we are taking the issue very seriously. PECO management has initiated several actions to address this increasing level of its uncollectible accounts. Given the economic challenges faced by our customers, it is hard to predict future expense with precision. However, we are forecasting bad debt expense for the second quarter of 2008 to be comparable to the second half of 2007, which is approximately $50 million.

Moving to Slide 10, I'd like to provide my perspective on our financial position as we move into the second half of 2008. In short, our financial position is in terrific shape. First, our operations, market fundamentals, and competitive position remained very strong. Our second quarter results to the $1.13 per share were $0.10 higher than last year, largely driven by strong nuclear operations and improving market fundamentals, and in part by some discrete items.

Like the US economy, the economies in and around Chicago and Philadelphia are weaker this year. We have seen some degree of slower than forecasted low growth at ComEd and PECO, especially during the last two months. We do not expect at this point that the slowing economy in the US will have the significant impact on Exelon's 2008 earnings. However, we will continue to closely monitor the potential effects of a slowing economy on our operations.

Second, we are keeping a careful watch on our O&M cost and capital spending. Year-to-date, our own O&M costs and capital have tracked closely with our expectations. But we are beginning to see inflationary pressures grow across all of our operating companies. Last fall, we told you that we expected to see a 2% to 3% compounded annual growth rate in operating O&M cost from 2008 to 2012.

We are now expecting to see our O&M costs grow at a compounded annual growth rate of around 4% during this time period, this reflects inflationary pressures on costs that we and others in the industry are seeing. Third, we have an increasingly strong cash flow profile. We are expecting to generate about $5 billion of cash flows from operations this year. This is about $500 million higher than our original planning assumptions. It is primarily due to the tax planning opportunities that I mentioned on our first quarter earnings call.

Lastly, I'll briefly mention the strength of our balance sheet liquidity. We are committed to maintaining strong investment-grade ratings supported by strong product countries. We continue to have ample liquidity and sufficient access to short and long term capital at reasonable terms, given the credit ratings for our respective issuers. We also have credit facilities in place aggregating over $7 billion largely extending through 2012.

During the second quarter, Fitch provides the ratings outlook for Exelon Generation from stable to positive and affirms the outstanding ratings of Exelon, ComEd and PECO. Fitch's positive ratings outlooks reflects the leverage, interest coverage and profitability measures that are strong for the rating and compare favorably to the peer group. When considering all of these financial metrics, I view our financial condition to be very strong and we are well positioned to withstand a weakening economy.

Turning to guidance, and as John mentioned earlier, we are reaffirming Exelon's non-GAAP operating earnings guidance range 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. At the start of 2007 we explained to you that the, profile Exelon's quarterly earnings to change and that the distribution of earnings would be less due to the summer months for our third quarter, this helped through for 2007 and continues to hold through for 2008.

On a fourth quarter earnings call in January, I indicated that our third quarter earnings would likely represent 26% to 29% of our full year 2008 operating, and we iterating that range today.

And with that I'll turn the call back to you John.

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

Thank you, Matt. Operator we're ready for questions.

QUESTION AND ANSWER

Operator

At this time the floor is now opened for questions. [Operator Instructions]. Our first question is coming from John Kiani with Deutsche Bank. Please go ahead.

John Kiani - Deutsche Bank Securities

Good morning.

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

Good morning, John.

John Kiani - Deutsche Bank Securities

I'm trying to understand a little bit more about the value return policy and the timing of it. I appreciate the fact that you obviously give that a very diligent and thorough review on an annual basis…I'm kind of wondering with the stock down here where it is effectively lower than it was 7 or 8 months ago, but with natural gas prices even despite the recent pullback still up 20% to 25% from that timeframe and coal prices up still a 100% from that timeframe.

Why the company wouldn't think about being more opportunistic especially with the balance sheet that Exelon has and looking at a buyback today based on…the advantages of the current market conditions affords that?

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

Well, I think when look but the adjustment in price you talked about is something it's about a week old. And one doesn't want to change one plan too dramatically just because of what a nervous stock market does in a week, but we are already in the second half and we will keep looking both at when and how much. I mean there is the buyback issue which you all know is in our plans.

There is a dividend increase issue and we want to do those in an orderly way being opportunistic is a good thing, but moving billions…billion dollars or moreover, overnight is something you take a little carefully. So, I think we added 0.5 billion last year I think that proves we are prepared to be flexible and obviously we are paying attention to what happened to the market. We are not very happy with this, basically $10 shift at all and it has our attention.

John Kiani - Deutsche Bank Securities

Okay. Thanks, John.

Chaka Patterson - Vice President, Investor Relations

Next question, please.

Operator

Thank you. Our next question is coming from Greg Gordon with Citi. Please go ahead.

Greg Gordon - Citigroup

Thanks. Good morning. First…

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

Hi, Greg.

Greg Gordon - Citigroup

You guys said your 96% financially hedge for '08 and 90% for '09. You said largely un-hedged in '11, but I didn't hear a number for 2010. Did you give a range for 2010?

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

We've given a range in the past, I think its 50 to 70% and we are working our way through that, Greg.

Greg Gordon - Citigroup

Okay. So, it would be fair to presume that you are moving towards the high end of the range and as you…

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

Yeah, I think that's very fair. We're moving towards the high end of the range. We have already stated that we are above that range of 50 to 70. I think we have actually told you that several times.

Greg Gordon - Citigroup

Right because of the PECO contract being in place.

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

That's right. And also because of the swap we did with Commonwealth Edison.

Greg Gordon - Citigroup

Right. So, in some of your analyst presentations over the course of the year, you have given a rough projection of where you thought the PECO load serving contract would price, just given a read through of where some of the other entities in the market had been pricing their hedges. I think, EPL the one that you have referenced. Obviously prices are down about 5 or $6 per megawatt hour in my measure since you gave that presentation.

So, it begs the question, do you guys have a point of view on where these markets are to trade, is this a technical phenomenon that we are seeing as you see, sort of an unwind of a broader commodity trade in the financial markets, or do you think these pull-backs we have seen represents some fundamental shift in outlook.

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

I would like Ian, mostly to answer that. We think the fundamentals particularly in PJM East are still largely in the upward direction. That said I doubt we think there is great long-term virtue in any one particular number either today's number or a $5 higher number couple of months ago, but Ian, why don't you do your best to help with that.

Ian P. McLean - Executive Vice President, Finance and Markets

Yeah, I think I answered it John. I think the market, the global markets are extremely nervous and everyone is looking always now for negative information and with the economy being weak, people are nervous about load growth and it all feeds in to this sort of sensing you hear news be at correct or not correct. There is going to be more gas than people thought available.

Today's price is as good as last week's price, as far as I am concerned I don't have a strong view on it, I just don't. It will be what it will be. We will hedge, than we think within two years it's going to settle down and get back to business as normal and everything will move on from there.

Greg Gordon - Citigroup

Thank you, Ian.

Chaka Patterson - Vice President, Investor Relations

Next question please.

Operator

Thank you. Our next question is coming from Hugh Wynne with Sanford Bernstein. Please go ahead.

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

Morning, Hugh.

Hugh Wynne - Sanford Bernstein

Good morning and congratulations on a good quarter. Just wanted to ask about the direction of revenues over the 2008 2010 timeframe? You guys have I think emphasized on several of your comments that this is a period where you're hedged, where earnings are likely to be relatively flat, and that the major impact of higher market prices will not be felt until perhaps 2011. Nonetheless in this quarter, you all realized average revenue per megawatt hour of about $62 on your marketed retail sales, which is up by approximately $7 per megawatt hour from similar calculation last year which was 54 bucks per megawatt hour.

So the fact that your hedge is not precluding you from realizing higher revenues on your market sales of power and I was wondering if you could help me to understand how that works, what's driving that? Is this simply the gradual roll off of existing hedges and the impact of higher wholesale prices flowing through gradually to your top line overtime? And if so, should we expect more of that in subsequent quarters through 2010 or should I be thinking about this in a totally different way?

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

I'll take a shot at that, Hugh. I mean I think there's two things; one is just nuclear output is always a factor. So you have to take the volume piece into that. And secondly is, I think when you look at the power prices its…we aren't a 100% hedge. We are at the high-90s. So there is always some amount that we leave open and power prices go up, we can take advantage of that. So I think there is always a little bit that provides some opportunity for us.

Matthew F. Hilzinger - Senior Vice President and Chief Financial Officer

It seems to me you a piece of this is that 95.8% figure that Chris delivered in the second quarter. We can't budget in poverty and can't plan on having it quite that good. So when Chris delivered it, Ian can sell it.

Hugh Wynne - Sanford Bernstein

I don't see how with respect… I don't see how movements and output can affect your realized revenue per megawatt hour, and I certainly don't see how the 4% un-hedged position in 2008 could produce a $7 increase in realized revenues per megawatt hours. So there must be something else, no?

Matthew F. Hilzinger - Senior Vice President and Chief Financial Officer

We've got a breakdown, let's give it you.

Kenneth Cornew - Senior Vice President; President, Power Team

Hugh, Ken Cornew. Couple of things first you're right, as our hedging program old hedges roll out, and new hedges roll in and prices are increasing. We are going to see an increase on the revenue line. But I think the important thing for you to focus on is the margin line. And to the extent we keep our costs from our nuclear fleet particularly as stable level and the revenue line increases, we're going to see some increase in margin. We also have a fossil fleet and to the extent our fossil units have higher fuel cost.

Now they are going to make their way into the cost line. We're going to see a higher revenue line and at somewhat muted marginal line. So I think one thing, one thing to take away from this discussion from your perspective would be look at the margin line. The revenue line is important. Spot prices have gone up substantially year-over-year.

Fuel costs have gone up substantially year-over-year. Older hedges that were at lower prices have rolled off year-over-year. All those will contribute to probably some increase in margin, but not quite to the extent you're looking at it from a revenue line perspective.

Hugh Wynne - Sanford Bernstein

Great. Thank you very much.

Chaka Patterson - Vice President, Investor Relations

Next question, please?

Operator

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

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

Hi, Jonathan.

Jonathan Arnold - Merrill Lynch

Good morning guys. I wanted to ask about Texas and just how you... how the fleet did in the very sort of volatile markets we have there in the second quarter. And also as Ian, you've said in the past that you've given the uncertainty around things like wind generation coming into that market that is not some way you'd be looking to deploy capital. But now we will have a decision at least from the commission on where they are headed with wind transmission. Does that change anything in terms of your outlook of going forward there?

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

Ian, why don't you answer that right on the details?

Ian P. McLean - Executive Vice President, Finance and Markets

Jonathan, first on the quarter in the spot markets, we have machines in Texas that are dispatchable machines, intermediate and peaking kind of equipment. And we've seen some volatility down there in the quarter. And we've gotten some good dispatch and good results from the spot market with our position in Texas.

Matthew F. Hilzinger - Senior Vice President and Chief Financial Officer

So, you are clearly recognizing that on Wind Generation, it is a big difference to think about whether it's 10,000 megawatts of Wind Generation or 18,000 megawatts of Wind Generation and it looks like a very different generation stack and supply model and we have to consider that in any investment we are looking at or contemplating making in the future down there regarding generation.

So, clearly it is an issue, clearly it's something we need to look at. We think 18,000 is a big number and may have some real impacts on the type of generation stack it's going to make an economic and reliable operation exist.

Jonathan Arnold - Merrill Lynch

Okay. Thank you. Could I go to the quick follow-up on related subject, please?

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

Go ahead, John.

Jonathan Arnold - Merrill Lynch

You are talking about for the year, the strong Generation performance you're offsetting some of the load issues, an uncollectibles of the utilities. To what extent is that statement reliant on the two one-time type items you had in the second quarter, and to what extent is it reliant on sustained above average performance through the second half of the year? I guess I am kind of curious as to whether that's where you are now; do you have to continue doing well at Generation to make that statement?

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

John, I'll take a crack at that. I think based on that the plan that we have for the nuclear plants in terms of output, if they meet their plan that's what… that's we are expecting for the second half of the year. Obviously we need to get through the summer. That will have a big impact. But if you look back at really the first half of the year, we've had a very, very strong operationally sound year. I mean in terms of what's happened in the market fundamentals and then in terms of the operations to the plants and the outputs.

So, when we look at the year, we really do look at it as a very strong and solid operational year. That the one timers, you can, when we sit back we kind of look at him whether it's on a quarterly basis or a six-month basis. And for the most part, they really do wash out. When you look at a range between 400, 440 at the end of year you end up with a few pennies here and there on kind of a net basis on the dispute items.

It really is not impactful in terms of how we look at the business. And so, stepping back our profitability is really driven by the nuclear assets and their performance to market pressures. So, does that answer your question, Jonathan?

Jonathan Arnold - Merrill Lynch

Yes, it does. I just have one other. You have this…

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

Hey, Jonathon we got to move on. So, give us a call later on and we'll get you an answer to your question, okay?

Jonathan Arnold - Merrill Lynch

Thank you, guys.

Chaka Patterson - Vice President, Investor Relations

Next caller, please.

Operator

Thank you. Our next question is coming from Dan Eggers with Credit Suisse. Please go ahead.

Daniel Eggers - Credit Suisse

Hi, good morning.

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

Good morning.

Daniel Eggers - Credit Suisse

On the Exelon 20-20 plan, can you just give a little more insight into kind of the timing of when you expect to start making more meaningful capital expenditures as part of that $12 billion program? How much of that plan is already in CapEx that you guys were looking for; and then maybe other insights as far as what kind of return you expect to earn on that capital at what this going into, or it should pretty attractive hard assets?

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

Let me take a shot at it and Matt will help me here. Much of this plan was in our capital plans already. We look at the nuclear operates we divide them in to branches. First one I think is around 250-300 megawatts that sound right Matt?

Matthew F. Hilzinger - Senior Vice President and Chief Financial Officer

Yes.

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

And that is in the next several years and there's a high degree of certainty around are doing that and big payback on doing that. Then there is another chunk, it's down there few years further out that there is a much larger band of uncertainty around is to, whether we could actually do it, make it pay and I'll let Chris to amplify that if you want.

Now, one of the biggest pieces of this is whether we do gas combined cycle plants in either PJM East or in Texas. And I think sometime yes this year, we will probably make a firm decision on the PJM East plant. The Texas situation is a little more confusing because of things that have already been discussed in this call. These are the biggest single chunks. As you know, we've only authorized $100 million for the nuclear project in Texas.

We think that will cover us well into '09 and we are genuinely open minded as to whether we go forward with that project or not. We really mean the conditions we put at it. Matt, can you…better Chris can you flush this out a little more beyond what I said.

Christopher M. Crane - Executive Vice President and Chief Operating Officer

We're going to be as we always our capital investments very disciplined in how we look at whether we're going to make those in terms of deferral rates and IIRs and that this program I don't think it's going to be any different. We're going to look at things and that's particularly around the capital investments around nuclear operates or natural gas plants or renewals that we're going to look at.

So, we're going to be very disciplined. We've always been that way and I think we're going to continue that down the path. There is a portion of this that we're going to look at in terms of offsetting our own greenhouse gases and those of our customers. And we work for look for if when it's appropriate, appropriate recovery at the utilities if it's associated with that. So, we're going to be very, very disciplined about how we go forward on this.

In terms of what's been built into our capital plans. We have not given to the Street capital investments plans for the next four or five years. But we're going to continue to take a look it at again, if it makes sense, we'll adjust our value return policy that way. But I think John's reiterated these have to make economic sense for us to do it.

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

Yeah, just to backup this, Chris Crane just to backup what Matt said, the first and John…the first group of projects that are underway that fall under not only our new 2020 program, but there are already plans in place to be during retrofits on steam paths…on the steam turbans. What we're doing is taking the advantage of replacing just because of degradation in age.

It's just a normal asset management plan of doing a retrofit with larger and more efficient units that are going to gain us stationary to motoring units that are going to gain us this greater amount of the 350 megawatts we're going after first. So it's been in our plan, our long-term asset management plan, we get to take advantage of new technology and advancement to gain the efficiencies that will increase the megawatts. But first, two blocks of upgrades fall in that type of area that has been planed. The third is as John said we'll continue to evaluate.

Matthew F. Hilzinger - Senior Vice President and Chief Financial Officer

I'll add also that some of these things are fairly small and we took a look just yesterday at the first slice of our building improvement plan. We've already got something like a 9% reduction in building energy consumption from work we've already done. We took a look at another 4% chunk yesterday. The total amount of money involved is between $5 and $10 million, and it has…the returns vary all the way from close to zero to up at 15% or 20%.

But the average is over our cost of capital and it's not a small amount of money. So, it's a good way to make a point and to do it fairly cheaply. The next slice of buildings we look at, probably will involve a little more money, and raise questions like, are we in a building or two we shouldn't be in at all. And so, we're looking at those now, but the returns were pretty good on this first slice.

Daniel Eggers - Credit Suisse

Great. Thank you very much.

Chaka Patterson - Vice President, Investor Relations

Next question please.

Operator

Thank you. Our next question is from Anthony Cordell [ph] with Jefferies. Please go ahead.

Anthony Cordell - Jefferies

Just a quick follow-up from Jonathan's question about in…Texas. Have you guys been able to quantify the benefit that you guys have received from your plants in Texas?

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

Ian and Ken.

Ian P. McLean - Executive Vice President, Finance and Markets

I don't understand the question, the benefit of the...

Anthony Cordell - Jefferies

How has the contribution from those plans this quarter versus the previous quarter?

Ian P. McLean - Executive Vice President, Finance and Markets

Yeah, we don't disclose...

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

Regional.

Ian P. McLean - Executive Vice President, Finance and Markets

Regional, this is one of the things we said at the trade-off. So obviously, it's been positive because the volatility is been there.

Anthony Cordell - Jefferies

Okay, thank you.

Chaka Patterson - Vice President, Investor Relations

Last question, operator.

Operator

Thank you. Our final question is from Zack Shriver with Ducan Capital [ph]. Please go ahead.

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

Hi, Zack.

Zack Shriver - Ducan Capital

Hey, John. Hi everyone, congratulations on a very good quarter. Just a couple of questions in terms of first NOx.

Matthew F. Hilzinger - Senior Vice President and Chief Financial Officer

No, just one question, Zack.

Zack Shriver - Ducan Capital

Is that Matt, okay, then we'll do it on offline. Just on NOx and CAIR, just what you think the timetable is in order for the annual NOx to be reinstated, whether its going to be reinstated administratively through an EPA process or if its going to be reinstated through a legislative process with a remand to congress. My understanding of it, it has been remanded or will be shortly remanded back to congress or back to the EPA, where they will start working on it.

But will that process be effectively intercepted by a congressional legislative process and. And when we look at your hedge position in the near-term, we look at the time it will take to reinstate that value in the curve, will that value get reinstated by the time your hedge is well off get with the nice and open in 2011 and under different kinds of administrations that value higher, equal or lower than where it was under a Bush CAIR? Thank you.

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

I'm sure that question proves you know, as much solid than we do. Zack this is not a great shot. Let me go back to 11 and 10 for a minute.

Zack Shriver - Ducan Capital

Yes, sir.

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

I think Ian's view, Ken's view, my view is that the pressures are upward in that period for reasons of capacity constrains, regardless of whether the care rules reinstated. Ian, you agree with that?

Ian P. McLean - Executive Vice President, Finance and Markets

Yes, I think that's right, John. I don't see when you get out until that, those sort of years, what… there isn't a simple solution to the problems you facing…we get at the point in our way; you can't built stuff quickly enough to do anything about it. So, I think there will be upward pressure comes back on the market when the market settles down, but it's going to volatile for a while.

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

And Bill if you…either you or Betsy want to add anything on what your guesses as to what will happen, I mean.

Elizabeth Anne Moler - Executive Vice President, Government and Environmental Affairs and Public Policy

Yeah, let me take a short at it. The EPA administrator has said that he intends to announce by the end of the month, whether he is going to go back to the court and ask the entire D.C. Circuit, so called on bond proceeding to reconsider the panel's decision. He has not made it clear what he intends to do. EPA is apparently shocked that their rule is over churned. If that does not work I'm sure that someone will try and take the case up to the Supreme Court.

I don't have anyway of knowing whether they take the case, but it probably doesn't look good for them to do that. But in the meantime here is uncertainty because of what's going to happen with the pre-existing state implementation plans and everything. So, there is just a period of uncertainty here that's inevitable, but it doesn't really remove the price pressures that the John was talking about.

Zack Shriver - Ducan Capital

But from a proceeding perspective?

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

Is that correct, I want to follow with that later on.

Zack Shriver - Ducan Capital

I look forward to that. Thanks so much, guys.

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

You're welcome. Thank you, operator, and we'll conclude our call.

Chaka Patterson - Vice President, Investor Relations

Operator?

Operator

Thank you. This does conclude today's Exelon Corporation conference call. You may all disconnect and have a great day.

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Source: Exelon Corp. Q2 2008 Earnings Call Transcript
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