Exelon Corp. Q1 2009 Earnings Call Transcript

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Exelon Corp. (NYSE:EXC) Q1 2009 Earnings Call April 23, 2009 11:00 PM ET


Karie Anderson - VP of IR

John Rowe - Chairman and CEO

Matt Hilzinger - SVP and CFO

Ian McLean - EVP of Finance and Markets

Ken Cornew - SVP

Frank Clark - Chairman and CEO, ComEd

Bob McDonald - CFO

Chris Crane - President and COO


Greg Gordon - Citi

Hugh Wynne - Sanford Bernstein

Jonathan Arnold - Bank of America/Merrill Lynch

Michael Lapides - Goldman Sachs

Kit Konolige - Soleil


At this time, I would like to welcome everyone to the Exelon First Quarter Earnings Conference Call. (Operator Instructions).

Thank you. I would now like to turn the conference over to Karie Anderson, Vice President of Investor Relations. You may begin your conference.

Karie Anderson

Welcome to Exelon's first quarter 2009 earnings review and conference call update. Thank you for joining us today.

We issued our earnings release this morning. If you haven't received it, the release is available on the Exelon website, at www.exeloncorp.com, or you can call [Deloris Mungia] 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 that we discuss in today's call contain forward-looking statements and estimates that are subject to various risk and uncertainty 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 a reconciliation of operating earnings to GAAP earnings. In addition during the call, we will be discussing Exelon's exchange offer to acquire NRG and Exelon's intention to solicit proxies for meetings of NRG and Exelon shareholders. Today's discussion does not constitute an offer to exchange or a solicitation of an offer to exchange NRG shares and it is not a substitute for the exchange offer documents or the proxy statements that we have filed with the SEC. For important additional information regarding the offer in the proxy statement, please refer to the earnings release AND today's 8-K.

Leading the call today are John Rowe, Exelon's Chairman and Chief Executive Officer, 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 60 minutes for this call.

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

John Rowe

This morning I'll offer my perspective on our first quarter results, briefly comment on our hedging disclosure program, and also on the proposed NRG acquisition. I will close with revisiting Exelon's long-term value proposition. I know you've all heard it before, but it would be easy to forget in these turbulent times.

Many of you have heard me describe Exelon's sustainable advantage using the diagram included on slide three of today's presentation. Every day we look at these four areas, finance, operations, energy markets and regulatory structures, and we constantly focus on keeping these four together because that is where performance lies. Today's call is largely focused on finance and I will address all four pieces because that's where our competitive advantage is.

As you saw in this morning's release, we reported operating earnings of $1.20 per share, which is at the high end of the guidance range we provided you earlier. This includes $0.06 per share associated with a tax ruling that I mentioned on March 10. It happened to come all in the first quarter, but we think of it as helping us offset higher pension and OPEB expenses throughout the first year. In other words, don't include that $0.06 when you are multiplying by 4.

Our first quarter results also reflect three fewer nuclear refueling outages quarter-over-quarter, 13 fewer nuclear non-refueling outage days, best-ever availability of our fossil fleet and an effective hedging program.

Our first quarter earnings are a significant accomplishment in this environment. I am very proud of both the management team and our larger group of employees for performing so well in such a distracting and troublesome time.

With these earnings, we are on track for the year, which allows me to reaffirm our 2009 operating earnings guidance range of $4.00 to $4.30 a share. Matt Hilzinger will walk you through the specific drivers shortly.

Turning to operations, we had a very solid performance in the quarter. Chip Pardee's nuclear team achieved a capacity factor of 96.2% in the quarter. This is really remarkable and I commend all of them for doing it. They completed a refueling outage at LaSalle in 22 days, which is considerably lower than the industry average of nearly 40 days.

Doyle Beneby and his team at Exelon Power achieved a commercial availability of 96%, which is the best quarterly performance since we started tracking that indicator in 2005. ComEd, under the direction of Frank Clark and Barry Mitchell, announced a significant reduction in spending programs to align with the diminishing sales. All this was done while ComEd reported its best-ever first quarter of customer outage duration statistics.

PECO, under Denis O'Brien and Craig Adams, reported its best performance on record for the frequency of customer service interruptions for the 12 months ended March 31, beating their previous record in 2000.

Turning to energy markets, the hedging program at Power Team has again proven effective as natural gas and power prices continued to decline for the majority of the quarter. Exelon, however, thanks to these early hedges, realized margins that were slightly higher quarter-over-quarter.

There are some bright spots in the market. Amidst the declining spot energy prices, recent procurement auctions, such as the BGS auction in New Jersey and the PPL auction in Pennsylvania, have reflected attractive prices of $104 per megawatt hour and $87 per megawatt hour respectively.

On the regulatory front, there have been several positive developments both at the state and federal levels. On April 16, the Pennsylvania Commission approved the settlement of PECO's procurement plans. The settlement provides for an additional residential procurement starting in June 2009 to serve load beginning in 2011.

This approved procurement plan coupled with lower energy prices and PECO's earlier phase-in plan, a plan that was approved by the Pennsylvania Commission earlier in March, will support the transition to competitive markets in Pennsylvania and our ability to obtain market based prices for electricity.

At the federal level, the NRC decision to renew the operating license of our Oyster Creek plant was very positive. It paves the way for that plant to continue to provide electricity supply, good jobs and value for our shareholders for many more years.

Also, in the first quarter, President Obama appointed Commissioner Wellinghoff as Chairman of FERC. This appointment represents a vote of confidence in competitive markets. Chairman Wellinghoff has been outspoken in his support for competitive markets, declaring in 2007 "competitive markets are the only way to provide consumers with just and reasonable prices and the lowest total bill."

Just yesterday we announced plans to build a 10-megawatt solar generating facility in the City of Chicago. When constructed this photovoltaic plant will be the largest solar plant in an urban area in the United States. The program is contingent upon federal loan guarantees. We are excited about this project and optimistic about receiving the guarantees.

The project would support our Exelon 2020 goal of bringing more low carbon power to the market. It would also revitalize an unused brownfield area in urban Chicago. We hope that this facility will become an outstanding example of stimulus dollars at work, both to create jobs and to create renewable energy.

Let me briefly comment on the information regarding our hedging program that Ian McLean and Ken Cornew discussed on a call last week. We are committed to providing you with both timely and transparent insight into our business. We believe that the disclosure process that Ian and Ken described meets the concern you expressed at our earlier and larger meeting.

I've directed them to update you on a quarterly basis going forward within this formatted process. We will do this, both when things are looking happy and when we face challenges.

At the same time, I want to give you a caution about running the models too automatically. Given the volatility in the marketplace and the other factors that will impact our earnings and cash flows, we must billion wary of simple extrapolation. The model simply cannot reflect everything that management can do, both on the cost side and the revenue side. That is why we have traditionally given you earnings guidance one year at a time after we've been through a rigorous planning process.

This morning, I reaffirmed our earnings guidance for 2009. After we've made our 2010 plan as good as it can be through continued work on our cost structure, completion of our hedging work and other measures, we will release 2010 earnings guidance likely in the fall of this year.

Simply put, after we put Exelon together, merging ComEd and PECO, we managed to make money for you for a number of years largely through cost cutting in soft markets. Over the last three years, we mostly had the benefit of rising markets. Now, in falling markets we have to go back and do it on the cost side again, and we will do our very best to do that.

We have heard your feedback on what kind of information will help you understand our wholesale business and we hope you agree that what we laid out a few days ago is a good solution. As I said, you can expect to receive an update on it.

Now I will turn to our proposed acquisition of NRG. I continue to believe this is a good transaction at a good time for both Exelon and NRG's shareholders. As you've all heard, the combining companies will have a stronger footprint in the most competitive markets and a lower cost profile which will benefit both sets of shareholders.

It is also very well positioned when power market fundamentals improve and gas prices recover, and particularly well positioned when carbon legislation becomes effective. We have filed all notices and applications with the US federal and state regulatory authorities, those whose reviewer approval is required. We hope to complete the regulatory approval process sometime during the second half of 2009.

We have received support from 51% of NRG shareholders at our last tender offer expiration and are now pursuing shareholder action at NRG's Annual Meeting, which is yet to be scheduled. We have proposed an expansion of the NRG Board from 13 to 19 directors and have nominated nine well qualified independent candidates who will act in the best interest of NRG shareholders. We are seeking NRG shareholder support and will be soliciting proxies for these proposals.

We have continued and we will continue to evaluate the NRG transaction with the same levelheaded, cold blooded financial discipline you would expect us to do. I have lived on value for the last 25 years, and these are certainly not the times to change that attitude. If at any future time we determine the transaction no longer creates sustainable value for Exelon shareholders, we will turn our attention to other opportunities, because at this time of turbulence, there are always long-term value opportunities.

Let me close by reiterating our sustainable value position. We have built a company based on low emission, low carbon generation. That is of course partly because we inherited it. It is also very much because we appreciated the environmental advantages of these types of generation.

Our generating fleet is the lowest emitting fleet in the country when measured by carbon density; that is the metric tons of carbon dioxide produced each year per megawatt hour of generation. We run our plants with an industry leading management model, one we try to improve upon each year.

Since 2006, we have been first in the nuclear industry on our two-year capacity factor. We also have a wonderful record on safety reviews. Our management model is designed to maintain that operating performance in the years to come. Not only Chris Crane, our Chief Operating Officer, and Chip Pardee at Nuclear and Doyle Beneby, but the whole team in our nuclear operation has incredible data.

We have positioned ourselves to compete in the most attractive competitive market, PJM. PJM fosters both a competitive energy market and also a separate capacity market through RPM, which is designed to assure reliability of the system in years to come. RPM incents to build a new generation in addition to keeping generation online that otherwise might have been retired.

The ruling by FERC in late March to more accurately reflect the cost of new entries will send better price signals for 2012/2013 to enhance capacity utilization and continued reliability. We have developed risk management tools to ensure we can meet our near-term commitments when faced with lower commodity prices. They also ensure that we have sufficient liquidity to execute our hedging program.

The effectiveness of our hedging program allowed us to deliver to you our first quarter operating earnings of $1.20 per share, the strongest first quarter in Exelon's history despite the declining spot natural gas prices for the majority of the quarter.

We have a history of successfully driving costs out of our business. We already have the lowest total generating cost of any nuclear fleet in the country. Our average production cost is 10% lower than the industry average. We focus on sustaining that advantage. Chris and the rest of my management team are committed to keeping our 2009 O&M spending at 2008 levels and we are looking forward in 2010 to finding even more ways to exercise financial discipline.

Our sustainable advantage remains. We have achieved success in the elements of the business we can control. We have positioned ourselves to participate in the upside when commodity prices improve again, and we have positioned ourselves to gain from environmental legislation that continues to gain momentum.

To put that into simple numbers, a $1 increase in natural gas prices has the effect of increasing Exelon Generation's 2011 margins by more than $400 million. The impact of $10 a ton of carbon dioxide pricing is even more substantial as every $10 raises the ATC cost of power by roughly $7 to $7.50 per megawatt hour.

As these things take place, and sooner or later they will, we have the potential to create significant new roads for Exelon shareholders. These are, as you know, very challenging times, but we have given you a good, solid quarter. We are on track to give you a good, solid year. We will work very hard on next year and our position in the marketplace gives you opportunities in the longer run.

I will turn this call now over to Matt to take you through the quarterly financials.

Matt Hilzinger

As highlighted, my key messages this morning are on slide four, so I would like to start there. We provided a significant amount of detail regarding our results in our earnings release and the accompanying tables. Therefore, I'll spend my time this morning discussing our results for the quarter and updating our 2009 outlook.

Beginning with our current quarter results on slide five, we recorded operating earnings of $1.20 per share in the first quarter of 2009 as compared to $0.93 per share in the first quarter of 2008. Our first quarter results were largely driven by higher earnings at Exelon Generation and ComEd and a slight increase in earnings at PECO.

I will start by mentioning one item that affects quarter-over-quarter results at both Exelon Generation and ComEd. In February, the Illinois Supreme Court ruled that for purposes of the Illinois Replacement Tax, both ComEd and Exelon Generation were eligible for an investment tax credit related to investments in Illinois property.

As a result of this ruling, Exelon recognized the benefit of $0.06 per share in the first quarter of 2009. The majority of this benefit of $0.05 was recognized at ComEd and the remaining benefit at Exelon Generation. Even without this tax item, our quarterly results are very solid, driven by our strong nuclear performance and higher distribution revenues at ComEd.

Turning to slide six, you will see the key drivers for Exelon Generation's quarter-over-quarter increase in operating earnings. First, our nuclear group continued their exceptional operational performance this quarter with higher nuclear volumes driven by less refueling outage days, benefiting quarter-over-quarter results by $0.07 per share.

Additionally, excluding its owned output from the Salem Generating Station, Exelon Nuclear achieved a capacity factor of 96.2% in the first quarter of 2009, which is much higher than the 89% achieved in the first quarter of 2008. Second, portfolio and market conditions were $0.04 per share favorable in the first quarter of 2009 compared to the first quarter of 2008.

These favorable results were partially offset by higher nuclear fuel costs of a penny per share. Average margins realized by Exelon Generation were $39.25 per megawatt hour in the first quarter of 2009 as compared to $38.70 in the first quarter of 2008. These results clearly illustrate the effectiveness of Power Team's hedging program as around the clock market prices were roughly 28% lower at PJM Western Hub and 36% lower at NI-Hub in the first quarter of 2009 as compared to the first quarter of 2008.

Third, O&M expense at Exelon Generation was favorable due to the decrease in refueling outage days, which reduced quarter-over-quarter O&M expense by $0.06 per share. This decrease was partially offset by expected increases in inflation and pension and OPEB expense of $0.03 per share that we talked about on our fourth quarter 2008 earnings call.

Last, we regularly review our generating assets for potential impairments as required by current accounting standards. This quarter we determined that the fair values of the Mountain Creek and Handley plants in Dallas and Fort Worth, Texas were less than their carrying values and we recorded an impairment charge of $0.20 per share to reflect the decline in the estimated fair value of the plants. The impairment was based on management's valuation of the plants and was driven by lower gas and power prices in the ERCOT region. The recognition of this impairment is a non-cash charge and we have excluded it from operating earnings.

Turning to slide seven, you will see that the key drivers of ComEd's higher quarter-over-quarter results with the most significant drivers being higher electric distribution revenues of $0.06 per share reflective of the September 2008 distribution order and the benefit resulting from the Illinois tax ruling of $0.05 per share.

As anticipated, O&M was slightly unfavorable compared to the first quarter of 2008 as a result of the higher pension and OPEB expense. However, the increase was almost entirely offset by O&M savings achieved through various cost efficiency programs, such as the results of paying from ComEd's sustainable solutions team and their engineering and operational excellence initiatives that were instituted as a part of our overall cost and capital management initiative.

Turning to PECO on slide eight, you will see the key drivers of PECO quarter-over-quarter increase in operating earnings, including increased gas revenues of $0.03 per share and unfavorable weather conditions in 2008 of $0.02 per share, partially offset by the scheduled increase in PECO's CTC amortization of $0.02 per share.

PECO also experienced an increase of $0.01 per share in O&M expense, resulting from increased pension and OPEB and bad debt expense.

Turning to load on slide nine, ComEd experienced a decrease in weather-normalized retail deliveries across all customer classes in the first quarter of 2009 with an average decrease of 3.6% or 2.5% if adjusted for the 2008 leap year impact. The decline was unfavorable to our first quarter 2009 forecast of a negative 2.9% with the large C&I customer class experiencing the most significant decline.

Turning to slide 10, PECO also experienced a decrease in weather-normalized retail deliveries across all customer classes. We had forecasted a decline in quarter-over-quarter load of 1.7% in the first quarter of 2009. PECO's actual load was slightly lower than we had forecasted with an average decrease of 2.2% or 1.1% if adjusted for the 2008 leap year impact.

The large C&I customer class experienced the most significant decline, whereas load in the small C&I and residential customer classes were flat to slightly positive quarter-over-quarter when adjusted for leap year impact and weather.

While first quarter 2009 load at both ComEd and PECO was lower than we had forecasted, primarily in March we are going to continue to monitor loads through the second quarter before revising our load forecast for the remainder of 2009.

We have reflected the impact of the first quarter actual load in the 2009 load estimates of negative 1.3% at ComEd and negative 1.2% at PECO as shown on today's slides as compared to our beginning of the year forecast of negative 1.1% at both ComEd and PECO. The decline in load experienced at both ComEd and PECO in the first quarter of 2009 had the effect of decreasing operating earnings by $0.01 per share at each of the utilities.

To provide some sensitivity around the load deterioration on our earnings, a decline in annualized load of 50 basis points on average across all customer classes of ComEd and at PECO would decrease each of ComEd and PECO's operating earnings by $0.01 per Exelon share. We will continue to monitor deliveries of both ComEd and PECO service territories and update you on our second quarter earnings call as to where we see those.

On slide 11, we have provided information around accounts receivable at the utilities. Through the first quarter of 2009, we've seen some small deterioration in aging of accounts receivable at ComEd and a slight improvement in the aging at PECO as compared to the first quarter of 2008.

At ComEd, the first quarter of 2009 accounts receivable greater than 60 days has increased approximately $25 million as compared to the first quarter of 2008 with just under half of this increase driven by increases in rates over the last year.

With respect to PECO, in the first quarter of 2009 PECO experienced a slight improvement, about $12 million decrease in accounts receivable greater than 60 days when compared to the first quarter of 2008. We believe that the improvement in the aging of PECO's accounts receivable is driven by the enhanced credit and collection procedures implemented at PECO in 2008.

On an annual basis, we are currently forecasting ComEd's 2009 bad debt expense to approximate 2008 levels of around $70 million and are estimating PECO's bad debt expense to approximate $95 million, which is roughly $65 million lower than it was in 2008. These forecasts have not changed from the forecasts that we gave you at the beginning of the year.

As you would anticipate, our expectations are subject to changing economic conditions. Therefore, we are closely monitoring the aging of the receivables, the effectiveness of our collection efforts and the overall risks associated with our customer's ability to pay. We will continue to keep a keen watch on accounts receivable balances and the related expense at both utilities.

Now, I will turn to slide 12 for an update on our 2009 financial outlook. We are very pleased with our strong first quarter results, including the discrete tax benefit we realized this quarter and our continuing commitment to our cost and capital management initiative, and we are reaffirming Exelon's 2009 non-GAAP operating earnings guidance range of $4.00 to $4.30 per share.

We expect the second quarter of 2009 operating earnings to range from $0.95 to $1.05 per share compared to the second quarter of 2008 operating earnings of $1.13 per share. As you may recall, during the second quarter of 2008, we recognized $0.11 per share of income associated with the uranium settlement and option gains at Exelon generation.

We remain committed to keeping O&M expense flat from 2008 to 2009 at roughly $4.5 billion. In order to do that, we are committed to achieving $150 million of sustainable cost savings across the business, which reflects the incremental $50 million of 2009 cost savings that ComEd committed to in February.

Through the first quarter of 2009, we have realized or specifically identified 80% or $120 million of our $150 million 2009 commitment. Our O&M savings are expected to be back-loaded into 2009 with the majority of forecasted savings expected to come in the second half of the year.

In addition to sustainable cost savings, we are looking at other discrete opportunities across the business to offset higher pension and OPEB expense this year. The tax benefit that I discussed earlier is an example of the type of opportunities that we are pursuing. Please remember that higher pension and OPEB expense will be recognized throughout the year while this tax benefit was recognized in the first quarter of 2009.

From a pension funding perspective, the US Treasury Department issued guidance in the first quarter that provides some flexibility for the discount rate used to determine required cash funding of pension plans. This guidance specifically referenced 2009, but also indicated that guidance will be forthcoming to address future years.

The relief had the impact of reducing our 2009 minimum pension funding requirements by nearly $90 million on a pre-tax basis, which is reflected in the slides included in today's appendix. Please note that the new treasury guidelines only impact cash contributions and not costs for 2009. Under GAAP, our 2009 expenses were locked in at the beginning of the year.

Turning to slide 13, I continue to view Exelon as well positioned from a liquidity perspective in these recessionary times. We are expecting to generate around $5.1 billion of cash flows from operations this year. This is roughly $350 million higher than our regional planning assumptions primarily due to the accelerated tax depreciation benefits that we are pursuing under the new federal stimulus plan, the additional reduction in O&M spending at ComEd, and lower expected contributions to our pension plans.

From a capital markets perspective, PECO issued $250 million five-year first mortgage bonds at a coupon rate of 5% during the course of the first quarter, and Exelon has debt maturities of only $29 million in 2009. Last, we continue to have access to sufficient liquidity with approximately $6.9 billion in available credits for our credit facilities as of April 17 of this year.

Longer term, we continue to focus on creating economic value for our shareholders, such as the tolling agreement we announced earlier this week related to our Green County PPA in Oklahoma. While the agreement won't have a cash or earnings impact until 2012, it should result in a more favorable credit metric today from S&P's perspective by reducing the amount of imputed debt associated with the purchase power agreements that S&P applies to our credit metrics.

To recap, our strong first quarter results provide us with a very good foundation for what we see to be a continuing challenging year. Through our top-tier operations, prudent cash flow management, effective hedging program and our partners to-date on realizing and identifying sustainable cost savings and other opportunities across the business, we remain on track to meet our financial target for 2009.

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of Greg Gordon with Citi.

Greg Gordon - Citi

I had two questions. The first is you inferred that you have the baseline assumptions in your guidance relative to load, which you did put in your presentation and you gave us sensitivities that would result from changes off that baseline. What do you think the bias is right now as we go into second and third quarter, because when we look at the data here we saw that, in particular, March was a particularly big drop-off in demand in almost every region of the country on an economic basis?

I'm wondering as we look at what's happened so far in April whether we are seeing a continuing deceleration of demand or whether things have stabilized?

Matt Hilzinger

We see exactly what you see and we would call the bias exactly the way you call it. I think our view of the downside at ComEd and PECO is something like a penny a share each. As you know, the ricochet effect on Genco is larger at ComEd than it is at PECO because the Genco-PECO contract is still below market.

So you get a bit of recovery in Genco and PECO that you don't get on ComEd.

Greg Gordon - Citi

That's because you get to resell the power in the market at a rate that's actually pretty good relative to your obligation at the retail level, right?

Matt Hilzinger

Yes. Given where power prices are right now, that's fairly de minimis in terms of the impact. It does work that way, Greg.

Greg Gordon - Citi

My second question is with regard to the procurement auctions that are coming up, and it sort of goes to the market dynamics right now. We're hearing that all the commodity markets, not just power, are trading extremely thin. Do you see these procurement auctions as sort of pretty critical liquidity events for the company?

Do you think the bias will be to prices sort of rising to a more economically rational level as these liquidity events happen, or do you think they might actually put downward pressure on the market as excess generation goes to try to find load?

John Rowe

I'm going to give you a short answer, and then defer to Ken and Ian to give you a better answer. My view is we are pleased at how well the auctions have sustained themselves so far. Our bias, like your question implies, is that the next ones are likely to be a bit lower, and we're glad we're hedged as much as we are for the rest of this year and through 2010.

Ian, do you want to pick that up or Ken?

Ian McLean

I think you said it just about right. I would expect that they are good liquidity events for us. I think that they are competitively priced. I do believe that there is a slight sort of risk premium people are adding to their prices now because of the difficulties in obtaining funding.

So, overall, I think they fairly reflect the marketplace and we do look at them as a good liquidity opportunity for us and we look forward to participating in them.


Your next question comes from the line of Hugh Wynne with Sanford Bernstein.

Hugh Wynne - Sanford Bernstein

I had a question regarding the impact of wind on the value of base load generation assets in Texas, such as the NRG assets that you plan to acquire, and also the impact on base load generation assets in the Midwest, like Exelon's Illinois fleet.

I understand that wind capacity in Texas has gotten up in excess of 7 gigawatts, which is almost equivalent to a third of the night time demand, and that the power prices in West Texas as a result have been driven down to zero and in some cases even below zero during the night time hours.

I guess, the first part of my question goes to what will be the impact of that wind power once it's connected to load centers in the East through the ERCOT transmission expansion on the off-peak earnings power of the NRG fleet.

I guess, parallel to that, we've seen a tremendous increase in 2008 in wind capacity in Iowa. My question was what impact have you seen or do you expect to see on all fleet power prices in Illinois?

John Rowe

In both cases we see the impact of wind as negative for off-peak power prices. Question is always whether we have modeled enough. I think our base case on the NRG acquisition, I think we are looking at 12,000 megawatts. The more transmission that gets built to move the wind, it has kind of a perverse effect because the wind tends to cost the customer more, but at the same time it hurts our power prices.

Ian or Chris or Ken, would one of you pick up on this and expand please? Ken?

Ken Cornew

Hugh, John is absolutely correct. It's a good question and John hit it right on the head. We are modeling increases in wind generation in the Midwest and in Texas. John was right. We are modeling 12,000 and other sensitivities to wind and looking at transmission investment that would get it into the marketplace.

Obviously, the wind is one component, the other components being what demand growth does when we come out of this economy and what other generation supply response you see, either retirement or new constructing.

Clearly, as you know, it's not as simple as just wind and transmission. Its wind transmission, demand and other generation assets that make the system work. We are very confident that we've modeled those scenarios in both markets.

Hugh Wynne - Sanford Bernstein

Can you comment on the Midwest? Have you seen an impact on power prices in the Midwest?

Ken Cornew

Yes. We have seen some lower spot prices in the Midwest, Hugh. Some of that you could attribute to some new wind coming from the West into Western PJM. There have been some congestion issues that are more short term in nature given transmission and unit outages that have also impacted demand, short term demand as an impact and short-term prices, spot prices for the commodities that drive electricity price are all impacting.

I think the transmission grid can handle a good amount of wind and allow it to move East. I think if we saw a very large amount of wind, we probably need to expand the transmission grid to appropriately move that energy East from where it is now in the Midwest.

John Rowe

Hugh, Bob Dylan was an aspiring singer and not much of a utility executive, but he wasn't far off when he said the answer is "Blowing in the Wind." Our Exelon 2020 work says that the cost of adding all of this wind to society is between $50 and $80 per ton of avoided carbon dioxide. This is not as cheap a way for our customers to deal with the CO2 problem as everybody wants to believe it is.

Nonetheless, it is very clear that the politics are with building wind. We're going to keep seeing more of it and we're trying very hard to stay on top of its effects. We're certainly trying to model it in the NRG acquisition. I might say as a snide aside, it seems to concern us more than it concerns NRG, but that's not a helpful comment.

Hugh Wynne - Sanford Bernstein

Matt, could you comment quickly on how close we are to impairment levels on the ComEd goodwill given the further decline and utility valuations in the first quarter?

Matt Hilzinger

We do take a look at it on a regular basis. In fact, we took a look at it this particular quarter. We obviously didn't have an impairment or we would have reported it, but you are right that the values of T&D companies have come down from where they are before.

I think when we look at the profitability of ComEd in terms of the revenue increase and the cost reductions that they are going through, it does provide a healthy level of cash flows that supports that goodwill. We'll continue to take a look at it. We do have kind of a formal time that we have to take a look at it in the fourth quarter.

We have taken a look at it in the past and we'll take a look at it again in the fourth quarter.

John Rowe

Matt, just to expand on that, and you are the one to do this rather than me, but as I remembered there were positives as well as negatives. Will you expand a little bit, were there more positives or more negatives this time?

Matt Hilzinger

I would say that the level of value that we evaluate the goodwill on has come down year-over-year. I do think when we get down to do the specific analysis, it's really the cost cutting initiatives that provided a big positive to why we didn't impair it. So, I think when we do the analysis that was a big consideration in terms of how we do the valuation.

John Rowe

Brother Clark and his team have new religion. It's fun watching Frank become a cost cutter, amazing what a good man can do when he has to.

Hugh Wynne - Sanford Bernstein

That's very good to hear.


Your next question comes from the line of Jonathan Arnold with Merrill Lynch.

Jonathan Arnold - Bank of America/Merrill Lynch

I had a detail question on the costs within ComEd in the quarter. You showed us higher pay on slide seven, higher pension and OPEB expense offset by cost saving initiatives. It was negative a penny overall. Can you break that apart a little for us, give us a sense of how much cost savings was achieved?

I think you also said we'd start to see cost savings accelerate like into the back part of the year. So is it possible those numbers start swinging positive later in the year?

Frank Clark

The short answer is yes. That number should get positive as we move to the backend of the year.

Bob, can you give them a more detailed breakdown?

Bob McDonald

Compared to the first quarter of last year, excluding the impacts, the increase in tension and OPEB costs, we were about $3 million better after-tax in O&M compared to the first quarter of last year. You are absolutely right. We are transitioning into our various cost cutting initiatives, expected to see some of the benefit of those initiatives in March and did see that in March.

We expect to see more of that as we proceed through April and through the remainder of the year. We have cost cutting initiatives that should get us to over $70 million in the reduction on O&M compared to where we were last year at this point. While we are still executing all those initiatives, we think we're on track.

Jonathan Arnold - Bank of America/Merrill Lynch

If I may just ask a broader question on this, John, I think in the intro you talked about having been in a cost cutting mode for several years when the market was last weak, and then having had a following wind, I think you were suggesting more of a cost cutting focus going forward and we've seen a lot at ComEd so far.

Are you looking and how broadly are you looking across the rest of the company and what are the possibilities of similar scale to activities in other businesses?

John Rowe

Chris has developed programs in Genco that in Nuclear go as far as I think we dare go, and he is now in conjunction with Ruth Ann and Ian taking a very hard look at the holding company and its costs.

Chris, would you like to expand on that?

Chris Crane

Yes. We're not at the point of giving a number, but we've got a roadmap laid out to look at our governance and oversight structure versus what the future on the commodity market is. We would expect in the third quarter to be able to roll out our plan. We would desire to do most of our structural adjustments in the third quarter that would start to reflect in fourth quarter accelerated savings, and they will be sustainable into next year.

Jonathan Arnold - Bank of America/Merrill Lynch

Should we be seeing this as what you originally talked about in the year as an offset, the weakness elsewhere in the business, or is this a business in itself?

John Rowe

No. You should see it just the way you said it. What we're looking at is that portion of 10 which wasn't covered by prior hedges is likely to be in a softer commodity market, and we're going to do our very best to offset that with further cost reductions.


Your next question comes from the line of Michael Lapides with Goldman Sachs.

Michael Lapides - Goldman Sachs

Let's just kind of assume current pension rules, can you talk a little bit about your A), cash investment and pension; and B), your outlook for your balance sheet and uses of your balance sheet over the next couple of years?

Matt Hilzinger

I think I would start with kind of the overall way that we're looking at the balance sheet. When we look at kind of our credit metrics, so you start with FFO to debt, we're projecting at yearend to be at about 34%. That is clearly within the range of what S&P considers to be strong investment grade.

When we look at all of the scenarios out there and we've provided a number at EEI, and then I think we updated it again at the March 10 conference, we take a look at the stress scenarios there. We've talked to S&P in detail about this that we're still well within strong credit metrics.

So the first thing is I just want to make sure that people understand that we're watching it, we're looking at it, we're going to fund it because we need to fund it, but we don't see a detrimental impact either in the short term or the long term in terms of our ability to stay investment grade.

With that being said, we continue to watch the market. We are about 60% funded right now on the big pension plan. The first quarter we saw the assets come down substantially, probably around 10% to 11%. They recovered a little bit in April. We're going to continue to watch it as it goes through the rest of the year like everybody else is, and we're committed to make the contributions that we need to make.

Right now what we've tried to do is give you and the shareholders and the bondholders a way to go through, at least, get a sense of the magnitude of what we need to contribute over the next few years.

I think the treasury rules that I referred to in my opening remarks are a positive thing. They're going to reduce our current funding this year by 90. Everything we can tell there's going to be forthcoming regulations that should provide some additional relief as we get to '10.

Even without that relief again, our balance sheet is in good shape. We'll just watch and continue to make the funding that we need to make. Does that answer your question, Mike?

John Rowe

Let me just expand a little, Michael. Matt, correct me if I'm misremembering this number, I think as of March 31 the unfunded requirement was about $4.3 billion. That is what I have on my notes.

The question obviously is, one, how fast do we have to refund it? The federal government is going to have to be rethinking that issue for a whole lot of folks and that may give us some additional options.

The second question is, how fast do we want to refund it, because on the one hand if you have confidence in market recovery you might like to have a little more money in there earlier, on the other hand we have lots of other uses for the cash too. I asked somebody for a sensitivity, 1000-point improvement in the Dow, whenever you think that might happen, would reduce that total funding requirement by $0.5 billion.

So we, like a whole lot of other people, are going to be looking at both what we need to do and what we choose to do. Right now, our basic position is to fund it as we have to, but if we change that course of action because we think it might be beneficial to do more sooner, we'll let you know.

Michael Lapides - Goldman Sachs

That helps a ton. What I was trying to think about was excluding the NRG acquisition, whether what's happening with pension and what's happened with forward power prices would have an impact on your ability. It obviously has to, but does it put you in a situation where you are not contemplating share buybacks in the longer term given your existing asset base and pension requirements, or is that really so tied up in terms of what Uncle Sam does that it's hard to make that call?

John Rowe

First, it is tied up in what Uncle Sam does. Second, it's tied up on what S&P thinks. They've been fairly stern with us that they let us do more than we think we should. Given the NRG acquisition and their view that we have to either sell a bunch of stuff or raise some equity to make the NRG acquisition work, pretty clear that our view of shareholder value add right now does not include additional buybacks in the foreseeable future.


Your next question comes from the line of Kit Konolige with Soleil.

Kit Konolige - Soleil

Two unrelated questions. I think, John, you were talking about the good outcomes from a shareholder's viewpoint of the auctions at public service and PPL. What did you think of the Allegheny auction?

Ken Cornew

I think its par for the course. The difference in pricing is largely driven by things like the product definitions that each of these companies is looking to procure. Also, there is a big implication on basis or congestion in the prices. Again, as Ian and John iterated, we like when buyers are in the market as well as sellers.

The opportunities seem to be fairly priced and much of the pressure on price is because of base load energy and other components of the load following products. Prices are either holding up pretty well or actually going up. So, we haven't seen anything inconsistent from that in these auctions recently in Pennsylvania.

Kit Konolige - Soleil

Actually this is a tad different from what I might have implied, but that's okay. You guys can handle anything anyway.

When I look at NYMEX forwards for power and gas and so on, gas can be a fairly robust market. Power, I think, in a lot of the hubs, people have a lot of questions. I think it was mentioned somewhere either by you guys or one of the questioners that these are pretty thin markets.

That said, if you were to believe them, by '11 and '12 gas and power are going to be a lot higher than they are now without anybody actually knowing. Obviously, those things could change. We have a pretty steep curve going on there. Given that there is CO2 coming around the bend and so on, are those forward prices somewhat believable even though nobody really trades at them?

John Rowe

The short answer is so clear. Yes, the market projections and forwards are somewhat believable. I can meet that standard with grave confidence. We try to spend a lot of time looking at gas prices. We are doing a major presentation with our Board on it shortly. It's obviously very important to our hopes that gas prices get back in the $6 to $7 range.

Ken, do you want to just expand on what you think is the most credible outlook on gas?

Ken Cornew

Yes, John, I think the forwards are believable, as you said. When you look at the cost of new gas, there are a lot of moving parts to it, but it could be somewhere in that $6 to $8 range for gas overtime.

A lot of pricing in the '11, '12, '13 time period is obviously dependent on that gas price, and it's also dependent on what happens with the economy and some of the other fundamentals on the demand side in particular as well as supply. The way we look at the market right now, we think that prices are believable. Some of the power products are traded relatively thinly and are implying a bit of spot price in them actually from my perspective.

So, short answer from me is yes, they are at least believable.

Kit Konolige - Soleil

It occurs to me that if we're going to have CO2 burdens on coal plants, then people are going to be using more gas for electricity. Is it likely in your thinking by '11, '12, '13, is there likely to be enough more gas being used for electricity that that alone is going to affect the price of gas?

John Rowe

The short answer to that is yes. We are seeing first stress in the short run on gas price downward that comes from a weaker economy and the development of the new shale-squeezing operations which seem to have a lower cost than people would have thought a few years back.

In the long run, you have a dance that goes back and forth between how costly are new shale fields and how many of them will environmental pressures allowed to be opened driving gas prices down? Obviously, driving gas prices up, the fact that that's the only popular form of new reliable capacity and you need more gas to backup all of that wind. In the longer run, we like your questions imply, tend to be relatively bullish on gas. That said, it's a trade-off.

Let me just try to wrap this up. There is a joke that goes a fellow calls his friend and says how are things, as Kit asked. The answer was, well, not so good, not so bad. Exelon's prospects are not so good as they looked a year ago when all was rosy and gas was at $13. Exelon's prospects are a lot better than most other folks in this economy.

We're terribly proud of the first quarter. We're quite confident in our ability to sustain our earnings range for the year. We're working very hard on trying to make next year another good year. That's about all we can say at the moment, but that's not so bad.

Karie Anderson

Thank you, operator. That concludes our call.


This concludes today's conference call. You may now disconnect.

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