Exelon Corp (EXC) — Q3 2015 Earnings Call Transcript

Thank you, Dushyanta. Good morning everyone and thank you for joining our third quarter 2015 earnings call. Leading the call today are Chris Crane, Exelon's President and Chief Executive Officer; Joe Nigro, CEO of Constellation; and Jack Thayer, Chief Financial Officer. We are joined by other members of Exelon's senior management team, who will be available to answer your questions following our prepared remarks. We issued our earnings release this morning along with the presentation, each of which can be found in the Investor Relations section of Exelon's website. The earnings release and other matters which we discuss during today's call contain forward-looking statements and estimates that are subject to various risks and uncertainties. Actual results could differ from our forward-looking statements based on factors and assumptions discussed in today's material, comments made during this call, and in the risk factors section on the 10-K which we filed in February, as well as in the earnings release and the 10-Q, which we expect to file later today. Please refer to the 10-K, today's 8-K and 10-Q, and Exelon's other filings for a discussion of factors that may cause results to differ from management's projections, forecasts and expectations. Today's presentation also includes references to adjusted operating earnings and other non-GAAP measures. Please refer to the information contained in the appendix of our presentation and our earnings release for a reconciliation between the non-GAAP measures to the nearest equivalent GAAP measures. We've scheduled one hour for today's call. I'll now turn the call over to Chris Crane, Exelon's CEO.

Good morning, everyone and thanks for joining us this morning. We're pleased to deliver another very strong and what's been a very good year for us thus far. First, I'll highlight our financial and operational performance and then I'll switch over to our key strategic objectives. On the financial front, we're reporting operating earnings of $0.83 per share, over 6% EPS growth versus the same period last year and above our guidance range. Despite the delays in closing PHI which I'll address further, we're still on track to deliver our best year of earnings since 2012. We are raising our guidance range to $2.40 to $2.60, and Jack will provide more details on the financial performance during his remarks. It's been a phenomenal year across our companies. At the utilities, we're set to invest $3.7 billion this year in needed infrastructure and enhancements and grid reliability and resiliency modifications, part of more than the $16 billion investment that's planned over the next five years. This includes our smart meter installation program which we now have completed nearly 5.5 million gas and electric installations across our operating companies. Our utilities will exceed $1 billion in net income in 2015, driven by industry leading operational performance with each utility achieving first quartile safety, first and second quartile safety results and ranking in first quartile in customer satisfaction. We reached the settlement at PECO in its recent rate case filing which follows the BGE recent unanimous rate case settlement in Maryland. This highlights how strong operational performance supports recovery and constructive regulatory environments. On the generation side of the business, we had another solid quarter of operations performance. Nuclear capacity factor was 95.5, power dispatch match was 99%, renewable energy capture was 94.8%. We also had great execution in Constellation this quarter showing the value of our generation to load matching strategy. Our ability to optimize our portfolio even during adverse market conditions in a way that contributes meaningfully to our earnings. The breadth of the Constellation platform gives us multiple scales to market. We are the number one retail electric provider and well ahead of our nearest competitor. We serve nearly 200 billion kilowatt hours of wholesale and retail load and we are also a top 10 marketer of gas in the U.S. delivering 46 Bcf of gas daily. On both sides of the company, we continue to run the business at high levels of performance and the results are evident in this year’s earnings. Now I want to discuss three key initiatives we have been working on this year: capacity performance, the low carbon portfolio standard and the Pepco Holdings merger. Starting with capacity performance, PJM capacity performance design went at implementation this year’s auctions with constructive results. We are pleased with the outcome of the capacity auctions. The new penalty structure holds generators accountable for reliability to the benefit of customers. For the 1819 auction, we cleared a significant number of megawatts at higher price zones that exceeded our own internal expectations. The transition auctions better reflect the value of the reliability of our nuclear units that they provide to the grid. Our next major initiative was getting a low carbon portfolio standard passed. We came into the year advocating for a better market design in Illinois, one that would level the playing field for nuclear energy as a key resource in the state. We worked hard to introduce the carbon standard earlier this year; however, the political situation in the state has made the budget the sole focus, leaving little opportunity for progress on energy legislation. We are disappointed that we have not made progress on this front; however, the overall outlook for the nuclear fleet has improved as a result of policy and market factors, namely the constructive results of the capacity auction, the positive results from Illinois power agencies' capacity procurement for 2016, and the long-term impact of the Environmental Protection Agency’s new carbon reduction rules. As a result, we have decided, as announced, to defer another year's decision about the future of Quad. That said, the low carbon portfolio standard remains a good policy for Illinois and a priority for Illinois. On our last key initiative was the Pepco acquisition. Let me take time to share our perspective on where we're at with the deal. We are very excited to have reached the settlement with the Government of the District of Colombia, the Office of People’s Council, the Office of the Attorney General, and others in D.C. The settlement includes commitments to provide substantially enhanced benefits to consumers and businesses in the district; it includes bill credits, low-income assistance, fewer and shorter outages, a clearer greener D.C., and investment in local jobs in the local economy. The settlement package was specifically shaped to address the concerns articulated by the D.C. Public Service Commission in its August quarter. As you’ve seen, we have improved the reliability and customer satisfaction at BGE and see the benefits of those performance improvements reflected in regulatory outcomes. We look forward to the opportunity to do the same with the Pepco family of utilities. The deal remains an important strategic element to the future of Exelon, allowing us to shift our business mix to a more regulated and durable earning stream. We realize the deal has taken longer than expected and we know that it has required patience for many parties, especially our investors, as we work to complete it. We received an order from the D.C. Public Service Commission two days ago that moves us in the right direction. The Commission granted our request to reopen the record and consider the settlement in the existing document, a schedule set that is in line with our proposed timeline. The commission is committed to consider the settlement in a fashion that is open, transparent, and fair. We appreciate the commission’s commitment to ruling on the merger in a timely manner and we ask for your support as we get this across the finish line. It has been a busy year and we've accomplished a lot and there is a lot left to be done. In particular, we're embarking on a large-scale cost management initiative. We'll provide more details at the EEI financial conference. We are pleased with the performance we've delivered for the shareholders this year despite significant market and regulatory headwinds as we always work hard to serve our customers and the communities we serve better.

Thank you, Chris, and good morning everyone. The Constellation business had another strong quarter outperforming our targets. Our portfolio management team performed very well and as Chris mentioned, our retail and wholesale business is having a very strong year. In addition, our core strategy of matching our generation fleet with our load business continues to provide significant value for our shareholders. It has been paying off across the volatility and price spectrum. We have captured higher prices for our generation during periods of extreme weather while managing our load obligations, and we've captured higher margins during low volatility periods like this summer as we've realized lower costs to serve our customers. It also provides us with an important channel to market for our hedging activities, which is important in times of low liquidity and in places where there is not an active market. My comments today will focus on power and gas markets during the quarter and our fundamental view. The recent PJM capacity performance auction and our hedge disclosures in hedging activity. Turning to the power markets on slide four, NiHub remains undervalued even independent of gas prices. PJM West price is more fairly valued when accounting for the new generation under development expected in the East. Our fundamental view of power prices remained unchanged; in addition, we especially see upside in the non-winter months and during off-peak hours. The difference between our fundamental view and the near-term forward market prices of NiHub is primarily driven by changes in dispatch status. Additionally, fuel and coal markets are in contango while power is backwardated, which is unusual. We think this is also contributing to lower prices in our views with support. During this summer, the impacts of a change in the stack were masked across the power pool because we did not see the peak loads that were expected and delivered natural gas prices were extremely low. While we saw price rebates continue to deliver high, the absolute price was driven lower by steel price. If we extended this picture on this slide further out in the curve you would see an even greater disconnect between the forward curve and our fundamental view driven mostly by a lack of liquidity. This lack of liquidity at NiHub is in most years and we are seeing it in West Southern 2019 and beyond in particular. Because of this lack of liquidity, our hedging activity has mostly continued to be down for our load business and not over the calendar markets. We continue to align our hedging strategy with our views of the market, and in 2017 remain behind ratable with 6% to 9% of power exposure. We are even further behind ratable in the Midwest with power exposure of 17% to 20%. This strategy exposes us to the significant upside we still see in that market while partially protecting us from further degradation of natural gas prices through our cross-commodity hedging. Before turning to the hedge disclosure itself, I'd like to touch on the recent PJM capacity auctions. Chris covered the results of the auction a few minutes ago, so I'll focus on the key takeaways from the auction. The biggest impact was getting behavior. In the 1819 base residual auction and the transition auction, we saw market participants bidding in a more disciplined manner and recognizing the risks with penalties for non-performance. Additionally, about half the new builds cleared versus what we saw in the 1718 auction. Finally, the vast majority of demand response cleared the base product which may have read-through value as PJM transitions to 100% capacity performance product in two years. As I mentioned earlier, our load business remains solid. Our originations have been strong and our generation to load matching strategy has worked well throughout the year. You can see the impact of this strategy throughout the gross margin disclosures. In 2015, we had a net $200 million increase in total gross margins since the end of the second quarter. We started the third quarter with a $100 million power new business target remaining for the year. We had strong performance during the quarter executing $200 million in power new business with the majority realized in the quarter. As a result of this performance, we raised our power new business target by $150 million resulting in only $50 million of power new business to go from the fourth quarter. Our performance was driven by our generation to load matching strategy including a load across to serve our load across the portfolio, and our position management activity showed that through the backstop of our generation. As an example, we experienced quite a bit of heat in early August and we saw the reserve margins in ERCOT come in as much as 10% lower than projected on those days. Spot prices increased and we benefited in capturing value from this move. As a result, we are also seeing upward movement in ERCOT pricing in the forward curve. In 2016, the impact of the capacity performance auction increased total gross margin by $150 million; this was partially offset by market price decline net of hedges of $50 million. During the quarter, we executed on $150 million of new business and are raising our 2016 power new business target by $200 million to $500 million total remaining. This compares to a $400 million new business target to go for 2015 at the same point last year. We are confident we can make this new target next year given our performance this year and the addition of the Integrys acquisition. Our total gross margin increased by $200 million to $7.8 billion. Capacity performance results added $300 million to total gross margin which was partially offset by a $100 million decrease due to the impact of lower prices on our open generation net of hedging. During the quarter, we executed $100 million in power new business. We are confident that we have the right hedging strategies to capture the upside we see coming in the market and we have proven that our generation to load matching strategy brings value in both low and high volatility environments.

Thank you, Joe, and good morning, everyone. As Chris and Joe stated, we had another strong quarter financially and operationally. My remarks will focus on our financial results for the quarter, our full year guidance range, and provide an update on our cash outlook for 2015. Starting with our third quarter results on slide six, Exelon delivered earnings of $0.83 per share exceeding our guidance range by $0.08. This compares to $0.78 per share for the third quarter of 2014. Exelon's Utilities delivered combined earnings of $0.33 per share outperforming the third quarter of last year by $0.04. During the quarter, we saw favorable weather at both PECO and ComEd. Cooling degree days were up 30% from the prior year and 28% above normal in Southeastern Pennsylvania and up 18% from the prior year and 3% above normal in Northern Illinois. Distribution revenues at both ComEd and BGE were higher quarter-over-quarter reflecting the impacts of increased capital investment and higher rates respectively. On September 10th, PECO reached a settlement on its rate case filing. They agreed upon a revenue requirement increase of $127 million representing 67% of the original proposal. The Pennsylvania PUC's decision is expected in December of this year with rates going into effect on January 1, 2016. The Pennsylvania PUC recently approved the new system 2020 plan which will lead to an additional $275 million being invested during the next five years to install advanced equipment and reinforce the local electric system, making it more weather resistant and less vulnerable to storm damage. An order on ComEd's annual formula rate filing is expected to issue by the ICC in early to mid-December. As a reminder, ComEd requested a revenue decrease of $55 million in its current filing. This reduction reflects the continued focus on cost management and operational efficiencies that are being realized from a stronger, more reliable grid with fewer outages. More detail on each of these rate cases can be found in the appendix on slides 19 through 21. Turning to generation, it had another strong quarter delivering earnings of $0.55 per share, $0.05 higher than the same period last year. As Joe mentioned, our generation to load matching strategy continues to provide value for our business and our shareholders. We benefited from a lower cost to serve both our retail and wholesale customers and had another strong quarter of performance from our portfolio management team. In addition, compared to the third quarter of 2014, we had a positive contribution from the Integrys acquisition. These positive factors were partially offset by realized Nuclear Decommissioning Trust fund losses in 2015 as compared to gains in 2014 and the impacts of the divestitures of certain generating assets in 2014. Last week, we filed a settlement agreement with New York PSC and FERC in regards to our Guinea facility. The new agreement shortens the RSSA period by 18 months, includes more market-based revenue and requires that any expansion must be justified by a study. The settlement is still subject to approval by both the FERC and the New York PSC. While we are pleased with the negotiated RSSA, it will allow Guinea to continue powering the grid in the local economy until 2017; it's only a temporary solution to a long-term problem. Single unit nuclear facilities like Guinea face significant economic challenges brought on by market conditions and a lack of energy policies that properly value the clean and reliable energy that nuclear provides. More detail on the quarter-over-quarter drivers for each operating company can be found on slides 17 and 18 in the appendix. As Chris mentioned, we are raising our full year guidance range for earnings to $2.40 to $2.60 per share. At the beginning of the year, we provided a standalone guidance range of $2.25 to $2.55 per share. We narrowed the range on our second quarter earnings call to $2.35 to $2.55. This guidance range included the impacts of the debt and share dilution from the PHI merger and assumes that the merger would close during the third quarter. Since the merger did not close, we have $0.13 of earnings drag from the interest expense and share dilution. Without this drag, we would have expected full year earnings to exceed the top end of our new guidance range of $2.40 to $2.60 per share due to the strong performance on both the Utilities and Constellation this year. Consistent with our past practice, our guidance range does not include the impact of an extension of bonus depreciation which we would expect to be around a $0.08 decrease per share. Nonetheless, we are comfortable that we will still be within the guidance range even if bonus depreciation were to be extended. Turning back to Pepco for a minute, we will need our original deal case accretion of $0.15 to $0.20; however, it will be pushed back until 2019. In addition, we expect the impacts of the merger to be neutral in 2017 and $0.07 to $0.12 accretive in 2018. These changes are primarily due to the delay in closing the merger, the consequent updates to PHI’s business plan as a result of this delay, and due to the meaningful improvement in Exelon's business plan. The deal remains critically important to our long-term strategy. Slide seven provides an update on our cash flow expectations for this year. We project cash from operations of $6.8 billion across our businesses and free cash flow of $925 million at generation in 2015. As you can see, our projected earnings cash balance is roughly $9.6 billion for the year, most of this is related to the fact that we’ve raised the funds necessary to close the Pepco merger which, as you know, has been delayed. $2.5 billion of the debt was subject to redemption if the merger does not close by December 31st. Yesterday, we announced the debt exchange offering to amend the mandatory redemption date in those notes. This action will minimize our refinancing risk and allow our bondholders to stay invested in the bonds as the year-end approaches. In closing, I want to reiterate that our company can perform well in a rising interest rate environment, which is typically a headwind for our industry. This is because our earnings are positively correlated to interest rates due to both ComEd's ROE being directly tied to the 30 year treasury rate as well as the discounting of our pension liabilities. As a general rule, every 25 basis point increase in interest rates equates to roughly $0.02 of consolidated earnings uplift related to ComEd in the pension. Thank you and we will now open the line for questions.

Just Jack, taking a before you left off on the Pepco accretion numbers. You guys are going to have $0.13 of drag because of the equity and the debt associated with the acquisition. If we look at '16, how much of that $0.13 gets offset I guess on a year-over-year base if we're to step forward one year.

We expect that the transaction will close towards the end of the first quarter and it will have a modestly dilutive effect.

Including $0.13 or net of the $0.13?

Including the impact of the shares and debt issue, so it is inclusive of that $0.13 expense associated with interest and increased shares.

Okay. If I go I guess next question. On the Constellation side with the retail margins coming through. Can you guys give us some context; how much contribution is coming from that business or where you guys sit in that historic margin range of $2 to $4 megawatt hour. Just so we can see a little better from the outside what's going on there.

Yeah, hi Dan, this is Joe. Good morning. Let's start with the second question first. We are still well within that $2 to $4 range. It's above the $2 value and it's below the $4. Our commercial industrial originations remained solid and we're happy with that. As for the margin, I think about it more on a total portfolio basis, because there are retail margins as one component of it. The second thing is we serve a lot of wholesale polar load as well which have a different margin structure associated with them. But the money that we made in the third quarter was really driven by three key things. The first thing is that if you go back and look at our hedge disclosure again for the second quarter, we were effectively 100% hedged across our book for the year. And so we set up with the short buys, recognized we had the backstop of our own generation to serve loaded market guide volatile. The second thing is we costed our loads when we sold them; the risk premiums were much higher than what was realized in the spot market, primarily driven by the low gas prices during the third quarter. And then the last thing is we took an opportunity when the prices dropped to haircut during the summer to materially get our position in longer as we walked into August and then we saw some volatility. So we capitalized on that as well. So it's really been three components that drove the value.

Okay, got it. And I guess last question you maybe Chris or Jack is just on the decision to defer the nuclear plant closures. How much earnings drag should we assume is coming off those three plants in 2016? And given the delays in making a decision, what would actually get you guys to the point to decide which higher in any of these assets that are making money?

So let's first talk about PJM and Quad and Byron. The capacity performance auctions substantially changed the profile of cash flow and earnings. We still need a low carbon portfolio standard to cement the long-term viability of these assets. But Quad is just marginally flat on free cash flow. It is slightly dilutive on earnings. If we can move the capacity performance along, it will greatly improve that. Byron is in a little bit better shape based on capacity performance and we'll continue to watch that closely. On Clinton, we were prepared with no action taken on the capacity market to go forward with the retirement. We have seen a commitment and action at MISO to evaluate zone 4 as its only competitive, real competitive market to evaluate the redesign of the capacity construct that would adequately compensate the generators for the investments they are making. We've also seen positive signals from the state of Illinois by evaluating and starting workshops to evaluate the problem statement and workshops to look at potential fixes on Zone 4 in Southern Illinois. So now that we've seen some potential for improvement, we're willing to go another year. At unit Clinton is one of our newest units in the fleet and has over 30 years of potential run left, with support coming from MISO and understanding the problem statement. We saw that as enough promise to extend it one more year to see what we can do in 2016.

So is your view that you'll have some sort of market reform in 2016 I guess in the first half of '16 in MISO for those plants to look viable or is it just the action that will get you comfortable even if it's not resolved?

We want it resolved in 2016. I don't know if it's going to be in the first half, but it has got to get resolved in 2016 between the low carbon portfolio standard and the capacity construct in MISO. It is going to be imperative for us to go forward. Quad in the subsequent auction cleared 16-17, 17-18. So we've got a blanket on that for a couple of years but it did not clear 18-19.

Okay, got it. Thank you guys.

Yeah, hi. Good morning. Couple of questions just on the recent update that you gave; is the kind of push out of the accretion just due to delays in closing and just more time to get the cost cuts and through, and I guess maybe any rate relief through like the rate freeze that you have. Is that the main difference?

That's part of it and the other part is our approved from the time we announced the merger and from when we talked about the LRP last quarter, our position has improved. So there is a little bit of we're better than we were. And the delays are the other part of it.

Okay. And then I guess just on the nuclear decision. I would just wonder if there is a little bit of kind of risk, okay, you were crying wolf on this, because you talked about this for a while then you're not shutting this year. Just how is the risk of the shutting like real in '16 or what is different in terms of making this decision now. I mean gas prices are also a lot lower too.

Yes. So we opened the books to key stakeholders in the state. They could see the red that was being produced by these assets. We were able to work with PJM and the other stakeholders on capacity performance that gave us the improvement that we're not seeing the level of red or in some cases neutral on the assets. These are long-lived assets and they are big decisions to make; we're not crying wolf, we've actually got results. And if we can continue to get results, these units will become profitable and be able to stay within the fleet. And the contributions they make to the communities that they serve. So this is not backing down on a decision; this is making progress on a path that we defined clearly at the beginning of this. If we cannot see progress, we will shut the units down. We have seen progress and we continue to believe there is potential for more progress. If we do not see that progress, we will shut the plants down.

Great. Thank you very much.

Thanks. A few questions, first back on Pepco. I have the good fortune of having followed them before you announced the acquisition, and I have been keeping my model up to date. It actually looks to me like their financial situation is materially degraded over the year or so or year and a half or so through the time that's been caused by this delay; they haven’t gotten rate increases, they've got massive operating cost increase, they’ve added several hundred basis points of leverage to their balance sheet. I mean they don’t look like they are a viable entity in their current form if this deal doesn’t close. So, it’s part of this problem with the delay and the accretion that you’re coming from a deeper hole?

If the delay in filing the rate cases has contributed to PHI’s position that they’re in now. They publicly spoke about what their future would be on a stand. We believe that once we are able to fold them into the fleet and drive the synergies and help support them with operational performance, that will give the environment for a fair regulatory recovery going forward like we’ve seen with BGE.

Yeah. I mean certainly as I have observed on a standalone basis, they’ve just seen a massive escalation in cost, which I am sure you’d be able to control much more readily given Exelon’s playbook; that should lead to a necessity from lower ask in terms of rate increases to get back to a decent return, more to think correct?

Yeah. I mean that’s part of the thesis in our filings and what we’re able to do with the settlements; we can drive the synergies with our platform that will reduce the request for needed scopes of rate increases.

Okay. Thanks. Going back to the $0.08 impact to earnings from bonus depreciation, Jack, that’s on this year’s earnings and is that sort of lower rate base net of capital allocation? Can you just walk us through how you do that calculation?

Sure. That would be, Greg, on 2015. The $0.08 would hit $0.07 at ExGen, it would hit a penny at ComEd. Importantly, it would also improve our cash flow by $650 million, and at ComEd, we would see the impact of bonus depreciation would cause a $215 million reduction in ComEd's rate base.

So, what do you assume you do with the $650 million in cash? Does it just go into the corporate general bucket, or do you assume a specific offset in the denominator through much that reduction, is that the answer?

Effectively, we would reinvest that back into the utilities part of our business to fund our capital plan.

Okay. And why is there such a big impact on ExGen?

It’s the domestic production credits; there is a limit that goes into place and as those bonus depreciation hits, that limitation goes into effect and meaningfully hits our ExGen part of our business, which is somewhat unique within the industry.

That hits your ability to claim production tax credits?

As a generator, we’re entitled to claim so-called domestic production activities tax credits, which are calculated as a percentage of generation income. So, as bonus depreciation reduces that income, it thereby reduces the related tax benefits.

Okay, got it. Thank you, guys.

Good morning, guys.

Good morning, John.

Quick question. I noticed that in your recast of the ‘15 guidance, those now, you obviously have the holdco drag, which I apologize I missed this guessing in part of the financing on Pepco. But what would be a reasonable run rate of holdco expense as we look for beyond this year?

So, Jonathan, we commented in our earnings script that the equity and debt financing associated with PHI because we didn’t close as anticipated in Q3, would be a $0.13 drag on the year. So, our guidance contemplates that drag and incorporates that obviously. Prospectively, we would anticipate closing the transaction towards the end of the first quarter of 2016; we would get the benefit of Pepco’s earnings and the pro forma would be modestly diluted for 2016 until we, as Chris mentioned, execute the rate cases and grow the revenues and earnings at PHI over the course of the next several years.

And I had the comment about the $0.13 diluted; that was a ‘15 comment or was it ‘16?

No, that’s a ‘15 comment, Jonathan. 15, sorry, 2015 drag. In 2016, we have the benefits of PHI for three quarters.

Okay, got it. So once you close, will you start on that holdco financing for that deal kind of into the segment, or do you think you’ll still have a discrete pair of drag that might be larger going forward?

We will incorporate the shares issued, or we have the shares issued, the $893 million shares in the share counts that will give us advisory for all of our business units and then we have the corporate moving company or holding company that will get allocated.

Okay, so I should, once we get into ‘17, let’s say this parent segment, the best guess is kind of flat?

Starting in ‘17, we’ll start to see an increase going into ‘18 and very strong at the end of the LRP period.

Okay, thank you guys. And then could I ask one other thing? We saw this Maryland A.G. filing in the second quarter; any thoughts around timing? How concerned are you it might be Maryland that ends up throwing the wrench in the works?

Yeah, Jonathan, this is Darryl Bradford. We have - the attorney general asked for leads to file an opposition brief; we’re going to following on that opposition today along with the Maryland Public Service Commission, while the attorney general allow to file in that we feel that the Maryland decision is a very strong one and the parties that are appealing have a very heavy burden to go for its permit. There will be a hearing in the Circuit Court on December 8 on this and we believe that decision was very solid and we believe that it will be helpful.

Okay, great. Thank you very much.

Thank you. I was wondering if you could provide any high level perspectives on the cost cutting initiative that you had mentioned in the scripted remarks.

Yeah, we’re going to be putting out the details at EEI, but we’ve looked at our corporate center BSC, business service cost, we’re looking at IT costs in some of the work that we can do there and also at the generating company, so we should be able to provide more detail on that, or we will be providing more detail in the year.

All right. Thanks so much.

Good morning.

Morning.

So first question going back to Pepco, if you will, the 2019 figure what’s embedded in there is that simply just closing on the transaction, executing status quo or are there rate case assumptions, etcetera? I was just trying to get a little bit more sense that far out in terms of what’s baked in.

So there are rate case assumptions that we’re taking straight out of PHI’s RP. Once we close, we’ll be able to get deeper into those numbers in the drivers but it is based on their assumptions on what they’ll recover in rate cases and their assumption on cost controls going forward. So we will be able to do more on that and provide updates when we get into the detail at the close.

Got it. To a clarification, it might be a little tricky first earned ROE approximately, I mean is it fair to say what I’ll let you comment on that on the Pepco side and then separately as you think about this transaction you’ve got, I suppose the cost update coming at EEI, is there some fungibility between those two as well?

I'm sure there is because you are going to have the Massachusetts model will dictate the overhead down to the specific company. So there should be, with this improvement, minor adjustments. But it would be too early to speculate now on where that goes. On the ROEs, the calculation would be straight out of the LRP that PHI is operating under now; their LRP will have to be updated post close with our assumptions of not only the cost reductions but the operational improvements.

Great. Last little question here. What is the creaks? You guys filed an interesting 8-K recently regarding must offer requirements in 2019. Is there an ability to clip participate for a partial year and toward the subsequent capacity auction at all?

Hey, Julien, it's Joe. Julien, we've looked at that that would be very difficult especially with the new capacity performance environment. So you've seen our most recent filings; we don't intend to participate with that.

Got it. Just wanted to clarify. Thank you.

Thank you. Good morning.

Good morning.

First question, just wanted to clarify the $0.08 that you had in the third quarter above the high end of your guidance, was that all coming from the stronger performance at Constellation or what was the main driver there?

Ali, it was both across the utility business as well as Constellation and ExGen part of our businesses. So we had strong weather and operating results at both PECO and ComEd and then we had good operating results at PJE, and as Joe articulated in his discussion we had strong performance from the generating part of our company.

Okay. Second question, this disconnect in pricing between your fundamental view of NiHub and the forwards; we've been hearing that for the last several quarters now and this seems to happen during that. What is your opinion going to trigger that to coincide? Is there just a surge in demand, extreme weather? I mean like I said we've been seeing this for a while; what do you think will change that?

Good morning, it's Joe. I think - it’s Joe. I think there is a couple of things. But I think the biggest thing is there is a complete lack of liquidity in NiHub and especially when you get beyond like the 2015-17 period. We think that with normal weather in 2016, NiHub is somewhat fairly valued. But as you move out on the curve, it gets materially undervalued and that's driven mostly by the lack of liquidity. If you look at you have gas prices that are in contango market and M3 is relevant because it's across the region. A lot of hours setting price using M3 gas. So if you look at like 2016 to 2018, you've got $0.25 of value on the curve just associated – $0.40 of value associated with Henry hub prices and another $0.20 to $0.25 with M3. There are $0.65 of value in the gas curve and yet the power prices at NiHub today are $0.25 backwardated. In addition, it's closely contango as well. So that part of it, the coal retirements part of it. We have seen heat rate expansion even at these low gas prices; we think some of that has been masked quite frankly by the fuel being so low. But when you put all that together in the complete lack of liquidity, that's where we are coming up with the driver of higher prices in the future.

Understood. And the last question, assuming these forward curves stay as they are, and I know that at EEI you'll update your curves and the mix as well. But when you look at - I mean you are showing us fairly flat margins in 16, 17; the cost savings that you are planning, are they going to be strong enough so that just directionally, GenCorp can show a positive net income stream because depreciation and another expansion are going up as well? Or are we still looking at flat to perhaps declining GenCorp profile given what the forward curves are telling us right now?

Ali, it's Jack. I know that there is a lot of interest in us engaging on the cost reduction topic before EEI. But I think it's probably better to align our disclosure around that cost reduction effort with our outlook for 16, 17, and 18 hedge disclosures. You'll obviously see the significant benefit of capacity performance in that period aligned with the benefits of cost reduction. So the story is positive; we'd ask for your patience in terms of transparency around that until EEI.

The bottom line is we are seeing improvement over the LRP period.

Okay, so from an Exelon perspective, just directionally, you would, as we stand here today, 18, 19 earnings, with that going there should be higher than where we are in '15. Is that a fair statement?

Yes.