John Rowe
Analyst · Citigroup
Thank you, Frank. Thank you, John. Good morning, everyone. This morning I will add a little perspective to 2006 and offer some thoughts on our strategy going forward especially as it is affected by the national spate from competitive market and global climate change. As you all know 2006 was very a demanding year at Exelon. We faced serious regulatory challenges in both Missouri and Illinois. Arguably we lost in New Jersey but we kept our commitment to financial discipline as we have promised we would. In Illinois, the ComEd team has been successful in making Illinois Restructuring Act work. I think it’s clear to say that we have discussed the Illinois core solution to good use almost when we could. The real story for 2006 at Exelon is that we continue to be one of most successful companies in our industry. For the sixth consecutive year, we have improved our operating performance and our operating earnings. As John Young has already reported our year-over-year operating earnings per share increased 4% from 3.10 to 3.22, in spite of relatively unfavorable weather. On weather normalized basis, operating earnings would have been up about 10%. Over the past six years, operating earnings have increased by almost 9% per year. This success is the product of unrelenting focus on operating performance, disciplined financial management, and sound approaches to regulation, the continuing basics of our business. In the nuclear area, Chris Crane and his team achieved a new fleet generation record for the fourth consecutive year, producing over 131,000 gigawatt hours in 2006. Nuclear achieved 93.9% capacity factor for the full year, the second highest ever recorded by the fleet compared with 93.5% for 2005. It also set a summer capacity record at 98.1%. Our average refueling outage duration was 24 days, an improvement over 2005 and significantly better than the 2006 industry average of 39 days. Exelon executed four of the five shortest refueling outages in country in 2006. Totally with all these accomplishments, Nuclear also recorded its best worker safety record in the company’s history. The Salem and Hope Creek site also set a new combined site capacity factor of 95.7% for 2006 with refueling outage duration averaging 25 days. As many of you know, the site management is being transitioned back to PSEG under the termination provision of the nuclear operating service contract. The three senior leaders of Exelon's on-site team were hired by PSEG effective January 1 and Exelon Generation is transitioning out of management of the site. We are committed to a smooth transition and to continued safe operation. In our fossil area, Mark Schiavoni and his team have delivered a great year. Our fossil and hydro fleet finished the year with commercial and equivalent availability factor of 93.5% and 95% respectively, the highest commercial availability ever achieved by a fossil team. Power team, led by Ian MacLean, delivered another distinguished performance in turning our operational prowess into commercial success. Despite somewhat lower gas and power prices and lower load volumes, Power team hedged and optimized our portfolio to again deliver above budget growth and profitability. I am especially grateful to Ian McLean and their team’s efforts this year. At ComEd, a competitive auction was successfully conducted in Illinois to meet ComEd's continuing load obligation. The end result of the auction and ComEd's delivery service rate case was our overall rate towards customers that's as less than, I think, was approved by regulators in 1995, 12 years ago. Seems fairly clear that competition is working in Illinois in spite of what some would say. And PECO, although challenged by twice as many storms as would be more typical, still had one of its best years in non-storm reliability. We expect PECO to recover from the severe weather and again show improvement in reliability. As a consequence of our continued financial and operating performance, you have again rewarded us by making us the most highly valued company in the industry. Our stock grew more than 16% in 2006 from $53.14 on December 30 to $61.89 on December 29, 2006. Our yearend market capitalization exceeded $41 billion and is a little over $40 billion as we speak. As I discussed at length at our Annual Investor Conference, our strategy going forward has two components. First, we must protect the value that we have created, which requires delivering continued superior operating performance and constantly improving it, it requires supporting competitive markets, it requires protecting the market value of our generation and building healthy self-sustaining delivery companies. It is often said that the best defense is a good offense. In the utility business, it's often the other way around. In this case, what works for the (inaudible). Second, as we look forward, we will be dedicated to growing future value by improving even more our performance, continuing to use our financial discipline, evaluating new growth opportunities, and advancing our environmental strategy. I should also say that the value return policy we announced last fall is also part of this. The components of our strategy are increasingly affected by two overarching policy debates. One is about this continued viability of wholesale markets and the other is about climate change. In our view, the evidence is simply overwhelming that competition at the wholesale level has delivered huge public benefits. Even apart from ComEd's recent experience with the auction in Illinois, studies by PJM, CERA, GAO, and [SYNOP] have all confirmed that wholesale competition has; one, improved the operating performance of existing generating units; two, reduced their cost of operations; three, resulted in the construction of significant new generation; and four, pass along significant price reductions to customers. CERA recently estimated the savings for residential consumers at $34 billion between 1997 and 2004. In spite of this record, competitive model is being challenged. This is because public reacts to price increases under any model. In competitive jurisdictions, there have been price increases over the past several years, in some cases because of reliance on natural gas, and in other cases because of timing. In a number of states, Illinois included, the increase coincides with the end of restructuring transition periods during which customers receive significant savings of rate reductions and accompanying rate freezes. Massachusetts customers recently saw a 28% increase. In Delaware there was a larger 59% increase. And Maryland recently announced a 47% increase. These all compare to 23% increase in Illinois. (Inaudible). Now what is truly remarkable is that folks blame competition for the current price increases rather than rising fuel costs. In fact, the states that have traditional cost based regulation have also seen double-digit rate increases. For example, Louisiana saw a 67% increase between 2000 and 2005, Mississippi 53%, Oklahoma 47%, Colorado 43%, and Georgia 37%. As we all know, people resent it when electricity prices go up. Increasingly we hear a chorus of naysayers, including some in our industry, some regulators, some public power figures, and even those who support to represents industrial customers saying that wholesale competition isn't working. The irony is of course that industrial customers were in the forefront of efforts to inject competition in the industry a few years ago. And those who think rate based means keeping price increases have very short memory. We at Exelon do not intend to stay on the sidelines in this case. In the coming months we will redouble our advocacy for the competitive model both at federal level and in the states. We will look for then active support from the investment community. The question is quite literally whether we will affirm the obvious benefits of competition or whether we will again revert to planning regime and the inward search for a lower cost or market solution that doesn't work for anyone. This competitive issue is particularly critical as we confront the second major policy, climate change. Any one who picks up a newspaper or watches TV news tells that climate is an issue whose time is now. The evidence that the atmosphere is warming is compelling, and in the judgment of most scientists, warming is predominantly caused by human activity. I read one review this morning that suggested that Exelon would use this forum as a vehicle to campaign for carbon legislation. We hardly need to do that. There are others far more effective who will do that. At the regional and state levels, we see the RGGI initiative -- R-G-G-I -- in the Northeast and California's recent adoption of a bill known as AB 32. At the national level, there has been a flurry of activity in the bipartisan (indiscernible) for the Senate resolution last summer. Speaker Pelosi has just announced a new committee on that. I think no one can predict the details of ultimate legislation, but it seems obvious that climate legislation will receive a great deal of attention this next presidential election. We at Exelon are not strangers to this place. We have been working on it for a very long time. I was recently reminded that I first testified before Congress about carbon taxes in 1992. In the late '90s, one of the reasons we sold our fossil plants was we believed that carbon legislation would be coming in due course. More recently, I have been active as Co-Chair of the National Commission on Energy Policy, a bipartisan group of academics, environmentalists and some from the industry which has worked some response. After much discussion, the commission concluded that effectively dealing with climate change requires both a carefully crafted regulatory regime, one that will effectively address carbon without an impossible economic burden, and the development of innovative, low carbon energy alternatives. NCEP recommended a cap-and-trade system with an exclusive safety valve to protect the economy, the tightening of CAFE standards, and more support for energy efficiency cleaner coal and new nuclear plants. There is no single technological answer to climate change. While increased R&D is required, we believe that a competitive market within a proper regulatory regime will provide more innovative responses. In a very real sense, preserving and protecting competition is essential to successfully addressing climate change. In months ahead, we will be advocating both. Whatever the fate, however, of climate legislation, it is clear that Exelon is uniquely positioned with our large nuclear fleet to continue our earnings performance in a carbon-constrained world. So let me just wrap up and turn to your questions by saying we had a tough 2006, but we had a good 2006. I am very proud of what the Exelon team has delivered in the past year and look forward to a better year this year. We have delivered outstanding operating results and continued outstanding earnings performance and overcome significant regulatory challenges. We shall keep marching along on our course. Thank you very much. And we'll proceed to Q&A.
