Good morning. My name is LaShanta and I will be your conference operator today. At this time I'd like to welcome everyone to the Exelon Corporation Q4 2016 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be question-and-answer session. [Operator Instructions] Thank you. I will now turn the conference over to Mr. Francis Idehen. Please go ahead, sir.

Thank you, LaShanta. Good morning, everyone, and thank you for joining our fourth quarter 2015 earnings conference call. Leading the call today are Chris Crane, Exelon's President and Chief Executive Officer, and Jack Thayer, Exelon's Chief Financial Officer. They 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 the earnings release, today's material, comments made during this call and in the risk factors section of the 2014 10-K and the third-quarter 10-Q. Please refer to today's 8-K and the 10-K and the 10-Q and Exelon's other filings for a discussion of factors that may cause results to differ from management's projections, forecast 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 45 minutes for today's call. I will now turn the call over to Chris Crane, Exelon's CEO.

Thanks, Francis, and good morning to everybody. Thank you for joining us on our fourth quarter call. Before I go into the results I want to take a moment to thank our crews who worked hard to restore power for our customers in Baltimore and Philadelphia affected by the January storms. BGE and PECO were able to restore approximately 22,000 customers throughout the weather event, keeping the average restoration times to less than three hour, which is a remarkable accomplishment given the challenges associated with traveling and the working conditions as the storm intensified. I'll start off by reiterating our strategy and our capital allocation philosophy. The balance sheet strength is a priority that guides every strategic decision. It allows us to deliver stable growth, sustainable earnings and an attractive dividend for our shareholders. Our strategy for delivering these objectives is to harvest free cash flow from the Genco, to invest primarily in the utilities for the benefit of our customers, invest in long-term contracted assets, which meet our return requirements and return capital to the shareholders. Consistent with this capital allocation policy, we're announcing today an evolution in our dividend policy. Our board has approved a policy to raise our dividend by 2.5% each year for the next three years beginning with the June 2016 dividend. The dividend increase shows our commitment to provide an attractive total return proposition for our shareholders and reflects the shift in focus towards our regulated utility and long-term contract businesses. Our balance sheet and our cash flow profile support the shift in the dividend policy and maintain a high credit quality and investment grade rating remains a top priority. We continue to de-risk the Company by growing our regulated business. This has allowed us to generate earnings with a lower risk profile. We…

Thank you, Chris, and good morning everyone. As Chris stated, we had a strong year financially and operationally across the Company. For the full year, we delivered earnings of $2.49 per share and $0.38 per share for the fourth quarter. If bonus had not been extended, we would have delivered earnings of $2.58 per share, meaningfully exceeding the midpoint of our guidance range. The appendix contains details on our fourth-quarter financial results by operating Company on slides 21 and 22. My remarks today will focus on 2016 earnings and O&M guidance, our credit profile, the cost management initiative and an update of our gross margin disclosures. Turning to slide 6, we expect to deliver 2016 full-year adjusted operating earnings of $2.40 to $2.70 and $0.60 to $0.70 per share for the first quarter. While we anticipate closing the Pepco holdings deal in the first quarter, our guidance is a standalone figure that assumes the equity and debt issued for the PHI deal is unwound during the year. The impact of the extension of bonus depreciation is included in the guidance. Our growing utilities earnings primarily reflect increased capital investment in distribution and transmission to improve reliability and customer service at ComEd as well as increased rates from PECO's recent distribution rate case, partially offset by higher O&M at PECO and BGE related to storm and bad debt costs. Our strong operating performance at our utilities is fostering a positive regulatory environment in all our jurisdictions and is evident in the transformation and allowed and earned returns that we've achieved at BGE since the Constellation merger. BGE has improved reliability and customer satisfaction in every year as compared to 2012, the year of the merger, which in turn has led to improved regulatory outcomes and earned ROEs over that same period.…

[Operator Instructions] Your first question comes from the line of Greg Gordon with Evercore ISI.

Thanks, good morning guys. Great presentation. Thank you. A couple of questions. Can you talk in a little bit more detail about what your plan is and what the milestones are for making a decision in Illinois on the uneconomic units? And can you refresh our memory on where we stand in terms of profit and loss on the three units that you had initially a year and a half or two years ago identified as impaired?

Sure. As you know we were successful and PJM was successful on the capacity market redesigns that gave some upside to the fleet in NiHub. Greatly helped Byron and added help to Quad cities, but since then as you've seen the downturn in the forwards Quad cities continues to be challenged and more neutral on cash flows and earnings, while maintaining the risk of operation. We continue to work on Clinton. Clinton is negative. We have two initiatives underway, one working with MISO on Zone 4 reforms and we'd like the design to be more like the new PJM capacity market design. But that in itself will not save Clinton. As you know there's a lot of work going on in Springfield with the administration and the legislature. And we have had a very strong support from the leadership of the legislature and the administration on coming to a resolution on the energy outlook for Illinois. It's not only the Clean Energy Standard, but there is an environmental jobs, agreeing jobs bill and there's a utility of the future bill that have to be negotiated together. There's been progress made in that dialogue, but it is critical that we have, that we're able to present to the legislature this spring a combined package that ensures the financial viability of our assets as they contribute highly in reliability, in environmental or we will have to make the rational economic decision. It's our job to get the stakeholders together. We're working hard on that and to bring the leadership what is a consensus package that’s good for all of Illinois and its customers. So we're in this spring time in Illinois and we're hopeful that we can have reasonable heads prevail and negotiate a balanced outcome and as I said present that to the leadership so they can provide the continued support.

Okay, so Quad because of the further decline in gas prices and power prices since the CPE results has gone back out of the money. So is that a fair summary?

It is. It is. With these forwards it is.

Okay. And the second question is, so you guys are going to, based on your cash flow slide on page 37 you're going to end the year with a pretty substantial cash balance. And if I look at the cash flow profile you project through 2018 that should continue to grow all things equal. Your debt to EBITDA is going to be sub-3, by my measure you're trading at under 4.5 times EVD to EBITDA on the implied valuation of the nuclear business. That basically implies that the nuclear is a wasting asset write, that with $8.5 billion of debt on the balance sheet that you should be amortizing debt because these plants are going away in 10 years. I mean what can you do to convince investors that this low gas price environment doesn't ultimately drive these assets out of business? Because if they are 20- or 30-year assets and not 10-year assets the stock is undervalued.

Yes, first of all there's more than 10 years on these assets. We had license renewal at Braidwood. It goes into the late 2040s. The money producing plants are the larger dual unit sites that will run into the 2040s. That's Byron Braidwood, LaSalle, Limerick, Peach Bottom and they are positioned well in the markets. Peach Bottom is in the 30s I think, but the others are in the 40s. So we've got a long run left on these profitable plants. If the smaller units or the single site units cannot be profitable and we can't get a market design they will be retired and there is an upside based off of that retirement on free cash flow and earnings. We will remove the drag. As Jack described, we're very focused on the debt to EBITDA ratios at the GenCo, and over this period of time we will be reducing over $3 billion of debt at the GenCo and continuing to manage that, matching our assets with our debt. We feel very comfortable where we're at. But it is a misnomer that is out there that these are 10-year assets with a large debt profile on them. Jack, you want to -.

No, I think you covered it Chris. I mean the goal is to create that fortress balance sheet to do the right things around our assets and sustain the profitability of the long lived plants.

All right, thanks guys.

Your next question comes from Dan Eggers with Credit Suisse.

Hey, good morning guys. If we go look at the dividend increase in the 2.5% a year for the next three years, can you maybe, Chris, share how the Board thought about using capital to raise the dividend considering you already have a pretty healthy yield? And then what was the thought process behind 2.5% a year for those three years?

Sure. We had, as we talked back three years ago now when we had to restructure the dividend, we had grown the dividend at Exelon based off of the earnings and cash flow on a very volatile business, the GenCo. We had to make the shift and take the pain at the time to refocus the payout and where that reliable cash flow would come from. We set out at that time after the merger with Constellation, improving the performance for the customers and the reliability of BGE and along with that improving the profitability. ComEd has done a phenomenal job improving reliability, making prudent investments and as our shareholders have seen, as you have seen, the strategic plan we laid out a few years ago is paying off. And it can be seen, it's transparent that by 2018 theoretically the utilities would be covering the dividend. In discussion with shareholders and feedback at the end of the year the certainty and our confidence in the business needed to be fully displayed. In dialogue with the Board, we thought that we can make these increases. We've talked about the free cash flow, we talked about the balance sheet and we're committed to that through 2018. I think it's a positive sign in the right direction that we feel confident in our strategy going forward.

Okay, got it. And then on the Pepco deal, I guess you have kind of down to one month of room for the commission to make a decision. I guess A, have you heard anything or is there anything indicative of where the commission could make a decision? And B, if the deal does not get approved how do we think about the full return of the previously raised equity and the debt retirement?

So the commission did state that they would take this matter up before our March 4 date. And that's our only commitment is to try this till March 4 and if we can't get it by March 4 then we have to fold up and then start to execute on the debt reduction and the buyback of the equity issued. And that would start immediately. The plans, the contingency plans are in place by Jack and Stacy and the team. And that execution would then start at that point.

And Dan, just for modeling convention, what we've assumed is it takes us roughly five months to buy back the equity and that has a $0.06 drag associated with it during 2016 on our standalone plan. And we would assume we'd retire the majority of the debt associated with Pepco in March, which has a $0.01 drag. So all-in on a standalone basis there's about $0.07 of drag in our EPS associated with PHI closing that out if we end up on a standalone basis.

And I think that the disclosure in the back of the $1.6 billion or whatever buyback that you have in the appendix, that's based on just buying back the same number of shares you originally issued, although the notional amount is obviously less than you raised. And is there a possibility you guys could buy back the amount you raised rather than the number of shares?

To your point what we've modeled is buying back the 57.5 million shares that we issued for the transaction. I think our balance sheet strength and where we see that orienting from a debt-to-EBITDA basis provides a lot of flexibility. And we'll review what's the best means of creating value for shareholders.

Got it. Thank you, guys.

Your next question comes from Steve Fleishman with Wolfe Research.

Yeah, hi, good morning. Just on the dividend strategy change I just wanted to confirm that that's the plan kind of with or without Pepco?

It is.

Okay. And secondly, what are your thoughts on the use of the bonus depreciation cash? And it sounds like you haven't included that in the impact of bonus or you're just taking the hit but not including reinvestment. What might you reinvest in?

We have significant investment in the utilities. We are putting debt on the holding company. We would anticipate less debt issuance to infuse the equity into the utilities as part of that. And there we would look at other opportunities to for further regulated or contracted investment if they met our hurdle rates.

Okay. And then the $1.350 billion that you're putting into contracted generation at ExGen, is that all renewables projects?

There's a contracted peaker up in New England that's a modest part of that. But the bulk of that is contracted wind or contracted distributed generation.

Okay, and argue assuming – are you including any debt financing on those assets or are you assuming for purposes here you're just funding all of it? And could you add debt to those projects?

Steve, we're assuming that because of their contracted nature that we'll be able to secure project financing, which would get some measure of off credit treatment to minimize the impact on the overall balance sheet.

Okay. And so the $1.350 billion is just your equity investment in these?

The $1.350 billion is just cash.

Cash. Okay.

So that can be either project financed or equity financed, some combination of both.

Okay, great. Thank you very much.

Sure.

Your next question comes from Jonathan Arnold with Deutsche Bank.

Hi, good morning guys.

Good morning.

Good morning. Just a quick one on a similar topic. Does the projection you show for ExGen net debt to EBITDA stepping down to 2.3 by 2018, how much of your free cash flow are you assuming you are going to reinvest? Or is all of it just rolling into the net debt calculation in that upper slide?

Jonathan, the major drivers of that are we have a $700 million maturity in 2017 that we pay down. We pay down about $1.2 billion of CP and then a growing cash position, which ultimately takes you from that 3.2 down to 2.3 times.

So is it fair to say the 3.2 of free cash flow is kind of all rolled into the debt projection or not entirely?

It's rolled into the debt projection. It's financing or funding the dividend increase. It's basically insulating the balance sheet to a very strong position.

Great. That was my other things got asked, so thank you very much.

Thank you.

And your next question comes from Praful Mehta with Citigroup.

Hi guys.

Good morning.

Actually going back to this debt question at ExGen, I just want to understand given the goal is to harvest cash from ExGen as you've pointed out and to reinvest that cash, and we've talked about the lifetime of assets for the nuclear as well, is there a level of just debt, as in currently the debt balances let's say $9 billion, is there a level of debt that you see if the right debt grows that number that you see at ExGen, is it between the 2018, 2019 time frame? Are you targeting a certain number?

We're retiring about $3.6 billion over the next five years at ExGen. And I think that provides us, rather than targeting a specific number I think more importantly it provides us with a considerable amount of flexibility and insulation and allows us to position from a point of strength our merchant fleet to compete on a long-term basis. It's clearly differentiated from the balance sheets of some of our competition. And we think that that will be a competitive advantage as we proceed through the coming years.

Got you. Thank you. And then secondly in terms of the dividend, if the Pepco transaction weren't to close as you grow your dividend by the 2.5% as you've talked about, how are you looking at the payout ratio relative to just the utility earnings by 2018 and is there a target level that you're comfortable with in terms of payout relative to just utility earnings?

So from a dividend standpoint, in effect what we do is we set a minimum from a payout ratio at the utilities, but we've got a lot of flexibility in how we can fund that growth. So rather than targeting a specific payout ratio in aggregate what we're really looking at is a minimum payout ratio at the utilities of 65% to 70%. And then we look at where best to fund the dividend as well as fund the investment in the utilities to grow the regulated earnings stream of the company at 7% to 9%.

Got you. So there is an area where the payout from just the utility business or I guess the total payout relative to the utility earnings could go higher than the 70% if in case the Pepco transaction doesn't close?

That's a possibility. But if you look at, go back to what Jack said, a payout ratio of 65% to 70% by 2018 theoretically with our earnings profile, the utilities would cover that dividend. And that's a theoretic position we wanted to be in because we need to make decisions on further capital infusions for necessary projects to drive customer satisfaction and reliability.

Got you. Thank you.

Your next question comes from Barbara Chapman with BNP.

Hi.

Hey, Barbara.

How are you guys doing?

Good.

Good. If somebody could speak to your sources and uses slide on 27 please and help answer a couple of questions. One, the issuance needed at Baltimore Gas & Electric just seems larger than what we've dealt with. So I'm just kind of curious what's going on there as far as an investment standpoint. But also on the corporate issuance, it doesn't appear there is a placeholder for the reissuance of the debt that was not exchanged and therefore called last year. So if you could explain if the Potomac merger goes through are we done now with the permanent debt financing for that?

So Barbara, let me start with your second question first. This is on a standalone basis, so you'll note under the debt retirements that we have a further $1.875 billion of retirements here. If PHI goes through then clearly we would look to fill the gap of what we called during the fourth quarter of 2015 through a further financing at the holding company and on a pro forma basis, this sources and uses table would show the impact of that. With respect to BGE, we’re retiring $300 million there. We’re issuing $750 million, so the net $450 million you’ll recall we have a significant gas program there where we are hardening and replacing infrastructure within our gas utility as well as we have significant investments in reliability on the distribution and transmission side.

Okay. So we are back – we’re still on the original thought that closing Potomac you will be out with to refinance what had to be called then?

Absolutely.

Okay, because it’s confusing the way this is written on that issue. Okay.

And then Barbara, just the difference this time obviously is we would issue on the other side of the transaction completing. So we have sources of funding that we can use to bridge. And then we would do a large holdco issuance to replace that short-term financing.

And your final question comes from the line of Shahriar Pourreza with Guggenheim Partners.

And your final question comes from the line of Shahriar Pourreza with Guggenheim Partners.

And your final question comes from the line of Shahriar Pourreza with Guggenheim Partners.

And your final question comes from the line of Shahriar Pourreza with Guggenheim Partners.

And your final question comes from the line of Shahriar Pourreza with Guggenheim Partners.

And your final question comes from the line of Shahriar Pourreza with Guggenheim Partners.

And your final question comes from the line of Shahriar Pourreza with Guggenheim Partners.

Good morning, everyone.

So just looking at slide 8, is there a scenario that could essentially see some of your ratios including your debt to EBITDA essentially south of 2.3 especially if we continue in a sort of a prolonged low gas price environment?

Okay, that's helpful. And then just on the dividend policy, when you think about your second leg of growth, should we assume like step functions to get you closer to what your consolidated growth is or should we assume maybe another large increase post-2018?

So, we would analyze the best shareholder capital return policy. We'd be looking at are there further investments that can be made that create stronger and continuing growth in our investment in the regulated utilities. But it will be analyzed and as I said we theoretically hit a target of a payout in 2018. We will take into consideration the best uses of capital allocation at that point and we would anticipate some growth continuing after 2018. There's a lot of infrastructure and technology advancements that are coming along that will benefit the customers and benefit reliability and drive much more productivity within our workforce. So it's something that we'll look at and we're heading in the right direction.

Excellent, excellent. And just one last question. Just around maybe you could touch on the New York Clean Energy Fund that's being proposed, sort of the outlook for Ginna post the RSSA and then is there any impact to the put option with EDF?

I will let Joe Dominguez cover this.

Sure. Good morning. As Chris said at the top of the call, it's not the Clean Energy Fund but it's a zero-emission credit program that benefits nuclear. As Chris said at the top of the call, it's been a constructive development for us in New York. We still have quite a ways to go. But as a threshold political matter, having a governor with the prominence of Governor Cuomo step forward and propose to compensate nuclear fairly to keep it in business is important. If we get the details right I would go so far as to say it's kind of a watershed event for the industry. But we don't have the compensation details sorted out yet. The RSSA at Clinton will expire in March 2017, so practically speaking we need to see the details for the New York program this year. Once we see those details obviously it could provide incremental revenue that would factor into the put if that put in fact occurs. But we don't have important details right now on the level of compensation or how the procurement mechanism would work. So it's all speculative until we do the work over the next three or four months and nail this down.

In my conversations with the leadership at EDF, they are very comfortable with our operations on the nuclear side and in this market environment they are not looking at exercising the put at this time. So we will continue to work on the regulatory side and drive strong operational performance. And we have a little time on Ginna to the end of the RSSA into 2017, and like Joe said we've got a very supportive administration that recognizes the clean benefits of nuclear and that's really appreciated.

Congrats on the results.

Thanks.