Ravi Ganti Christopher M. Crane - Chief Executive Officer, President, Director and Member of Generation Oversight Committee Kenneth W. Cornew - Chief Commercial Officer, Senior Executive Vice President, Chief Executive Officer of Exelon Generation and President of Exelon Generation Jonathan W. Thayer - Chief Financial Officer and Executive Vice President Joseph Nigro - Executive Vice President, Chief Executive Officer of Constellation and President of Constellation Joseph Dominguez - Senior Vice President of Governmental and Regulatory Affairs & Public Policy

Greg Gordon - ISI Group Inc., Research Division Dan Eggers - Crédit Suisse AG, Research Division Steven I. Fleishman - Wolfe Research, LLC Julien Dumoulin-Smith - UBS Investment Bank, Research Division Jonathan P. Arnold - Deutsche Bank AG, Research Division Hugh Wynne - Sanford C. Bernstein & Co., LLC., Research Division Stephen Byrd - Morgan Stanley, Research Division Brian Chin - BofA Merrill Lynch, Research Division Shahriar Pourreza - Citigroup Inc, Research Division

Good morning. My name is Tierra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2013 earnings call. [Operator Instructions] Mr. Ganti, you may begin your conference.

Thank you, operator, and good morning, everyone. I welcome you to Exelon's Third Quarter 2013 Earnings Conference Call. Thank you for joining us today. We issued our earnings release this morning. In case you did not receive it, the release is available on Exelon's investor website. The earnings release and other matters we will discuss in today's call contain forward-looking statements and estimates that are subject to various risks and uncertainties, and the actual results could differ from our forward-looking statements. Please refer to today's 8-K and Exelon's other filings for a discussion of the factors that may cause the results to differ from management's projections, forecasts and expectations and for a reconciliation of operating to GAAP earnings. Leading the call today are Chris Crane, Exelon's President and CEO; Ken Cornew, Exelon's Chief Commercial Officer and President, CEO of Exelon Generation; and Jack Thayer, Exelon's Executive Vice President and Chief Financial Officer. They are joined by other members of Exelon's management team, who will be available to answer your questions following the prepared remarks. We have scheduled 60 minutes for this call. I'll now turn the call over to Chris.

Thanks, Ravi. Thanks, everybody, for taking the time to join us this morning. Operationally, we had another strong quarter with great performance in both the utilities and the entire generation fleet. Financially, the third quarter was strong and results were higher than our guidance range. The third quarter operating earnings were $0.78 per share. Jack's going to cover that in more detail in his remarks. Low commodity prices, low load growth and tough retail margins continue to challenge our industry. While these challenges are mostly beyond our control, we are leveraging our core competencies to control what we can and influence what we cannot. We're focused on operational excellence, regulatory advocacy, financial discipline and investment that provides value to our shareholders. As I said, operationally, we had a good quarter and we're having a very good year. Once again, our generation fleet performed at high levels. For the quarter, the nuclear fleet ran at 94.8% capacity factor, and during the summer period had a 97.4% capacity factor. The fossil and renewable fleet had a strong quarter as well. In particular, the fossil, hydro fleet performed at exceptional level with a dispatch match rate of 99.1%. The utility performance remains very solid. All 3 utilities year-to-date improved on the customer satisfaction index year-over-year, and in some case -- places, we're reaching our highest numbers that we've seen in over a decade. No major storms did contribute to this favorable quarter for the utilities. On the regulatory advocacy side, we continued to push on many fronts. The rate case for ComEd and BGE are on schedule, with decisions expected in December for both. On the RPM stakeholder process, we continue to work with PJM and other stakeholders on improving the capacity market rules. The stakeholders are discussing reforms in the area of…

All right. Thanks, Chris, and good morning, everyone. As Chris mentioned, I'll cover changes in natural gas basis and how we incorporate these risks while we hedge our portfolio, as well as our hedge disclosure. If you turn to Slide 3, I'll turn to Exelon Generations results this year and the outlook for the next 2 years. Challenges we have faced over the past year have continued over the third quarter, with natural gas modestly down across all years, power prices mixed across all regions and years, key grades modestly increased in the Mid-Atlantic and Midwest, very little volatility outside of ERCOT and the retail competition continues to be aggressive. These factors all combined to put further pressure on our ability to extract margin to our wholesale and retail businesses. To offset these pressures, we've mentioned $100 million reduction in 2013 O&M during the second quarter call. As seen on Slide 3, for 2013, the total reduction in gross margin from last quarter is $50 million. While prices were lower, especially in ERCOT, where summer peak prices came in lower than forecast, our hedge position and execution of $100 million in our new business target provided an offset to the open gross margin decrease of $150 million. Unfortunately, the lack of volatility in other regions and our outlook for the remainder of the year has caused us to reduce our expectations for incremental margin from our commercial business. Our non-power business continues to ratably transition from our to-go bucket to our executed bucket. It's important to note that we expect this $50 million reduction in 2013 to be offset by cost reductions, and Jack will be highlighting these a bit more as he discusses our full year guidance. In '14 and '15, our disclosure indicates a reduction of $50 million…

Before we go to Jack, I need to correct one thing I said. I said the range was going to $2.40 to $2.50. That's $2.40 to $2.60 is the new range.

Thank you, Chris.

Thanks, Chris. Good morning, everyone. I'll review the third quarter financial results, our full year guidance range, key events of the quarter and our balance sheet and cash flow outlook, starting on Slide 5. As Chris mentioned earlier, Exelon's results for the quarter exceeded our expectations. Operating earnings for the third quarter of this year were $0.78 per share, well above our Q3 guidance range of $0.60 to $0.70 per share. Compared to our guidance, favorability at both ExGen and our utilities drove us well above the range. While we expected to be at the upper end of the range provided, we continue to limit costs, resulting in lower-than-planned O&M across all our businesses. We are realizing merger synergies faster than forecast and that is helping results. The utilities accounted for just over 1/2 of the savings compared to guidance. As Ken alluded to earlier, the full year 2013 RNF production shown in the hedge disclosures was offset by ExGen, with lower O&M and interests. The lower O&M was driven by reduced O&M costs related to outages of power and lower labor and benefit costs. Across our operating companies, some of the reduced spending were onetime benefits, quite fewer than expected large storms, and others may reverse in the fourth quarter, but in general, our focus and execution on cost management helped drive these results. The $0.78 compares to our operating earnings of $0.77 per share during the third quarter of 2012. The quarter-over-quarter difference was largely driven by improved performance at our utilities, specifically at BGE and ComEd. I will go into greater detail on the quarter drivers in a few minutes. As Chris mentioned, for the full year, we are narrowing our guidance range to $2.40 to $2.60 per share from our previous guidance of $2.35 to $2.65…

Thanks, Jack. There have been a few reports in the past month commenting on the impact of the lower gas and power prices on our earnings. I think these reports all assume that we'll sit on our hands and not take any action and the market participants will not rationalize their behavior. In fact, we continue to take a hard look at our assets and determine their economic viability. We will shut down facilities that we do not see a path to a long-term sustainable profitability. We've built our record on reducing costs and improving productivity of our business, which is shown in the $550 million of synergies from our merger, exceeding our original estimate. Our hedging portfolio -- we are hedging our portfolio to reflect our fundamental view of the market and that it will improve. We continue to look for opportunities to grow. We'll continue to advocate for public policies and market designs that properly compensate our fleet, victories in the court and legislative regulatory fronts that will support our pricing. We'll continue to optimize the use of capital structures, different capital structures like the Continental Wind project financing and our current view of some of the analysts on Exelon's expect performance is not where -- excuse me, the current view of some of the analysts on Exelon expected performance is not where we see it to be. We believe that the analysts have it very wrong, and we would like to change that. With that, I'll open it up for questions.

[Operator Instructions] Our first question comes from the line of Greg Gordon.

You guys have been doing a good job on the cost side. Can you tell me, I think we've been assuming that total O&M and TOTI at ExGen, if you include CNG of around $5 billion, but given the headway that you've made on costs this year, could you tell us what the right run rate is as we go into 2014?

Greg, as you mentioned, we have pulled a substantial amount of costs out and we will update on our O&M at EEI. But I think it's safe to assume we are in the midst of our 5-year planning process that we're targeting flat O&M across the business plan at ExGen.

Okay. Second question is, and this goes to the statement you made earlier and I think that you reiterated, there's a view that this negative gas basis that we're seeing in Pennsylvania is going to migrate west as this REX pipeline partially puts around. Can you go into a little bit more detail why you feel like the expectation that negative basis permeates West is incorrect?

Greg, it's Joe Nigro. There's a couple of reasons for that. The first is I think you're right, we do expect the REX pipeline to move gas out to the Mid-Atlantic into the Midwest. Historically, we have seen the need for inflows to the Midwest area of natural gas to meet the demand and that, historically, come out of Canada in the Gulf Coast. We would expect to see the displacement from the gas moving in from the Mid-Atlantic and displacing that gas that, historically, has come out Canada and the Gulf. I think the other important point to mention though, Greg, is that gas basis is one component of it. When you look at our -- when we look at our fundamental forecasting and do all the puts and takes of what we expect from a generation change perspective over the next few years, you still only have gas on the margin a lot less than we do in the Mid-Atlantic. So the impact on the gas basis change when we see a $0.25 change in gas basis lower, for example, the impact on power pricing is less than $0.25 a megawatt-hour. So when you convert that to power, the impact isn't nearly as great.

Great. Final question for Chris, and I don't know how much of this you want to answer, but obviously, also, a lot has been written about the potential for further consolidation in PJM. You guys have done a remarkably good job notwithstanding the bad overall macroeconomic environment of making the best of your merger with Constellation. Would you try to -- do you think that in Exelon's future, there's further consolidation, given your -- how you've refined your expertise in managing costs and optimizing portfolios?

Greg, we've continually supported further consolidation in the industry not only across PJM where it can be done but in other RTOs also. We have a small group that's constantly looking at value-accretive potentials and will continue to look at that as we go forward.

The next question comes from the line of Dan Eggers. Dan Eggers - Crédit Suisse AG, Research Division: Chris, I guess, just kind of following up at the end of your comments. You kind of talked about the idea that looking at the fleet and rationalizing assets if they don't make sense or you don't see a recovery as you guys expect. How do you frame out the timing of making these kind of decisions relative to kind of the long-standing internal point of view that market conditions are going to recover?

So we think through 2014 into the first part of 2015, we should see the uplift in the market. If we have it wrong, then we -- there's some assets that we'll have to look at for the long-term profitability. And that would be around the timeframe that I think it will be a very serious conversation taking place. Dan Eggers - Crédit Suisse AG, Research Division: [indiscernible] to be about 12 months from now is kind of the time horizon you think that would be the kind of the natural progression you see a recovery?

Yes. Dan Eggers - Crédit Suisse AG, Research Division: Okay. And then, I guess, you guys had talked previously about your freeing up some capital because of the dividend reduction earlier this year, the idea of potentially buying more assets or getting more contracted assets. Could you just share your thinking on, A, what you're seeing in those markets? And B, what are some downward pressure on your -- at the upper end of your open gross margins and ExGen? Is that going to have a bearing on the timing and maybe deploying that capital?

Jack, you want to go [indiscernible]?

Sure. So, Dan, you've heard us speak about the reduction in the dividend gives us between $1 billion and $2 billion of balance sheet space or growth capital that we could use and deploy. As we look at various markets and assets, interestingly, you're seeing, in certain markets, very attractive pricing from an ownership standpoint in ERCOT, and obviously, we're a very major owner that isn't necessarily translating into perceived value into our merchant fleet. In other markets, there've been recent transactions in New England, as well, at attractive values. And as you know, through our Boston Gen acquisition, we are a significant owner in that region as well. There hasn't been a lot. I would say there has been a whole lot of speculation about PJM. There hasn't been any actual assets. And so we'll watch, as will others, as other companies may look to strategically realign to a more regulated footprint.

Next question comes from the line of Steven Fleishman.

First question for Ken. I think, Ken, you mentioned briefly you'll be giving a '16 margin information, and I think you said '16 will be kind of flattish with '15. Is that on an open basis open gross margin?

Steve, I would say, if you look at our hedge disclosure and go down the lines between '15 and '16, we will relatively see flat '15 to '16 in open in several other areas. I would say we have a mark-to-market of hedges in '15 that's $450 million. We have been hedging 2016 and we have positive mark-to-market value at those hedges as well. And I just wanted to make sure you all were thinking about that and we'll go into much more detail at EEI in a couple of weeks.

Okay, but is the flattish more open or could it even be on a hedge margin?

The flattish is open in several areas. On the hedge, there is a lower hedge mark-to-market of hedges in '16 and '15, but it's not drastic. We have positive mark-to-market value, and like I said, I'd like to go through that more detail at EEI.

Okay. And then, Chris, just your comment at the end of the call that the -- your view that the analysts have it wrong with all the recent downgrades. How much -- when you say that, how much of that is the analysts have the kind of power market view wrong versus if the power market stays just as it is, that you can continue to do more to make sure Exelon handles the conditions better? Could you just give a little color where you see people having it wrong?

Yes, I'll start and we'll let Ken continue to fill in the blanks. When we talked about this upside in 2015 with the 22,000 -- 2,200 gigawatts -- 22 gigawatts coming out, there has to be a market rationalization of that, there's a tightening of the stack. We have gone back and the team is in process of modeling assets by asset again in the stack to make sure we have it right. We'll have more details on that at EEI, which -- Ken, do you want to fill in?

Hey, Greg, I think we're making -- I'm sorry, Steve. Steve, we're making a couple of comments there. Chris talked about what we see as upside, and I sound like a broken record when I do this, but I'm going to do it again. In 2013, so far, at NiHub, we're seeing an 8.6 heat rate. We're seeing close to $32 power prices. And then when you look out the curve, you see sub-$31 prices until 2016, with contango in gas and you see heat rates that are a full point lower. We have -- we scrubbed and continue to scrub our modeling of coal retirements. We look at all the announcements and the activity that's going on in the market, whether it's a plants that -- some may think we're retiring and are now being converted to natural gas, whether it's some plants that a lot of people didn't think are retiring that are retiring. And we've actually, given the latest information we've seen on coal plants, we actually are a little more bullish in our analytics about our $2 to $4 upside. We quite frankly have been conservative and has some plants running on coal long term that now have been announced to either being converted to gas, which will take them out of the stack -- take them up the stack and not running nearly as much or actually retiring. So we do think when the spot market rationalizes itself in '15, '16, you're going to see a very different heat rate environment than what the forward markets projecting. I think the other thing is important to realize here is, as Chris said, we're going to be very disciplined and rational about our actions if this is the market. And we're not going to sit on the current market valuations and prices and do nothing about it. So I think that's what we're trying to say. We do think the market will improve. We do think we need to be compensated fairly for the assets and what we provide with our fleet, and we're going to work hard at it.

It's hard to get your head wrapped around an implied valuation for our nuke set of $100 of kWe.

Our next question comes from the line of Julien Dumoulin-Smith.

So first, just in light of the latest transaction, Energy Edison, I'd be curious just to get your views in terms of what that did to the market versus your $2 to $4 expectations, if you could?

Julien, I think I just commented at that at some level, but let me have Joe Nigro dive into that a little more for you.

We take into account all the changes that we see in the generation stack when we run our analytics of our fundamental forecasting. We've seen a number of changes over the quarter with some units that we expected to remain in the generation stack actually retiring, some units that we expected to be refueled no longer going to continue operations. We've seen some of the announcement of what specifically energy plants to do with refueling some of the assets that they'd be acquiring from E&E [ph]. When we take all of that into account, as Ken mentioned a minute ago, we still see that $2 to $4 of upside in the market, when you look at the changes coming to the generation stack between the dispatch cost for the coal that remains, the increased cost when -- for plants that are going to refuel, you're talking about PRB coal trains that are currently dispatching $25 a megawatt-hour and refuel environment that's closer to $40 a megawatt-hour, so that has an uptick energy and then we continue to see that 20-plus gigawatts of coal retirements that we expect in PJM alone. And when you put them all that together, as Ken said, we expect to see the $2 to $4 of upside.

Then as conversely, what do you think about the wind impact perhaps in subsequent years offsetting these retirements?

Yes, we do see -- there's a couple of elements to that. We do see the impact of wind greater and greater especially on some of the plants at the nodal level of generation busbar as far as specific level, but we do factor that all into our modeling in the disclosures that we provide you represent the values of what we expect the plants to receive. At the generation busbar, we take that all into account.

Excellent. And then perhaps this is a more of a -- the high-level, as you think about your disclosures, the non-power margin executed versus to go, just thinking about the to-go side of that. For 2013, you're talking about $400 million executed, $200 million in theory to go. Given where we are in the year, how do you think about achieving that to go piece? Is that sort of in theory something that you achieve more on the spot basis in that sort of a transactional sense? Or is that something that you would -- you still need to sign contracts to get? I'm just trying to understand what you're saying.

Yes, there's a couple of elements to that. The non-power bucket includes our fuels business both on the retail and wholesale side. It includes our services business on the retail side, so that would be energy efficiency, demand response, our BGE HOME business, our solar business and then lastly it includes the results of our proprietary trading book. What I would say is, as noted in the disclosure, the gross up of our services businesses are expensive. It really inflates the amount that remains to go, so the results of these businesses have been reflected on an EBIT basis in our earnings guidance. The gross up of those businesses the way it's reflected is approximately $100 million. So we're in line generally with the expectations that we remain with that non-power to go business. And again it's across the 3 areas I had mentioned, our services business, the seasonality to our fuels business and then finally a higher proprietary trading results.

Julien, just to reiterate those, a large piece of that is run rate business on our services and our natural gas sales that renew themselves on a monthly basis.

Great. And a quick clarification actually on the prior question. When you were referring to taxes in New England, is it that you want to acquire more there or that it's a potential sales opportunity? Sorry, if it wasn't clear.

We're looking at growing the portfolio where it makes sense and we see good returns. Conversely, if we think the market's right and it's a good time to harvest capital, we would also sell assets.

And Julien, some of the reference that's similar to the Continental Wind financing, there are opportunities that we can look at within certain of our parts of our fleet that could be considered noncore to look at structured finance opportunities as another means of extracting value. So ERCOT, New England and then our hydro assets would be areas where we might consider pursuing that activity, as well as incremental financing at the Continental holding company level.

So project finance at the thermal -- some of the thermal assets?

Correct.

Our next question comes from the line of Jonathan Arnold.

I just want to revisit the last question that Julien had there. On taxes, I think you talked about sort of disconnect between asset values and some expectations in the markets, something like that? And are you -- can you comment on recent changes and expectations around market structure and are you more inclined to be a buyer or a seller in that market?

We would like to be more of a buyer in the ERCOT market where we see the market rules going. The most recent assets that have traded have been slightly above a value that we would put on them, so we'll still participate. Nothing I've seen yet would say it's time to liquidate. We think there's upside to that market, so there's upside to those asset valuations for the ones we have. And we'll continue to participate as things come to the market. But other entities have placed a slightly higher value on than we can see getting out of.

Okay, that's great. And then can I just on the kind of wind question in the Midwest, this is Ken or Joe, is there a way of giving us a sense, you see that forward curve, but obviously, it's made up of expectations around hourly pricing. As you look out into 2014, '15 and '16, how much of an impact does sort of incremental hours of potentially negative pricing have on the sort of aggregate calendar year strip that we look at. Is there any help you can give us on that?

Yes, we've seen negative prices at some of our nuclear plants up to call it 15% of the hours. When we look at the modeling that we do, we see that there's constraints on the system and congestions. We take that into account when we're building the value of the disclosure up from the bottoms up, I would call it. So we're not marking the generators to a NiHub price. We're marking the generators to a busbar price that has an expectation of what the congestion in marginal losses will look like at each of those plants for each of the years, and that included in that is the expectation of what the wind development will be in that time period and the impact that it has.

So is there -- are you saying that you'll have more wind but more infrastructure and it's kind of a wash?

Yes, we continue to grow the wind development in the Midwest, and we continue to see degradation in the basis value of some of our plants. And that degradation is reflected in the buildup of our disclosure. We do expect as you get out past the period that we've disclosed with some transmission changes, you could see possible improvement but that's not reflected in this current disclosure. This current disclosure reflects the degradation that we've seen.

So is that 15%, is that specific to sort of like history and it's going to get worse from there or is that what you're expecting it to become.

Well, let me bring it up and summarize. I think I'll have Joe Dominguez talk about the project when we've got in the short term to mitigate it. So what we've taken in the model is the most conservative with the RPS standards as the state's being fully met. Then we have that with a lot of inflow coming from MISO into the system and the negative impacts of the worst-case scenario of meeting the full RPS standard is in the model. So that's -- we're not betting on something better to happen with that. But in the meantime, Joe, why don't you cover the project that you have in place there?

Sure. And just as Joe said, we're seeing 14% to 15% of off-peak hours at our facility that is most exposed to the problem. It is not a problem that we face at every one of our nuclear units. In fact, the problem really exists where you would imagine if we're geographically more located to where the wind is coming across the seam. We have been working, I think, this has been reported in the press and by some of you we've been working with PJM to wrap our nuclear assets down at night when we're seeing a negative pricing of vendor when PJM is saying a negative pricing. We work with PJM to market monitor to formulate a program that allows us to start doing that on a pilot basis. We've experienced first couple evolutions of that. It is difficult for us to capture all of these events because the events are ultimately as unpredictable as the wind itself. But that's 1 method that we're working through. The other thing that we've accomplished is some rule changes in MISO where the intermittent resources now have to have a price bid into the system, which will allow for their dispatchability. We've seen some improvement in negative pricing events really as a function of that rule change. I think as Joe indicated, this problem is very much acquired at the transmission constraints at this plant space stage. So as very different plants get the benefit of transmission expansion programs and other transmission work that is occurring in Illinois, it wouldn't necessarily be the case that the problem is going to increase, for example, from 14% to something greater in the off-peak hours. It is, however, an issue and it's an issue that has driven us to take position on introduction tax credit and other incentive programs that are distorting the market and that really explains the company's position over the last couple of years. When Chris talked about the ongoing policy work is going to continue to evolve across all of these areas, the subsidy work, as well as the regulatory response to the subsidies so that we can try to clear up this problem as best we can.

Can you quantify the offsets?

Well, I don't think so yet. But I think it's fair to say that, for example, the plant that we experienced the 14% impact in 2012, that impact is significantly less, I'm going to call it 4% to 6% lower in '13 as a result of some transmission expansion. We'll see how the market reacts to this. It's hard for me to differentiate between the dispatchable intermittent resource rule that was accomplished in and the transmission work but I think we can marginally improve it. That said, it's a continuing problem.

Our next question comes from Hugh Wynne. Hugh Wynne - Sanford C. Bernstein & Co., LLC., Research Division: I wonder if you might comment on the demand assumptions that underpin your outlook for the power market recovery. And in particular, what are your expectations for energy efficiency gains. Just looking at Page 19 of your slide deck, it seems like we've seen declines in power demand across the regulated utilities system. So that's the first question. And the second question is what are your assumptions for the shape of the load going forward? And in particular, will there be a flattening of demand as demand response gets bid into the energy market in PJM?

Hugh, it's Joe. A couple of things. From a demand perspective, we forecast about 0.8% load growth in our $2 to $4 modeling across the PJM footprint. So historically, you've seen a conversion rate of, call it, 0.6% to 1% -- of 1% versus a 1% change in GDP. We're down to about 0.3% conversion and it's on the back of what you're talking about energy efficiency and demand response. In addition to that, we've run a sensitivity that if we were flat over the 5-year horizon with 0 load growth, the impact to that $2 to $4 is about $1 of megawatt-hour, just to give you some frame of reference of what the load growth value represents. I think to your question on the shape of the load flattening, I think it's safe to say we have seen that already, given the fact that we have seen substantial amount of demand response. And we have seen the impact of energy efficiency. I think the element that I would add though in our $2 to $4 of modeling, we don't include any upside associated with the rule changes in PJM as it relates to demand response bidding into the energy market. For frame of reference, we saw a couple of times this summer, we're the first energy market went to $1,800 a megawatt-hour in the back of demand response bidding. And I think just as importantly from the Exelon perspective in September during the heat wave given some generation outages and transmission outages, they implemented about 6,000 megawatts demand response that if you're bidding in the energy market would have a price associated with it that would've made to telling people it's very different that it actually did. So yes, it does flatten the load but I think there is an ancillary benefit when you think about what price that demand response we'll be bidding at and it can set the locational marginal price.

Our next question comes from the line of Stephen Byrd.

Most of my questions have been addressed but wanted to just go back to the retail business a bit, and Ken, I think you said that the margin outlook is unchanged. I wondered if you might be able to talk this a little bit about just competitive dynamics in the business, any trends you're seeing in terms of degree of competition or changes in the business over time?

It's Joe Nigro. Our retail business, the market environment overall still remains extremely competitive, and it's extremely competitive both on the commercial and industrial side and on the mass market side. What I would say to you is we've seen some stabilizing effect on our margins, meaning we've talked to you that our margins on the C&I side for power have been sub-$2, and they remain so, but they've stabilized slightly below that. And our expectation in our plan as we look at next year is not to see much improvement in that area. We have seen consolidation with what went on with the [indiscernible] with the direct energy process of buying but the market is still highly competitive.

Okay, and just hitting on the heat rate outlook, you had spent quite a bit of time on the Midwest as you look at PJM East and West, what's your general view from where we stand now in terms of the heat rate outlook in the East and West?

But I think Ken mentioned this earlier. We still hold a view of $2 to $4 of upside and the $2 when we're reflected is on the West -- on the eastern side of PJM, excuse me, and it's driven -- really, when you look at the changing composition of the dispatch stack in the locational margin price model, there are still hours that the eastern unit benefit from that change of the dispatch stack. So we have seen a degradation and basis as we talk about the gas basis -- gas that market basis is reflected in our analytical modeling and we're using those prices and with all that we do see the $2 of upside expected in the Mid-Atlantic.

Our next question comes from the line of Brian Chin.

Just a point of clarification on the gross margin comment earlier. When you said that the gross margin generally is unchanged year-over-year in '16, were you referring to only the open gross margin row or were you talking about the total gross margin, the $7.6 billion?

Brian, the open gross margin's unchanged. Most of our disclosure lines like our new business, non-power margins, those elements are largely going to be unchanged. We are hedging so we do have positive value in the mark-to-market of hedges. We will disclose exactly what that is in a couple of weeks. So I was referring to a similar 2015 to '16 outlook except for that we have had less hedging so somewhat less of mark-to-market hedge value.

Okay, great. And then just as a reminder, the open gross margin includes capacity revenues so the drop in '16 capacity revenues is obviously being offset by something else in your open gross margin comment?

That's correct.

Okay, great. And then my second follow-up question, we've seen other competitors out there where they've used a yield curve structure to tap a lower cost of equity for consolidation purposes. Can you just comment a little bit on to what extent does that present either challenges or opportunities for you and how you think consolidation can progress as far as Exelon is concerned?

So Brian, this is Jack. Where you've seen the YieldCo [ph] particularly at NRG have success, they really have a shareholder base that values those shares on the basis of exposure, the power markets and on an EBITDA-multiple basis. They had a modest dividend but they had an opportunity to carve off assets into a yield-oriented vehicle to optimize that. I think people own us for both our upside to power markets but also our dividend. And certainly, our renewables assets and the contracted nature of them as it factors into our ability to pay a dividend and drive value and reduced volatility in the earnings profile of the company, we think create value. That said, we do look at many structures, and we certainly have assets that align to those types of structures. And to the extent that there are -- that the price of capital for those structures and the need to acquire assets drives the markets higher, then the implied value of our renewables fleet should improve along with that.

Does the renewables fleet that you own now more merit a closer look towards a yield curve structures so that way, you can compete on a similar cost of equity footing?

I think it has us look at more of project financing for the credit quality that it gives us and then bringing that cash back in for investment.

And the reality is, Brian, as you know, we can tap many markets to secure capital to grow our business. And if you think about who the investors are in those yield-oriented names, whether they're pension funds or insurance companies or other elements, we're capping similar capital, as Chris mentioned, through the project financing side. We could, through other means, secure capital as well from those entities at a lower cost of capital. And there are opportunities in a nonpublic vehicle to form relationships with entities to benefit from that lower cost of capital. So rest assured, we're looking at any and always optimize the cost of capital for our company as we look to deploy capital for growth and the implied yield or cost of capital on certain of those YieldCo is not lost on us.

Our final question comes from the line of Shahriar Pourreza.

Most of my questions were answered. Chris, in your prepared remarks, you mentioned that your cash flow outlook puts you in a position to make potential acquisitions in the space. Does your cash flow outlook also assume a scenario where EDF may put the nuclear assets to you as early as 2016? And what could potentially be a pretty challenging [indiscernible] environment? And I have a follow-up.

We do stress the balance sheet for any potential commitments that have to be made. If you look in the disclosure, we have the like-kind-exchange issue in the out years that where we feel that we're going to prevail on, but there was a probability shift and we had to put that in the disclosure. And we stressed the balance sheet to make that commitment before we agreed to the EDF potential point, we made sure that, that was stressed. So we are very comfortable where we're at right now with the balance sheet.

And remember there's -- as part of that contract, there's a baseball arbitrage type of valuation approach. So to the extent where the challenge course spread market, then that should show up in the implied value of those assets, thereby reducing the put value.

And then let me -- just one more question is under an assumption that the power price or heat rate recovery doesn't materialize and you find yourself in a scenario where you're rationalizing your fleet, a couple of the assets in those put options could also face cash flow challenges. I'm kind of curious on how the change in outlook could impact that transaction? Do you have like a clause where you can back out of the transaction or is it essentially the flexibility is going to come where the economic value of the assets are?

Yes, that's where the flexibility comes. If they're negative MPV and the negative cash flow would be in the valuation and so they're really not worth anything on the baseball arbitration. So we don't feel stressed over the deal. We think the upside we're getting from driving the synergies the cost savings out of it is the real focus of this.

Thank you, operator. That ends the call.

Thank you, ladies and gentlemen. That does conclude today's conference call. You may now disconnect.