艾索倫電力 (EXC) 2001 Q1 法說會逐字稿

Good afternoon, and thank-you for standing by. All participants will be able to listen only until the question and answer session of the conference. This conference is being recorded today at the request of Constellation Energy Group. If you have any objections, you may disconnect at this time. I would like to introduce your host for today's call Mr. Christian Poindexter. Sir you may begin.

Thank-you. Good afternoon everybody. I'm Chris Poindexter, Chairman of the Board and CEO of Constellation Energy Group. Along with me here in Baltimore are Ed Crooke, who's the Vice Chairman of Constellation Energy Group; Chuck Shivery and Eric Grubman, our Co-Presidents; Dave Brune, our Chief Financial Officer; John [_______________] Managing Director in Financial at Constellation Power Source; and Kevin Miller, Manager Financial Planning at Constellation Energy Group. We just had our shareholders meeting this morning, and thank-you for joining us this afternoon as we talk about the results for the first quarter of 2001. I hope you did have an opportunity to review our press release and all the accompanying financial details. If you don't have access to these items yet, you can get them on our website www.constellationenergy.com. Before we get started, let me remind you that during this conference call we will make various forward-looking statements within the meaning of the Securities Exchange Act of 1934. As you know, these forward-looking statements are not guarantees of our future performance and are subject to various risk factors. So please refer to the text of our press release today and our early Forex filings made with the SEC for the details of those risk factors. During today's call, Dave Brune is going to first provide a brief recap of our first quarter 2001 earnings performance as outlined in our press release. I'll then update you on our exposure in California and how it affects us going forward. Then I'll review our current outlook for the second quarter of 2001 and for the full year. After that, we'll open up the phone lines for questions. Now Dave Brune will get us started by reviewing the first quarter earnings.

Thank-you Chris, and good afternoon everyone. In reviewing our earnings figures, I'll be referring to our operating earnings. That means I'm excluding the ¢2 nonrecurring charge in the first quarter of 2000 for our early retirement program, as well as the positive ¢6 impact in this year's first quarter from implementing statement of financial accounting standards No.133 which is accounting for derivative instruments and hedging activities. Please refer to the earnings press release and the accompanying notes for the financial information for the details on these one-time items. Operating earnings for the first quarter 2001 came in at ¢68 per share, a 36% increase from Constellation's operating earnings of ¢50 per share in the first quarter of 2000. The primary driver of this increase in the first quarter results was the ¢15 improvement from reduced depreciation and amortization expense. Many of you are familiar with the accounting and rate-making changes that were implemented as part of electric deregulation in Maryland. But I'll spend just a few moments now to explain these items to those who may not be aware of its impact. To prepare for the deregulation of BGE's generating plant on July 1, 2000, we temporarily increased BGE's depreciation and amortization expense by $150 million over a 12-month period starting July 1, 1999, through June 30, 2000. This increased depreciation was part of the deregulation settlement agreement that was approved by the Maryland Public Service Commission in 1999. This temporary depreciation reduced quarterly earnings by approximately ¢15 per share for each of the four quarters beginning with the third quarter of 1999, up through and including the second quarter of 2000. Since that temporary depreciation has been completed, this year's first quarter reflects a ¢15 rebound in Constellation's earnings. Our first quarter results also reflect a ¢5 increase in the earnings contribution of BGE's gas distribution business, as compared to last year's first quarter. A small portion of this increase, about ¢1, stems from the gas rate increase that became effective in June 2000. But a large portion of this increase in the quarterly earnings contribution of the gas business is related to slight timing differences in revenues and expense recognition from last year's results that will largely reverse themselves over the remainder of 2001. One negative item for the quarter was the residential rate cut that took effect on July 1, 2000, as part of the electric deregulation plan. This lowered the first quarter by more than ¢2 per share. Other items in the quarter largely offset one another. In sum, we had a good quarter that pretty much matched up with our expectations. We're achieving good earnings growth, and we see additional earnings growth for the remainder of the year. I'll turn the floor back over to Chris Poindexter now to talk about our strategy and how it will fuel our future earnings growth.

Thanks Dave. Over the last three quarters, we've seen a dramatic shift in the earnings makeup of Constellation Energy Group. We have one more quarter to go before this transition is fully reflected in our trailing 12-month results. This will be followed by a third quarter that we think will deliver some powerful earnings. Our domestic merchant energy business now produces most of our annual earnings, and this segment will fuel much of our earnings growth going forward. This growth is one of the reasons that we announced in October of last year that we would create two separate publicly traded companies. We're on track to complete this separation during the third quarter or early in the fourth quarter after we receive the final IRS approval of our Private Letter Ruling request and the other regulatory approvals. Before I deal with the specifics of our involvement in California, I'll reiterate our company in Maryland is in a vastly different and much better position than California. The Mid-Atlantic region is benefiting from a strong and diverse supply of power and solid reserve margins. I continue to applaud Maryland's leaders for deciding early on to give electric deregulation rights the first time, and they implemented a thoughtful and well-reasoned plan for deregulation. As far as California is concerned, Constellation Energy Group is a relatively small participant in that market currently. Our credit exposure to the California utilities is significantly less than most of the California market participants. We sell about 142 MW of power to California utilities under long-term contracts. Our California receivables have been around $45 million in total. We're selling [_______________] in Pacific Gas and Electric representing the vast majority of the receivable balances. We expect that our receivable balance is topped out at this point. That's because we are being paid on a current basis right now. However, we've been taking reserves against the receivables for our sales in California during 2000 and 2001, and we believe these reserves adequately reflect what we will ultimately collect. Our reserves have hair-cut these gross receivables to reflect that we may ultimately collect only ¢70-75 on the dollar. While the bankruptcy filing by PG&E may prolong, the recovery process for the power has already been delivered under our long-term contracts with them. The bankruptcy filing should create more certainty about collections for future deliveries of electricity in California. We still think the California market has attractive fundamentals once we get through some of the current market volatility and political wrangling. That's why we announced last month that we would be going ahead with our 750 MW High Desert Project in Victorville, California. High Desert should be completed in mid 2003. We have a long-term contract with the California Department of Water Resources that provides us with a stable revenue stream. In fact, we started delivering 200 MW of power under this contract to the DWR earlier this month from some of our other supply sources in California. Deliveries of power under this contract will increase to approximately 800 MW when High Desert begins commercial operation in 2003. High Desert is just one example of our ongoing development efforts that support the expansion of our domestic merchant energy business. For the summer of 2001, we are adding 1100 MW of gas-fired peaking capacity in the East and Midwest, but we still expect to close on the acquisition of 1550 MW in the Nine Mile Point nuclear facility in New York around July the 1st of this year. We have three other large projects that we previously announced that are on schedule for commercial operations in 2002, and we have several other projects that we are currently evaluating as future development opportunities, and we are constantly increasing our contractual control of electric generation facilities throughout the United States. As I had noted, sometime in the third quarter or early fourth quarter of this year, we will separate our merchant energy business, which includes wholesale generation and power marketing from our retail services business. This step will further enhance our growth opportunities by creating two standalone publicly traded companies. The merchant energy business will maintain the Constellation Energy Group name. BGE Corp. will be the new parent company for Baltimore Gas and Electric Company, Maryland's largest utility in the non-regulated energy businesses, now serving retail customers throughout the Mid-Atlantic region. Before I open the phones to questions, I'll briefly comment on our outlook for 2001 earnings. We still believe that a reasonable range for 2001 earnings per share, on a total company basis is between $3 and $3.10. We also still expect more than two-thirds of the total earnings should come from the domestic merchant energy business with the remainder coming from BGE and the other businesses that will comprise the new BGE Corp. This full year earnings growth is based on several factors. We expect to see growth in the earnings contribution of the domestic merchant energy business as a result of a return to more normal weather conditions in December of 2001 in our Mid-Atlantic region and improving geographic diversity of our generation portfolio. The addition of the new gas-fired facilities and the Nine Mile Point nuclear plant will also contribute to our growth, particularly in the third quarter of this year. We also have one more quarter in 2001, the second quarter, where our earnings will benefit from the decrease in annual depreciation and amortization that kicked in when we completed the $150 million temporary increase that was part of our transition to deregulation in Maryland that David talked about a few minutes ago. As far as the second quarter is concerned, we expect earnings per share for this year's second quarter to be in the range of ¢42-¢47. That compares to the second quarter results of ¢37 per share for 2000. The decrease in depreciation and amortization expense will increase second quarter earnings by approximately ¢15 a share. We also expect to see growth in the earnings contribution of our merchant energy segment in the second quarter. However, these benefits will be partially offset in the second quarter by several items including the residential rate reduction, which we estimate to be about ¢4 on the negative side, the elimination of deferred fuel accounting for electric generating asset that were previously owned by PG&E, that's about a negative ¢2, and some of the initial startup costs for the 1100 MW of peaking capacity due to come online this summer. Weather also plays a part in our second quarter earnings expectations. Last year in 2000, May was very hot, and this increased BGE's electric demand above normal levels. We measure hot weather by cooling degree days, and we had 263 cooling degree days in the BGE service territory in the second quarter of 2000, about 16% higher than the normal level of 227 cooling degree days. This hot weather helped boost last year's second quarter results of about ¢3-¢4 a share. We expect to return to more normal weather conditions during this year, which makes for a tough comparison the last year. One last item before we move onto questions and answers. As you know, Constellation Energy Group issued $12 million new common shares in late March. This happened late enough in the first quarter and had no impact on our results for the quarter, but all of our earnings expectations for 2001 reflect the impact of the increased shares outstanding as a result of this new issuance. That completes my opening remarks, and at this time, we'll open up the phone lines for questions.

Thank-you sir. At this time, we are ready to begin the question and answer session. If you would like to ask a question, please press '*1'. You will be announced prior to asking your question. If you would like to withdraw your question, please press '*2'. Once again, to ask a question, please press '*1', and our first question comes from Will Maze from Banc of America. Sir you may ask your question.

Yes, good afternoon guys.

Hi Will.

Just wanted to ask you very quickly, if you could give us an update on the merchant energy business? If you could sort of give us a little bit more color on the pace that it is operating at? What the outlook is for this summer? Also, when you, coming back to the generation portfolio, the legacy generation portfolio, I'm wondering where do you stand on cost cutting measures there and also on your customer attrition rate. Have you seen what sort of portion of your load has switched at this point?

Okay, I'm going to let Chuck respond to the first part of your question Will.

Hi Will. I think Chris alluded to it in his first remarks, but if you look at just the momentum of the business growing, we've got four plants coming on. I guess, the initial units start coming on in May, and they go through June and July. That'll be on this year. They were not on last year. So that's the momentum moving forward, and of course, we have the other four plants that are under construction, that will be coming on over the next couple of years. So from the standpoint of the momentum of the business going forward, you're going to continue to see that. We think improved earnings around that will be deal flow associated with not only the power plants, but since they are in strategic areas, we expect to capture some structured deals with the load side of various entities in those areas. We are seeing that and working on a number of those right now. So I think from a momentum standpoint, you can say the momentum is really in pretty good shape.

And then if you could just, how was the deal flow in this quarter relative to maybe a year ago, and what's your expectations for the second quarter?

Well, it was kind of in line with our expectations for the first quarter. We have a fairly significant backlog of deals that we're working on. I think they'll be in line with the expectations that we have and with the guidance that Chris just gave you for second quarter. But as you know, a lot of these have timeframes that, due to a variety of things, can come on one month versus the next month, so it tends to be a little lumpy. We've talked with you about that in the past, but as we look at the backlog of the deals that we're looking at, we're pretty comfortable with what's going on right now.

Second piece of your question, Will, had to do with cost cutting. We're still in a period of the normal plant outages in the power plants. We got Calvert Cliffs number two down for refueling. It's coming back next week, and we've had an outage season as planned in several of our fossil plants. So thus far, we've not seen much impact of cost cutting measures that we've been taking, but I think that going forward you can expect to see that. In terms of the attrition of customers, my recollection is that we've had something like 34 MW worth of load lead which is 0.5% of the load, and that's primarily on the commercial side. We have very few residential customers, although all of them have an opportunity to switch.

Will, this is Chuck again. This isn't exactly on point with respect to cost cutting, but one of the things that we did was to go back and benchmark the O&Ms, the total O&M cost, as well as the staffing of all the new plants that we are bringing on, and you'll probably have a little bit higher operating cost in people just because of the startup, and you like to have a few more bodies around when we start the plants up, but based on the outside consultants that we use, those plants are in the top quartile to the top decile in terms of their O&M cost structure.

Okay thanks guys and good luck.

Thank-you.

Our next question comes from Greg Gordon. Sir you may ask your question.

Thanks. I've actually got a couple. Hi guys.

Hi Greg.

Talking about weather in Q2, you actually answered my question on Q2 earnings, but going forward to Q3, can you give us a recap of what type of weather you experienced in the third quarter last year, relative to what forecasts are for this summer and what the forward curve is indicating people are expecting this summer? And wrap into that a discussion of what your operating performance is on the generating fleet, of whether you expect it to be better or worse than last summer in order to take advantage of any opportunities you may find.

Okay. I'm looking at Kevin who is the walking encyclopedia, as you know, of all those kind of facts.

Greg, as far as the weather is concerned, in last year's third quarter we laid out that we were definitely hurt by very, very mild weather both in terms of volumes and in terms of price. While the weather was very hot in May, that pretty much quickly dissipated, and we saw a very, very mild July and August. We estimated, at that time, that between the distribution business and the generation business that about a ¢20 impact, negative versus normal. Again, a function of lower retail demand and therefore less distribution throughput, as well as very, very depressed on-peak and off-peak prices in the PJM wholesale market that we don't expect to recur any time soon. I think looking forward all of our projections are based on normal weather. There are some preliminary meteorologist reports that are saying things will be hotter than normal, and to the extent that happens, we wind up seeing increased pressure on prices. If we're able to capture some of that in the marketing business, it could be some upside in third quarter, but it's not something that's based into our numbers right now. We do expect at least sort of a ¢20 rebound based on return to normal weather. But we're not reflecting any improved earnings as a result of hot weather projections. And then in terms of the planned performance, I think maybe Chuck might be able to deal with last summer. I think in a nutshell, we were ready, willing, and able to deliver, but there was just not much demand there.

Greg, let me put a little more specificity around your question about costs. We would typically see, if you look at the forward market, on-peak prices in the $100-125 of megawatt-hour range in July and August in PJM, and what we actually saw on a realized basis were prices that were closer to about 40 during July and August next year.

Last year.

Last year. The anticipation this year is that July and August will be normal, and if you look at the forward market right now, they're back up over $100 for on-peak power for July and August in PJM. In terms of the plants, our expectation is those plants will be able to perform as expected during that hot weather. Clearly, we've spent a lot of time making sure that the people at all the plants understand what really drives revenue in this organization, and they appreciate that there really is not much else that's as important as those large power plants running, and running at the expected pro forma level, when prices are high and it's hot during July and August.

We have Nine Mile this year which we haven't dealt with in a summer before, but at Calvert Cliffs in the summer of 2000, we set an all time performance record, so you just can't squeeze anymore blood out of that than what we got last year, but we hope we can repeat it this year.

Right and one last question. I know you did talk at length about what's going on in California, relative to your situation with credit. Can you talk about the performance of the QFs on a going-forward basis, relative to previous expectations? For a lot of years you guys got penalized in the equity market for this, supposed QF cliff, that was common in California. Now it looks like that QF cliff, instead is a nice QF mountain in the other direction. Can you discuss what type of pricing you guys expected when you initially projected that QF cliff, and what type of pricing you're seeing now?

John [_______________] will follow on.

Greg, as you know, that the cliff pricing, when we fell off the cliff last year probably on the last plant, which was our ace plant in California, was a $150 of megawatt-hour. Prices we were seeing in the market prior to some of the legislative actions that has been taken actually by the CPUC in California was well above those levels. However, California and most of those things were index price contracts under something called the short run avoiding costs methodology. The CPUC has changed that formula to really take out some of this as the real potential upside that has drifted, if you actually have the free market prices that exist out west. So I think that from our perspective our numbers for this year, $3 and $3. 10, are pretty consistent with the prices that we're seeing out in California, and I believe for the month of March or April too, I think that the estimated price is somewhere around $70 of megawatt-hour, as they adjusted the gas price flow, and how they calculated the formula there.

Okay, thanks guys.

You're welcome.

Amy Chang from Epsilon Investment Management, you may ask your question.

Yes, hi. Good afternoon. I have a couple of questions. One is regarding the spin off in Q3. What other approvals do you need to get other than IRS and FERC?

We need an approval from the Nuclear Regulatory Commission, and then we're in the middle of a proceeding with the Maryland Public Service Commission. We don't interpret the law to say that we have to get their approval, but in order to maintain good relations with them, I went to them the day after the announcement and have been in constant dialogue with them since. And so they have opened a specific proceeding, they'll call us to look into our separation plan, and they've asked for a lot of information to be filed with them, and we're going to do that come May 9. So we don't expect them to beat a critical path. We still expect that to be the IRS Private Letter Ruling, and then right after we get that, or right before, I guess, we think we have a pretty good handle on what they're going to say, we'll file our documents with the SEC, called the Form S10 and that will go effective in 60 days. So that's how things are shaping up, and unfortunately, we don't get from the internal revenue services that says here we're going to give you an answer on a specific date.

I see. Thank-you. But you expect to be like, earliest like the end of third quarter, but maybe beginning of fourth quarter?

What I told the shareholders this morning, we fully expect it to happen this year.

Okay.

So it's hard to nail it down.

Okay, great. Thank-you. I have another question. First quarter, ¢30 is from domestic merchant energy and that's about ¢17 improvement from last year. Does that ¢17 include the ¢15 of D&A, so the actual growth is only ¢2?

The quick answer to that is, no it doesn't. The way that the tiers were broken down, beginning July of last year, between a separate and distinct distribution tier versus a generation tier, means that the depreciation impacts are actually spread between those business units. It's not a clean cut. But over time, as you get through an entire year and you break out some of these seasonal fluctuations in the billing methodologies, those tiers still exist for BGE, you will see those earnings materializing in merchant energy, but it doesn't happen in that full quantity in each quarter. It did not happen in that full quantity in this quarter.

I see. So what will be the real earnings growth then?

The merchant energy business, we've laid out a 20% earnings growth projection on that business on a normalized basis. Again, the problem is that when we look at the first quarter of 2000, and likewise the second quarter of 2000, those are not comparable quarters because of the revenues being allocated in a very different fashion between those businesses and the expense recognition being different under today's gas accounting without the overlay of regulatory accounting. So that the awkward part of all this is that you won't really have a good base period to project from, until you get to the 12 months ended June, and as a fact of the matter, even that 12-month trailing number has its weaknesses, because we have a very average third quarter in that period, so that the best framework or benchmark will wind up being the 12 months ended September. At that point, you will see that all of that ¢30 improvement in earnings, that will happen, really happened in the merchant energy side. What's left at the distribution tier is what's sufficient to cover its cost of doing business, and that depreciation was not taken on distribution assets, it was taken on generation assets. It's just that the distribution revenues were not granted in pro-rata fashion over those quarters, the way that depreciation was taken.

I see. So is it safe to assume maybe normalized growth will be like 20-25%?

Yes. That was our guidance in terms of merchant energy. That is where we expect...

You're hitting that target?

Yes.

Right. And so, I guess, that also explains why just looking first quarter, your merchant energy is only 44% of the total earnings, but throughout the year, as we get to more comfortable quarters, have, let the whole year play out, it will be like more than two thirds, right?

Well, one of the things in the first quarter, that's the big quarter for the utility business.

I see. Okay. Great. Thank-you.

Bob Decker from Harris Investment Management, you ask your question please.

Yeah, I've got about three basic questions, maybe you can just go through one at a time. Could you layout your capex numbers for both merchant and the regulated businesses for 2001 and 2002.

Yes. This year's number for merchant energy business is relatively high, because we're in the process of acquiring the Nine Mile point asset. So the number's about $1.4 billion in merchant energy, capital expenditures. The figure for 2002 is projected to be about $1 billion, as we get into 2003 and some of these more expensive projects come online, it could be as high as $1.8 billion. Utility capital expenditures is pretty consistent over that timeframe, in the neighborhood of around, it was about 255-260 this year, and the next couple of years 2002 should be between about 245-250 million per year. And that business Baltimore Gas & Electric has pretty much funds that entire capital needs through internally generated funds. The merchant energy side given that the capital program is pretty expensive over the next few years does need to be going to the capital markets on a ongoing basis and that's part of the reason for that equity offering we did again in March.

Okay. What do you see in terms of average megawatt capacity growth in the Merchant business, I mean you have you got some of the schedule from the information you lay out as to when thing's come on, but you have something like a average growth rate for your installed capacity over the next couple of years?

We look at it from a perspective of both ownership and control. We have laid out a target to get to 30,000 megawatts based on that's what we believe will support our wholesale business as we get up to the year 2005. On an annual basis that works out to something that is in the high 28-29% compound annual growth from where we are right now. We are certainly on a track to meet or exceed that this year with the Nine Mile Point with 1100 megawatts peaking capacity and some capacity that we are controlling under contract going for the exact split all the way through 2005 what's controlled versus what's owned will depend on market opportunities. But as we say in the addition to the four plants that are under construction for this year and nearing completion, we have got four more that are firm and construction is begun and quite a few others in the pipeline.

The other thing you have to remember about adding new plants or adding additional plants is if you acquire like we did at the Nine Mile point its pretty lumpy so...

Right.

1550 megawatts coming on in a step change.

So the capex number you just gave on Merchant energy that would include both acquisitions and billing or this is just going to be a bill plan and the acquisitions will be more opportunistic?

At this point, for instance, the Nine Mile Point is in there. That is what we expect those from construction and an acquisition perspective. Of course, conditions could change, and we might do more of one and less as another but at this point in time that's what we believe. But we believe, pretty consistently we will be above $1 billion in this next couple or few years.

Okay. So how do we both build and buy and mix or whatever you see the opportunities being there?

Yes.

Okay. All right. Thanks I got them all.

Thanks.

Jay Dobson from Deutsche Banc, you may ask your question.

Hi, good afternoon.

Hello Jay.

Chris, I was wondering if either Eric or Chuck could talk a little bit about margins in the business? I know you all don't like to talk very much about this, but obviously, just staring at the quarters you had the transfer of the generation last year, so I am wondering if maybe in just sort of qualitative terms you could discuss sort of the margins in just the sort of trading business and sort of structured business? Again, not in pure terms, but sort of they continue to improve or they are deteriorating, so that we can sort of separate that form perhaps the margins from the generating assets, which were transferred.

The first to speak will be Eric.

Jay, first of all hello, I think the way what we have seen with margins is that they are highly varied and I think that that is to be expected with the difference in volatility between the markets as the various domestic markets if you will. If you are asking specifically for example not from an American standpoint, but qualitatively looking forward what do we believe is going to happen and how are we going to deal with it. I think in markets that are short and expecting to be short for a while, the trend continues to be pretty flat margins, on the other side trying to take the short side it seems like the margins are pretty thin. The way we are looking at it, however, is not to be in all things in all markets. We are trying to have a very heavy discipline upon our cost of capital. And then looking at the margins of any particular trade or any particular structured opportunity as it relates to our assets or asset that we expect to build or control, and trying to make sure that we build in a margin of profitability on things that we can believe that we can project and control, which is adequate and attractive. I think, and this goes back to the question that previous speaker had asked, I think, therefore, what you should expect is that while we will continue in a capital expenditure mode, and it may be on the order of $1 billion a year, the way we think about is net capital and in some markets we are going to take capital out where we see margins deteriorating or opportunities deteriorating and another markets we re going to direct additional capital. So all in all, I think it's very hard to say that there has been a consistent trend domestically. I think in individual markets, the trend has been widening in some, narrowing in the others, and I would say right now the outlook in the particular markets where it has been getting wide, i.e., in California, I don't think we see that changing over the course of the next couple of years.

Well two followups on that, if you were to just look at Q1 this year versus Q1 last year sort of comparably it would be fair to say, number one, that you had fatter margin there or bigger margins on a comparable basis again excluding generation. And then looking forward you said still fat margins I think was the word or verbage you used, is that to suggest were at least as you can predict them or expect them, you don't see margins getting a lot better from here?

I think that first of all in regard of your first followup, that the margins have been generally about the same. Bear in mind our business, our base has gotten a lot bigger on a quarter-over-quarter basis.

Sure.

And in regard of that, if the entire market were represented by a bell curve of margins, if your business gets a lot bigger, probably you are going to take on that bigger part of that bell curve i.e., your overall margins are probably going to get a little bit narrower. But in regard of going forward, I think what we would say regarding our looking through the crystal ball, is that margins are going to be varied within the different markets. They are going to be highly varied and they are probably going to be more co-related to reserve margins in the area we co-related than anything else. That includes the margins on particular assets; the margins on particular trade or structures trade in the shorter markets have fatter margins. I can't be any more scientific than that, but I think that probably follows a trend that you see in the electric commodity markets, the gas commodity markets, and a whole slew of others historically.

Great. Thanks very much.

Mr. Paul [_______________] from McDonald's Investment, you may ask your question.

I was wondering, I have three quick questions, if you have any O&M targets for the year. Secondly given your considerable capital needs for the Merchant business, whether you have looked at what PPL has done and whether that is applicable at all or possible before the spin, and lastly just an update on Latin America?

Dave you want to talk about the O&M.

Yeah, we do have O&M targets, and they are not as we mentioned earlier, in bringing the new plants online is taking more people rather than less. Our goal is to bring those plants online without increasing O&M overall in the company.

Flat O&M year-over-year?

I would say right now flat O&M year-over-year.

Okay.

Well I can, this is Eric Grubman, I can field the, a little bit of the second question regarding that PPL financing. That is a fascinating financing, in my opinion, and I believe it is in all likely that a potential trend for the future and essentially what I mean by that is I think you can split the cash flows from power plants into different components, and probably direct them at different markets. But in regard to that part of your question asking whether that something that you all might be likely to see from us on a precedent basis, the answer to that is, I don't think so. We have two major areas of complexity that we have got to deal with at the highest priority before we can spin. The first is that we have to allocate the overall debt to the different sides of the business in a way which doesn't screw up our tax ruling or our appeal for a private letter ruling if this could be a tax free transaction, and secondly, when we issue various pieces of debt it has to have an issuer effectively that can well survive the spin, or it's got to be short-term debt that would be taken out within some reasonable period of time either on a round spin or within a reasonable amount of time shortly after spin, and that particular financing and that particular trend is going to, if it takes root, it is going to be connected to power plants for a long period of time. So, in our scenario, we have got to be extremely careful of the tax structure, and second of all, have the issuer in place, I think it is pretty unlikely that you would see us do something of that nature in any material size prior to spin.

In terms of Latin America we have stated it is our intend to exit down there, we got some negotiations going on but it is a little premature to tell you precisely what timing might be, but it's our desire to make a orderly move out of Latin America and put the money into some of the things we were talking about here and in the domestic picture.

How do you handicap your getting out of the book.

Well, we have got two main areas I guess right now and one of them is looking pretty good and one of them is not as good, but on the other hand we don't have to exit right away either, so I would say it is decent but maybe not quite as quickly as we had originally thought.

Okay, thank-you very much.

Leo Murphy from Pioneer Investment Management, you may ask your question.

Good afternoon.

Hi.

Chuck, I had an question I think its was you that dealt with the question on pricing in the futures end. Did you say earlier that last year in the July, August period the $140 future price that you saw in the spring slip back to around $40 on a real time basis at that point?

Actually, I don't think it is a 140 but you could see prices earlier in the spring that is between 100 and 120, for own peak power in July and August, but I think we had actually ended up clearing in July and August last year was right around 40 maybe a few bucks over that.

Okay, and that's what caused the ¢20 shortfall?

That's clearly was an issue for us because we had power we thought we would be selling into the market. We were selling it at the prices we thought we were.

Yeah, I guess what I am getting to is the fact that if in fact we have a normal whatever that is anymore, summer this year and you recoup that ¢20, is that we are talking about in terms pricing, getting that back above a 100 bucks during that time period?

Leo, it is Kevin, in terms of that short fall last year, remember that we got two different revenue sources during the summer. We got the price free service associated with Baltimore Gas and Electric which is a retail market place, so that is not going to flow with the wholesale market and then the second market is the wholesale where we will buy or sell. What happened in last year's third quarter is that the retail demand first did not arrive at our doorstep. As a result, we ended up selling a relatively greater proportion in the wholesale market and those wholesale margins were very depressed as well. Weather can sometimes cause the wholesale market to be much more lucrative than retail and sometimes retail market in the summer. But again it depends on the tightness in that market, it can be relatively more attractive market than the wholesale market. So last year, it was that combination of events being, coming in and expecting to sell in the retail market and frankly prices less than where that forward price was back in May of last year, but then when that load did not materialize because of the extremely mild weather conditions, we round up liquidating the spot market at much lower prices than we ever expect to see again on peak.

Tell me something Kevin, how much of your current capacity is committed forward. I am trying to get an understanding here how much free capacity as you stand today would you actually have in hand to take advantage of real time prices in July and August?

Yeah, this is Chuck, essentially there is the portfolio in PJM is fully balanced and if we see the kind of weather that we would expect to see normal time, the load to generation are balanced in PJM.

They are balanced.

Just about, yeah, I think we are a little bit short. If you look at just megawatts of generation capacity versus interstate load, this is not a suggestion this is the position we have, but you just compare those two variables we are slightly short on peak and slightly long off peak.

Okay, so you need incremental capacity at this point basically long to any degree?

In PJM yes.

No, that is what I am talking about. The new capacity is coming on the peak this summer will it catch July-August?

Most of that will, yes.

And that's incremental from what we are talking about here?

That is incremental and it is in not only PJM but also equal in Main.

You would want to identify how incremental on a revenue basis will you?

No.

Not even a range?

No.

All right, I will come back, thanks.

The Nine Mile deal, you remember, we are selling 90% of that back to the sellers.

Okay, thank-you.

[_______________] from Deutsche Banc Alex Brown. You may ask your question.

Thank-you, good afternoon, you have addressed a lot of my questions already, but maybe we could just step back and think about first quarter. The guidance you had given was ¢60 to ¢65 and you came in a little bit ahead of that. I just wondered if you could identify why would you have done a little bit better than expected and then maybe you could explain the timing of the gas business, I understand it was the benefit in this quarter may reverse itself out over time. Could you just explain again the timing about a little bit please.

Yeah, in terms of gas, this is Kevin. I guess the revenue benefit primarily happens here in the first quarter. We do sell all system sales and do have gas that we could sell in other markets and make some profit, and we do expect to have that as an ongoing portion of our revenue stream going forward. That tends to be from a price perspective more of a first quarter event, but the ongoing operations and maintenance of that distribution tend to be spread a little bit more ratively over the course of the year. So that business more than any other shows an awful lot of seasonality when you have got some good revenues based in your numbers they are going to show up in the first quarter but you need that manpower there to run that business year-in and year-out, so the costs gets spread over the remainder of the year. The main point, I think we would like to make about that gas business is that if you look at the trailing 12 numbers through March, we are at ¢26 a share earnings contribution, we would expect it to be a little bit lower than that by the time we get to the end of the year. Because while we have had this revenue come in the door right now, there will be expenses that recognize over the other quarters, that will tend to dissipate a little bit of that. So we don't want folks to look at that ¢5 and say, oh! it's all up side and lets move numbers higher than the company's expectation of 3 to 3.10. We are still solidly there, some of those revenues could have showed up just a little bit later, but it did show up in the first quarter and we are very happy that they did, but we are still on track with 3 to 3.10, we are not, the gas business result doesn't push us higher than that level.

So these results were mostly due to the timing difference of revenues versus expenses so those operating expenses, you are saying that probably the ¢4 differential is probably recognized somewhere in the second and third quarter?

Yeah, it may not be, it may not be, it may not wind up in the full ¢4 differential, but that might be at the high end of what will occur, but again the revenue opportunities, it tends to be a first quarter event and your expenses are spread other than your physical gas cost. Whatever margin you make on sale of gas, whatever margin you make on deliveries, some of those expenses will actually be incurred over the full course of the year and that is what we mean by that timing difference.

Okay, great. My second question I will take a stop at this, first quarter of last year you guys did ¢9 for power marketing on a standalone basis, throughout the year I think you did as good or slightly, I think the third quarter result was strong, second quarter was ¢5 and I think you guys explained that, your attention on the transfer of the assets in the BGS contract was significant, took a lot of time in your focus. Is it fair to assume that going forward to this year that now that is behind you that we should see as good if not better contributions from that business?

This is Kevin again, in terms of marketing and trading, of course we changed the accounting for that, with the assets moved over on July 1st now that's one commingled business. You are right, first quarter of 2000 we had a ¢9 earnings contribution and second quarter of 2000 we had a ¢5 earnings contribution. It does show that the deal flow is not ratable during the year, you get a little bit of lumpiness. The key is to stay on path with enough projects, enough potential deals in the pipeline so you reach that year end point you would like to see and try close as many deals as early as you can. I think in terms of deal flow, we see very consistent improvement in those opportunities out there. We do expect that to be additional portion of our business going forward, but it is important to emphasize, the trading is not our primary emphasis here, what we are marketing is deal origination and it does help do risk management for us, but really it's a physical position whether they are owned, or whether they are controlled contractually that we are trying to tie into that potential business out there and while we have got folks who are in the plants offering them to achieve the maximum output from those plants, it's a role of the marketing folks to try to maximize the revenues associated with that output and to the extent that certain deals come along, you may see a little bit more a little bit less in one quarter, but in total it's a question are they making the best productive use of those assets and going forward we certainly see that is an important adjunct to our physical position be they owned or controlled.

Yeah this is Eric, let me point out two real world examples that have occurred over the course of the last 6 months or so, which can give you a sense of why a direct quarter on quarter comparison in the marketing and trading platform on a stand alone basis might not work so well. The High Desert power plant in California, which we decided to in effect sell the output on a forward basis, had we decided to do that through our marketing and trading business, we would have booked that in a way which would have shown quarter on quarter improvement in the marketing and trading business on a market to market basis as you would know, which would have accelerated all of that and it would have been captured in the marketing and trading business. We contracted out of the plant. So those revenues and the profits associated with them are going to be realized over time, so obviously we have a difference in accounting. Which actually when looked at on the constituencies in the income statement. It's going to be in a difference place and I could draw the same example if you will from the Nine Mile plan. So when we look at the revenue stream and we look at the people involved, we may have a 90% of the human resources in negotiating the contract may come from the marketing and trading platform but depending on where we decide to sign that contract and how we decide to sell that power, the revenues may at be at a platform A or platform B. So I think it makes sense to roll up the revenues if you will from the merchant side of the business as opposed to looking discreetly at the marketing and trading side and trying to make quarter over quarter comparisons.

All right thank-you, good quarter.

Thank-you.

Zack Schriver [_______________] you may ask your question.

Hi guys, how are you. This is Zack [_______________]. Couple of quick questions. We are just wondering if you can go into this Maryland PSC process in a little bit more depth, it has been my understanding that they didn't have a jurisdiction over the spin and we kind of already got through that process when we actually transferred the assets, but is this an official docket that has been opened or is it just some sort of an informal proceeding, I mean, what are the issues that are sort of at play in this proceeding and what are the sort of milestones, which we should look for at the end of the day if we sort of go through this process tying to be open with them and things don't work out can we still sort of go forward with the spin?

Okay that's a good question Zack.

Thank-you.

And as I have said we had an opportunity to say we are going to aggressively meet them head on, but we chose to say no let's deal with them in a way that when we get all finished we are not going to leave any wounded soldiers along the way. So in that rhythm we began to talk to them about what we're planning to do, we gave them some information, and they finally did docket an official proceeding. And as I said, they have asked for a lot of information, which we are going to supply, filing goes in on May 9, and then the schedule calls for other parties, and there are a few others to deal with asked questions and eventually that will lead up to a hearing in July. It will a style of hearing where we'll have witnesses and other people will have witnesses, but it's not where they are cross examined. And I think the two main issues they are looking at. First of all Maryland law charges them with the responsibility of making sure that the companies that hold the franchises for the distribution and sale of electricity in the state are capable of carrying out that franchise. So they are going to be looking at what's going to be BGE Corp. and BGE, they're going to be looking at the balance sheet and satisfying themselves that this company that holds its franchise has the financial wherewithal to perform, and they will be looking at the staffing and those kind of issues, and the other big thing I think about California is we entered into a settlement agreement, which they signed off on back in late fall of 1999. It said that we are going to do all these things that you know about, reduced rates, and then we are going to freeze them for up to 6 years, and the up to 6 years is the residential part, and that takes us out to the middle of the year 2006. So before we transfer generating assets last July 1st, we entered into agreements between various subsidiaries of the holding company that provide that the unregulated side is providing standard offer service to BGE and that goes up through the end of June 2003. The freeze period goes to 2006. I think they have a concern where it is that BGE gets the energy to satisfy that obligation for those last 3 years, and Ed Crooke told the shareholders this morning, in our meeting, that we intend to resolve that matter before separation occurs, and we are in some current discussions with the Public Service Commission Staff and the office of peoples council on exactly how that's going to be done. One of the understandings was that of the competitive bidding for that service some time prior to the beginning of July 2003. So, our basic approach with them is to say let's go out now and do that bidding, and then if we don't get any bids at the right price then we, Constellation Energy Group, the merchant energy side of the company, will strike a deal with BGE to supply that energy. And a couple of things. One, between now and then, we are going to definitely see some load attrition, and we are going to see some people that are currently eligible for price free service that no longer will be eligible. So the load that we think will still be there to fulfill that obligation is maybe 40-50% of the current load that we are providing, and that could be provided at a profit. It might be below where the market is at that point but if we didn't have any BGE load we'd be sitting here in PJM with 6000-7000 megawatt load. So I am frankly of the opinion that we will be able to give the Public Service Commission comfort in the big issues, the supply for the last 3 years in the price free service, and the strength and stability of BGE Corp. So I am expecting to get their approval, and I think next year this time I will be happy that I didn't do it by bashing them into the wall.

I think, part of my whole modeling of the company and part of the near-term earnings growth actually came prior to some of these recent asset announcements, from just customers rolling off, large CNI customers rolling off and effectively taking below market capacity to market and then being able to trade around that. Are you still comfortable with effectively, potentially extending a residential PLR obligation from 2003 to 2006 at rates that will be politically palatable. Does that still foot with the kind of growth, which we are talking out of the merchant business of 20-25%?

Remember Zack in terms of the residential rates, while they are frozen in total the settlement agreement envisioned a forward price curve of increasing prices. So a residential price for energy actually steps up each and every year at something greater than inflation and the CTC that's being used is like the strain of cost is stepping down. So to the extent that we have got a certain cost profile associated with our power plants right now, for serving that load, that's far-spread, improves over time as that retail, kind of, increases for that residential load. As Chris said, that residential load is just a little bit over 40% of total demand right now. It does provide some buffer in terms of that net long position we would have around that by having some optionality and ability to structure transactions around the capacity that is not as attractive. They'll know that we really want a 100% to make it a long position. We've obviously been putting something else in place to take over some of that. It does show from an earnings perspective increasing revenue stream for Energy from where we are right now from an opportunity cost issue in terms of where that wholesale price, the wholesale price moves higher from here. You may have preferred to have that opportunity as compared to retail, but the retail price when we struck the deal was an attractive one, and it does step up over time.

Okay, final question is on sort of promising the regulators a balance sheet for BGE Corp. and Baltimore Gas and Electric. That it is as strong and capable of meeting its obligation, and in the franchise, where do we stand with respect to monetizing some of the stake in Orion especially given the recent run up in the stock, and can you sort of refresh us as to what the status of the lockup is?

Zack, I'll ask Ed Crooke who will be the Chairman and CEO of BGE Corp. to answer that, he is also on the board of Orion.

Okay.

The lockup goes to May 14, 2001, and we are as we've said consistently all along, we're going to look at some opportunities as they proceed going forward to liquidate some of that investment and transfer it in. The price has gone up very appreciably this year, I guess, and even this week, with the recent strong announcements that, I guess, came out this week. We are going to continue to watch it on an optimistic basis, we will be doing something, but there is nothing definitive that we can say right now.

With respect to the balance sheet issue Zack we were with the Public Service Commission earlier this week to get authority to issue $500 million worth of notes out of the utility, and engaged in a conversation with the Public Service Commission about the balance sheet issues. We explained to them who would be coming over to BGE Corp., what they would be bringing with them, and after this discourse, I think, the Public Service Commission's chairman was satisfied that we're doing exactly what we told her we would be doing, and I doubt that this is even going to be an issue in the proceeding that is coming up before the Commission.

Great, thanks so much guys.

You are welcome.

Andrew [_______________] from ING Asset Management, you may ask your question.

Yeah, hi guys, little bit of a followup to the last question. Where does the cash go that you raised in the equity deal post-split? Does it go to the merchant business or does it go to BGE?

It goes to both really. It goes to the merchant energy business, a portion of it, and a part of it will be retained by BGE Corp., not necessarily by the utility but by BGE Corp.

And has the proportion been set or is that still work in process?

That's a work in process.

Okay. Second thing is on the IRS ruling, what have they said to you about having a large shareholder, Goldman namely, and continuing that relationship? Is that something, I know they give trouble sometimes with these spin offs when you've got large shareholders, how does it work for you?

Well, in the pre-submission conference that issue wasn't raised in that fashion. If they had had a concern I think they would have raised that issue.

We've had a lot of conversations with them ever since we made the announcement, and I don't think it's ever come up.

We don't think it is an issue, that percentage level is going to be an issue.

Oh, good, and then little bit followup to an earlier question. With all the new plants, the four plants coming on line this year, is that about $25 million in net income at the end of the year? Is that more or less what it is? Have you given any guidance on that?

We've not given any guidance on that, no.

Is that a number, which is close or is that just a no comment.

That's just a no comment.

Okay, and then little confusion on, I know it's very hard to compare quarter by quarter, just in terms of the kind of business that you're in and in terms of what you're doing strategically with the business, but is it fair to say that in this March you earned a little bit more than you expected, therefore June is a little bit lower and the rest of the year is just fine? Is that a big picture way of looking at it or is that totally wrong?

That's not a good way of looking at it. There are some, I think, I haven't checked recently, but there were three first call estimates for the second quarter out there last time. I've looked, and I believe two were at ¢50 and one was at ¢56 and the average was 52. And we haven't given guidance on that second quarter, and quite frankly there are a lot of confusing accounting issues when you switch off of regulatory accounting and move onto pure GAAP accounting, that is what we tried to lay out here today. Last year's ¢37, if you were to adjust for GAAP accounting instead of regulatory accounting, would have been a different number, and so we don't look at that second quarter as being anything of a disappointing nature or that it is not going to give us what we expected. This particular quarter we gave guidance of 60 to 65; we came in at 68. We did wind up getting some nice revenues from the gas business certainly, and we have seen the merchant energy business continue to represent a larger portion of the total earnings. The one big issue that has been in the back of our minds and was reflected in our prior guidance but not explicitly stated was the question of whether we would or would not issue common equity and what size and what time. We did not issue that common equity in the first quarter, so the first quarter earnings contribution taken right now without that higher number of shares outstanding is a very, very large contribution. But relatively speaking each of the other quarters is going to have about a 163 million shares against it. So in that particular sense we view this as being a common stock transaction that funds our balance sheet and not specifically dilutive. If you take a look at the relative earnings contribution of the second quarter as compared to the relative contribution of the first quarter and you change the number of shares of one to the other, granted you achieve some interest savings in that process, yes, the other quarters are down a little bit from that. This quarter wasn't burdened with the higher number of shares, but when you add this quarter in by the end of the year and you average out the shares over the entire time frame, you are still going to wind up at $3 to $3.10 with our prior guidance. So, we don't look at this quarter as being a blowout quarter, we don't look at next quarter as being a disappointing quarter. This is in line with what we did; it was at the high end of our range in our mind. We've got some guidance out there that hopefully helps people build models for the second quarter and then at that point we'll have a little bit more of a true track record in apples-and-apples comparison that will help folks determine where we are in 2002 and 2003 going forward.

But now when you originally gave guidance for 3 to 3.10 that was before, I guess, that was quite a few months ago, that was before the equity issuance before even the filing of the Shelf, right?

Yes, certainly that's right, but in terms of us looking at our strategic options, although we did not say we would or wouldn't, we wanted to keep that flexibility to do an equity offering, and if we wanted to maintain that flexibility arrangement at 3 to 3.10 it seemed like the most reasonable outcome if we did in fact tap in, issue a Shelf and tap into it sometime earlier in the year rather than late in the year.

So even though the Shelf hadn't been announced, it was factored into your 3-3.10, so the fact that you're 10% diluted doesn't mean you are 10% up on earnings guidance?

I'm sorry, I didn't understand the way you asked, phrased that question.

When you announced 3 or 3.10 originally before filing the Shelf, that announcement already took into account what you thought you might issue as far as equity goes and the fact that you're still at 3-3.10 after diluting shareholder's 10%, doesn't necessarily mean that the earnings guidance has actually gone up. You know what I mean?

Yes, the shareholders aren't really diluted by 10% because I did, to factor it that way, you'd have to be implicitly saying that we didn't even have a 10% increase for the number of shares outstanding, but you'd have to compare that to a model where cash landed into your lap.

Right, now I understand that.

...no cost associated with it. So don't think of it in terms of that equity issuance is having that sort of a dilutive effect; it certainly does not. With that said, certainly equity is more expensive than debt and you don't want to go to the equity market paying more than you have to, but we definitely want to bolster the balance sheet and have the strongest position and most flexibility we could have as we got ready for the separation. I guess our process internally in giving guidance is to make sure that we don't close down any doors in terms of opportunities. There perhaps could be a possibility that we could put off an equity offering until later in the year. We'd be taking our chances in terms of whether that foreclosed any strategic opportunities for us or whether that was cutting things too close from a credit quality perspective for either or both of the businesses that we're looking at, and so we did not want to give guidance assuming that we were going to leverage this business very, very dramatically throughout the entire year and have a number that was beyond that $3.10 range. So, we do try to temper that business plan and take into account those reasonable possibilities that could happen, and at this point, the 3 to 3.10 is an appropriate level of guidance, and in a sense, it is factored into one of the frameworks we had looked in giving our prior guidance.

I understand. One last question probably for Eric; what is your strategy on the gas trading side of the business?

Well, I think that we have heard a lot, and we've seen some things where people have talked about gas trading as a discreet business, and I think it is fair to say that we're not looking at it that way, and in some of the markets which are experiencing the greatest volatility, the words that we've started to use here are that effectively gas is power. Other than playing it from the infrastructure side, i.e., if you're in the pipeline and storage business as opposed to generation business, I think, from the standpoint of the profit opportunity and the trading opportunities, the correlation is very high, and the evidence, I hear a lot more of the analytical community and the institutional investor community using the words spark spread which is the euphemism for the fact that in certain of these markets it is already had full conversions to some extent. So from that standpoint, I'll tell you what we're doing is wherever we have exposure to gas on the asset side, we are trying to structure our trade and structure our contracts and structure our capital investment managing the gas risk and the gas exposure just as we do the electricity risk and exposure.

Got you.

Thank-you.

Greg [_______________] from Lehman Brothers. You may ask your question.

Thanks. Good afternoon.

Hi Greg.

Hi. I had two questions. The first one, I'm just a little confused. I was wondering if you could come back to the docket that has been opened in Maryland on your separation. I was wondering just what was the genesis for this? Were there certain consumer parties that brought it forward or did the commission bring it or how did this get started?

The commission themselves did. When we met with them in October, we said that we would keep them advised of what we were doing and the concern then was making sure that BGE Corp. and BGE had all the things that were necessary to carry out their franchise obligations, so they opened this hearing, a number of people showed up, then they decided to docket this proceeding, and as I say, it is a legislative type of proceeding, and they asked for this information to be submitted by May 9, 2001, and the issues are pretty much as I was trying to describe earlier to Zack. One, where does BGE get the energy to fulfill its price free service obligation in the three years from summer 2003 to summer 2006? And secondly, what's the financial condition of the company? And that last part is complicated by the Private Letter Ruling that we got when we moved the generating assets from BGE to the translation of subsidy areas; the IRS rules didn't allow us to move as much debt as was associated with those assets. But consequently, we left on the BGE balance sheet more debt than you would expect. And what we're doing is putting some of the assets that we've mentioned into BGE Corp. So, the BGE Corp. balance sheet will look more like a regulated utility starting off and then over a period of relatively short time, we'll build up the BGE balance sheet to get it to look more like a traditional regulated utility company.

Okay and the final outcome in Maryland would be when?

Well, I think what they've said is they would expect to not holdup the whole proceeding, and we've shared with them that we're looking for some Internal Revenue Service action probably by third quarter. So, I think they're prepared to fulfill what they said and not get on the critical path.

Okay, and then lastly, I was wondering if you could kind of talk about opportunities in general. You identified some of the projects and development that are coming online. Maybe you could step back and just talk about general opportunities you see on the development or generation acquisition side.

Well, let me turn that to Chuck to respond to it.

Well, I think as we said earlier, if the projects we've talked about are actually the ones that you're either coming online this year or under construction over the next two or three years, and Chris mentioned that there are a lot of projects in the pipeline that we're looking at across the country. We'll make the decision as to whether we want to move forward with those depending on our assessment of that particular region and clearly whether it meets our capital allocation requirements, do we want to deploy capital on that region, are we going to generate the kinds of returns. But the opportunities, I think, are there. The other side of that of course is the acquisition route, and I think people are focused up to this point on acquisitions that have been driven by deregulation to the extent that utilities are for either strategic or regulatory regions, divesting themselves of assets, they become opportunities to acquire generation. Questions have been raised about whether that process is slowing down. That doesn't mean that there won't be assets available for acquisition. There are still a number of companies out there that are building assets that may for a variety of reasons decide that auctioning off or selling that asset as most appropriate over a reasonable timeframe. So we see that happening. It's more difficult to put your finger on those than to be able to point to particular auctions that are coming up and saying there are going to be six different auctions coming up for so many assets. You could have done that a couple of years ago. But there really are going to be opportunities we think to buy power plants at appropriate prices as we look out over the next few years.

Thank-you.

Danielle Seitz from Salomon Smith Barney. You may ask your question?

Most of my questions have been answered. But I was wondering about the Nine Mile Point and the capacity factor, is there some potential improvement on that over time that will liberate more power for you to sell on the open market? And also, do you have a sense of the forward prices in New York during this summer?

I will respond Danielle to Nine Mile Point. Yeah, we look at what they've done in the past, and we believe based on our knowledge of nuclear plants in general and benchmarking their performance against some of the top performers in the industry for boiling water reactors if there is an opportunity to improve the capacity, and we're not commenting on the significant move this year, but I think we did talk earlier on another one of these calls or at one of the meetings where we've discussed it that the closing date is after the outage that is currently underway for Nine Mile Point. So, we'll have the rest of the year without any outages up there. In terms of the second question, I'll turn it to Eric.

Are you referring to New York City, the speculation on New York City?

Yes, and eventually the price levels that you're seeing for during this summer.

Yeah, well, we followed like many of you all in the press and otherwise the apparent constraints in New York and the particular circumstances of that market during the summer months, and what I'd say is this, we see some of the same dynamics that have existed in other short markets such as California are possible in New York. The forward prices to some extent have reflected that. The forward prices have bounced around a little bit, with some of the court proceedings that have come about with respect to these various sites that they're trying to bring into production through this summer. Having said that, I think it is fair to say, that we as a merchant company are not heavily playing the volatility associated with New York City, because what we prefer to do strongly, is connect it to a specific asset strategy that we have or that we're planning on building, and New York City has some peculiarities which have caused us to steer away from it a little bit in the short term. We will participate to the extent that there is upside in pricing, more or less because Orion is the supplier of power to that market. But beyond that, I think, we're actively watching, we're very interested and curious, but you probably shouldn't expect us to get bounced around too much because of it.

Thank-you.

Leo Murphy from Pioneer Investment Management, you may ask your question.

Yeah, I just want to followup. Are there any limitations with regard to PJM power moving in and being transmitted into the city?

Into PJM itself?

No from PJM into New York City?

Oh, yes, New York.

Yeah, that's what I thought. I mean, there are technical limitations to begin with, aren't there?

Yeah, there are transmission trades going in, not only going up from PJM, but also moving from western New York into New York City itself.

Yeah, that's what I thought. The other question, I did want to ask you, somebody commented earlier that the second quarter last year, was it the second quarter or May with 16% in terms of degree days above average.

May was warmer. It was the whole second quarter, that particular calculation is for the whole second quarter, but May was at a point at which those degree days, let's say, were earned, where those sales were actually generated.

Can you give me some idea, what the April comps has been like, year-to-year in terms of degree days?

April?

Yeah.

I don't have those weather figures handy. I would not view anything today as being significantly different from normal.

Okay, thank-you.

Frank Gordon from Goldman Sachs & Co., you may ask your question.

Yeah. My question is a followup to what Eric said about having a lot of discipline when looking at the business, viz-a-viz cost of capital. And it is a question with regard to your earnings guidance. When you construct your forward-looking view of the world and you give it to Wall Street, is it based on some sort of hurdle rate cost of capital that you expect to earn on the assets you build, or is there some other methodology, and to the extent that you beat those hurdle rates, is that upside to the earnings guidance?

Yeah. That's an excellent question. You have some of the theoretical and the practical in that question. What we have when we look at projects, development projects, if you will, is I wouldn't call it a bright line test of a hurdle rate, but we like to see returns. Those returns though, are different than the returns that we may want and expect from another discreet piece of business, because the risks, for example, associated, not the risks so much, but the variability associated with putting a plant in the ground, that's going to be there for 30 years and have a stream, is different than the variables, or the degree of variability, if you will, around an opportunity, that's described by a week or a month or a year. And so we don't have one specific hurdle rate, if you will, across all, but we are trying very hard to place a discipline on ourselves. That when we think about allocating capital, on a long-term basis, that we always have a check that talks about our cost to capital and earning something over above that cost to capital. Implicit in your question though Greg, I detect is there upside off of our strategy because we are trying to observe a discipline. I think, the answer to that one is a little bit of the following, if we try to be conservative and we're right then yes there is upside. And we're trying the best we can, to participate in the growth that's inherent in this business, while being very careful to remember that this is a capital-intensive business, and at the end of the day, there are capital cycles. And so we're going to try to take advantage of those capital cycles, by being balance sheet strong, when the cycle moves one way, and being an investor for growth, when the cycle moves the other way.

Thanks Eric.

Welcome.

Once again, if you would like to ask a question, please press '*1'. Zack Schriver from [_______________], you may ask your question.

Just following up on that last question Eric, when, and as far as thinking about the balance sheet and a strong balance sheet, does the $500 million or so of common equity which you guys did at the CEG level, based on the current capital plan and investment plan, and cash flows and a sort of reasonable assessment of incremental opportunities, which you may or may not get, between now and the next year, what does that imply when we add it all up for CEG merchant as a pureplay's, need for capital and can we say that CEG merchant won't need to come to the back of the equity capital markets, given all the above listed factors for the next year, or can you just talk about the pureplay's need for capital, because I was kind of under the impression that the equity which we did for the consolidated entity, kind of, shores up the balance sheet for both entities.

Yeah. I think, Zack the way I'd respond to that is this, we have consistently said that we expect to operate the company with an investment grade status, and that we need to do that in order to be an acceptable counter party. We've also said that based on the opportunities we see out there, for development and acquisition, that we have a certain capital expenditure profile, which you've heard about, and you have talked about, so I won't go back into that. The issue is really that there is no such thing as linear in this business, and because of that what I'd say is, if at any point in time, we felt like, based on the capital opportunities ahead of us, that we were going to be straining investment grades, you can expect that we would not wait till the very last minute to try to fund, that we will attempt to maintain an investment grade, and we'll attempt to do that in a way, which accesses the capital market opportunistically. We don't want to be at the mercy of the market. So, I can't give you a yes or no answer, in terms of I think, the way you asked it, over the course of the next 12 months, because I can't predict how linear the capital opportunities are going to be over that next 12 months. We're looking at some acquisitions, we're looking at some additional development opportunities, but quite frankly, we have some development opportunities that other people are looking at, that we have, which could be source of capital. And it's just not possible to predict with great certainty, in a way that would let you connect the dots over a long period of months.

I mean, what about, what would you think about the $1.8 billion of capital, which you laid out. Based on that do we think that we can avoid something, and it is only if there was something incremental to that, that would require coming back.

I'm sorry I'm not following you on the reference to the $1.8 billion.

I recall $1.4 billion, I'm sorry.

I'm sorry, I've lost the train on your question.

Sorry, earlier on in the call you guys laid out the capital budget for the next couple of years, I'm kind of slipping through my notes to find it, it was $1.4 billion in 2001, $1 billion in 2002, and $1.8 billion in 2003. Based on that capital budget, do we think that we don't need to come back for equity capital and it is only if an incremental development opportunity to acquisition opportunity beyond that, that we need to come back for equity capital, based on the constraint of trying to maintain an investment grade credit rating?

Yes, Zack, in terms of the equity offering we just did, lets just put it in perspective. We had bled down our equity ratio during the course of 2000, to about 41% at the end of the year. And at that point, we felt a little bit uncomfortable especially with the separation pending. Coming out, we've now got the equity ratio at the end of March, up to about 45.5%, and we do have some trust originated preferred securities and preference stock there as well, it keeps our long-term debt ratio at about 48% of total capital right now. So obviously that bolsters our balance sheet, that gives us the opportunity to start closing on Nine Mile Point with seller financing that covers half of it, and from funds from operations and other debt to do that. As Eric said, in terms of determining exactly when, and how much we come back to the equity market, it's not the type of thing you can predict with certainty. You can clearly bleed down the equity ratio as we did during the year 2000. You've got to reload at some point and bolster that equity structure in order to maintain those opportunities as they come along. And certainly any acquisition opportunity that comes along, the bigger it is the more likely that that would require both a mix of debt and equity to get that transaction done.

All right. Thanks so much Kevin I will followup.

Paul [_______________] from McDonald Investments, you may ask your question.

What's your strategic thinking on monetizing the assets and churning the physical portfolio, and how far out do you think you need to start thinking about that seriously?

Hi, this is Eric. We think about that everyday. But I want to caution you, that thinking about it and executing it, when you have long-term assets in the ground, is two different things. Selling a piece of the development portfolio is very different than selling a chunk of the PJM, for example to us. But as a discipline, we do think about it everyday. We think about the capital cycle, we think about it in terms of not only the domestic market, if you will, but the individual domestic markets. And because we see some markets getting longer and some markets getting shorter, and I think you can expect that we will act differently in those different markets.

Against that backdrop, what's your view about supply and demand coming in, timeframe of coming in to balance into markets you're currently in.

I think it's different in different markets. But rather, I can't give you a 1 or 2-year answer, but I can give you a sense, for the way we're thinking about it. We are cautious in the long term, because the market right now is fuelling or favoring, if you will, a development, and if the market continues to fuel that at an accelerated pace, that would shorten the cycle. And we're going to be very careful associated with that. And it is one of the reasons, for example, I'll just use Nine Mile, in making that acquisition. We probably could have tried to negotiate a different deal and had more power outside the PPA, but given the characteristics of that market, we thought the best balance was struck by turning it up. Likewise, in California, that was a different calculus for us. That was a large deal, in a place which is experiencing a lot of uncertainty and while we might have taken the view that in the short term, meaning a year or two, we would've been better off building that, putting our capital in the ground and contracting or selling the power in the future, not doing it now, we felt like the prudency was better, given balance sheet characteristics, to go ahead and turn that power up during the period preceding or if you will, coincident with beginning construction. If we had 10 power plants there or 5 power plants, or had a balance sheet 5 times our size, we might have thought differently about that plant.

What's the duration of the Nine Mile PPA?

Ten years.

Thank-you very much.

You're welcome.

Sir, at this time there are no questions.

Well thank you all very much for being on today and your continued interest in the company. We look forward to talking to you and seeing you several times throughout the rest of the year. Bye.