艾索倫電力 (EXC) 2003 Q4 法說會逐字稿

Good morning. I'm Paul Allen, Constellation Vice President Corporate Affairs.

Welcome to the 2004 presentation of Constellation Energy's annual business plan and outlook. We will be presenting our fourth quarter 2003 earnings and an overview of the full year 2003 performance.

Everyone should have a set of materials including slides of the presentation and our press release issued this morning. The event is being both webcast and recorded for archival purposes and is available for a listen-only conference call.

I'll now ask our Chairman, President and Chief Executive Officer, Mayo Shattuck to come to the podium to start the presentation. We will take questions from the audience only after the full presentation has been delivered, and at the point that we're doing the Q&A, we will ask you to use the microphones that are in the center aisle.

Thank you. Mayo?

Thank you, Paul.

I'll start off by apologizing for my voice but when you live in a cold, wet and energy consuming territory it is very bad for the throat and presumably very good for shareholders, so you can suffer through this, like I.

I'm really glad that so many of you could join us this morning. As you know we do this once a year. This presentation tends to about be a little long and analytical but it is the chance for those of you building models and so forth to get through all the details.

I'll start off with an overview this morning. After that I'll ask Tom Brady, our Senior VP of Strategy and Head of the Commercial and Industrial Competitive Supply Organizations, to talk about our relatively new C&I Power and Gas marketing business; next we'll have Tom Brooks talk about the wholesale marketing arm, Constellation Power Source; then Mike Wallace, who's President of our Generation Group will talk about the fleet; and Frank Heintz, the President of BG&E, will spend a few minutes on the utility; and then lastly, Follin Smith, our Chief Financial Officer and Chief Administrative Officer, will discuss our financials and then we will have time for questions.

Let me begin by commenting on the state of the industry. Any survey of the energy industry's current landscape will show an interesting divergence in views on how to structure a business for the realities of this marketplace. While we see opportunity in competitive markets, many of our peers are restructuring their operations in an attempt to recreate the old utility model. While back to basics has been viewed as strategy of safety, earnings certainty has been achieved at the expense of growth potential. In many respects their shareholder returns rely on regulatory outcomes.

Furthermore, while companies are actively pursuing a return to the regulated model, many also cling to the hope that gas fired assets in which they invested billions of dollars will become economic again. Few assets are changing hands because creditors also maintain this hope. In the near term we do not.

Most importantly, deregulation continues to evolve and take shape. Competitive markets are a fixture in New York, New England, and PGM and this group is expanding. The states of Illinois, Michigan and Ohio are moving steadily toward more workable competitive markets. Existing markets in New England, Texas, New Jersey, Maryland, the District of Columbia and Pennsylvania are implementing deregulation plans as conceived. Sounds a little bit like Howard Dean, there, but -

In California, Governor Schwarzenegger is proving a vocal advocate of the core / noncore market structure that benefits direct access energy customers. These markets, along with some Canadian Provinces, represent a large, healthy and growing platform which underpins the Constellation business model. Importantly, we are not relying on either Federal deregulation or ever increasing number of State level deregulations to achieve our near term growth objectives.

In the longer term, we believe energy market restructuring will occur and we are building a business designed to realize its potential. We see markets becoming more complex as energy is being disaggregated and parsed into smaller sub components of value.

Power is following the path of other preceding commodities as it becomes a structured, physical and financial product. However, unlike other liquid commodity markets with national clearinghouses, energy continues to exist under a regional construct. A deep understanding of regional physical, markets and their regulatory rules is a crucial competitive advantage. There are few players of substance who have made the necessary capital and intellectual investments to be effective on a national scale.

For those on the web, this is we are on Slide 6. Against this backdrop, Constellation Energy has quietly pursued a contrarian strategy which targets customers in deregulated markets. From nowhere, we have built a company forecast to record an $11 billion of revenue in 2004.

Constellation's competitive supply business is currently active in 20 states, marketing an array of products to a customer base that includes wholesale T&D, and integrated you utilities, munis, co-ops and 53 of the Fortune 100. This competitive business is poised to grow 10-20% annually for the next several years, and has an enviable track record of achievement.

Over the course of the last five years, using Goldman Sachs developed technology, we have evolved to become the industry's largest wholesale competitive supply provider. We have constructed a similar platform designed to meet the needs of C&I customers in deregulated markets. We believed in retail competitive markets when others did not and have assembled two times as much market share as our next nearest competitor. We have a growing sales force, increasing brand recognition, product excellence, credit strength, and leading management. We are a national player in a large, fragmented market and we are positioned to consolidate market share.

As I look ahead, I consider this chart which tracks our gross margin and customer growth and I see a company structured to meet an incredible opportunity. For the last several years we have been adding the right tools, products and services to meet the market's growing requirements. We are in the early stages of an evolutionary process with a differentiated strategy and a sustainable competitive advantage. I'm energized, my team is committed, and our employees are focused on this opportunity at hand. The opportunity is now, and we are working tirelessly to seize it.

To understand why we have such strong faith in where we are headed, I think you must understand where we have been ,and what we have done to position the company for success. When I came on board as CEO in late 2001, we were a company at a strategic crossroads. We were vulnerable. Acknowledging the impact of declining spark spreads abruptly halted the company's existing development plan and strategy.

Important, early actions taken in 2001 and 2002 ultimately proved critical to Constellation's current market strength. First among these was the decision to remain one integrated energy company. Without the cash flow and earnings stability of our regulated utility, BGE, our ability to develop our competitive supply business would have faced considerable constraints.

Also important was ending the relationship with Goldman Sachs and uniting the systems and personnel that had operated under a two headed structure to pursue one common goal. We refocused the company on core skills and capabilities. We asked, "what do with we do well", and structured the company accordingly. We also divested and closed businesses that were noncore. These actions provided cash to strengthen even balance sheet. Even more important importantly, we were successful in terming out a predominantly short-term financing structure despite the impending collapse of Enron.

In advance of other companies, we saw the importance of financial transparency. We built an internal financial planning and analysis infrastructure to provide the right metrics and accurately project our business results. In part, our success has been proven by nine consecutive quarters of meeting or exceeding guidance. Finally we expanded risk and financial controls to insure that we are taking and managing risk in a manner in line with the interests of our shareholders.

Turning to Slide 9. Thankfully we had the right building blocks in place. A reliable customer focused utility, a leading wholesale competitive supply business, a low cost nuclear and coal-fired generation fleet, and long dated PPAs on many of our merchant generation plants. All proved invaluable.

We could have stopped right there, gone back to basics and followed the future path of many of our peers. We did not. In a large and evolving competitive market we saw opportunity, both in the wholesale sale and commercial and retail competitive supply business. As we watched the demise of Enron and other energy merchants, we saw a tremendous market opportunity. A gap had been created as the historic providers of products and services were no longer there. We determined to fill that void.

We started with a vision whose guiding principle was customer focused. By focusing on customers and the provision of value added products and services, we positioned Constellation to capture incremental margin. We invested in personnel and intellectual technology at our wholesale competitive supply business.

Our belief in the value of C&I customers led to our acquisition of AESs new Energy Business, the largest national provider of C&I retail services. We put in place required return on invested capital hurdle rates that contemplated risks and expected return. The convergence of customer focus and disciplined return metrics supported a contrarian strategy that perceived value where others did not. In disciplined fashion, we picked among the wreckage of fallen companies and held out for the right assets at the right price.

In addition to pursuing growth we also focused on productivity to squeeze greater earnings and cash flow from existing assets and operations. In short order, I hired Mike Wallace to speed the evolution of our Generation group into a leading merchant fleet. He has subsequently assembled a top notch team focused on asset optimization, safety, and reliability. Finally, I added a key finance, information technology, human resources, public affairs, and legal management bench strength from outside the utility industry to infuse the organization with external best practices and know how.

Now, let me speak a little on what Constellation has become. We are an energy company whose business is physical energy. In open competitive markets we are commercializing our physical knowledge to provide a host of value added products and services. The intellectual technology, market understanding, and risk management skills that facilitated our success in wholesale load serving, are grounded in a broader ability to manage the numerous physical aspects of energy.

We have a sustainable competitive advantage where detailed knowledge of physical markets is a determinate of success. Where the lowest cost of capital or the highest risk tolerance are key competitive factors we will not be active. We are leveraging skills and infrastructure developed to manage our own business, to structure products, handle logistics and manage risk for our energy and hydrocarbon customers.

These needs come in many forms, some less complex, including block gas and power sales. Others more complex such as congestion management in regions with locational marginal pricing. The latter requires deep understanding of the variability, consumption and nuances of thousands of nodes in the delivery and generation network. This is the physical nitty gritty of energy.

And for our customers, utilities, integrated utilities, muni's, co-ops, C&I businesses, we are an important partner. This is a vibrant market that continues to expand and evolve and we are at its forefront. Our experience these last 18 months has proven that this is also a scalable business with a potential for operating leverage. We are expanding our scope beyond the core power market to include hydrocarbon fuels. We have a growing natural gas and coal logistics platform with domestic and international capabilities. It's focus is reducing fuel expense for our own generation fleet and for our customers. In time, we believe our efforts in this $325 billion market will prove a meaningful contributor of gross margin and earnings to Constellation's bottom line.

We're now on Slide 12. Our objective for our merchant generation fleet is clear. Run our assets reliably, efficiently and economically. This includes current assets and future assets we acquire in attractive markets. We have a performance focused culture targeting operational excellence. This effort has taken many forms. Outage management initiatives, equipment reliability initiatives, and strategic sourcing. We are realizing through these programs that we still have a long way to go.

Over the next serve several years we will aggressively pursuit output and gross margin expansion throughout the Generation organization. Our fleet is also expanding. With the planned acquisition of the Ginna Nuclear Station from RG&E, we will add base load capacity. For economic support, the acquisition of attractively located generating assets, we will work to match owned generation with our deregulated market presence.

Our generation group and our wholesale professionals are working in a coordinated fashion to develop and structure products to improve the profitability of our fleet. These efforts have and continue to add to our bottom line.

Finally, we are also examining the economics of our fleet and taking steps to rationalize it. We announced in the third quarter that we are exploring strategic alternatives for our Hawaiian geothermal facility and we also recently shuttered our Gould Street facility in Baltimore. The net result, as in everything we do, is a focus on making the right strategic moves for our business and our shareholders.

As Follin will discuss greater detail later in the presentation, today we have meaningfully benefited from a focused corporate wide cost savings initiative. In 2002 and 2003 we removed $131 million from our cost structure. In 2004 we are investing in a slate of productivity initiatives which should bear fruit in 2005, 6 and 7.

Turning to Slide 14 and our 2003 results. The fourth quarter concluded what was an excellent year for Constellation and our investors. For the fourth quarter we earned 67 cents per share, excluding special items. This is the 9th consecutive quarter this management team has met or exceeded guidance. This results brings our full year 2003 EPS to $2.76. This is a 10% year-over-year growth rate in earnings excluding special items.

We anticipate another year of strong growth in 2004. We expect earnings for 2004 to be between $3.00 and $3.15, a range of 9% to 14% over 2003 results. For the next several years, we still believe a growth rate of 10% is about right.

In 2003 the market began to perceive the value we had created. In the past year, our shares have appreciated almost 41% for a total shareholder return with dividend reinvestment of 45%.

For the year, CEG was one of the top performing shares in the utility sector and since the start of my tenure on October 25, 2001, I'm proud to say our shares are up more than 70%. Shareholders wealth creation is management's primary goal. Long-term stock appreciation at levels above our peers in the Dow Jones electric utility average, is an important determinant of management's long-term compensation. We believe that strong earnings growth will drive long-term stock appreciation and a premium PE multiple. We strive to deliver a superior total return to our shareholders through a combination of stock price appreciation and dividends.

Last Friday, you probably noted, we increased our dividend by 10%, from 26 cents to 28.5 cents per quarter. We anticipate growing our dividend annually, roughly in line with our earnings growth.

Turning to Slide 17 and some final thoughts. I am often asked about our long-term vision. What I find most rewarding after these hectic two years is not only what -- that we have a vision but that is it is clear, it is aspirational, and it's embraced by the entire management team. We have embraced the notion that competitive markets will grow and eventually dominate the landscape. We therefore are positioning ourselves to be the leading advocate and the leading provider in these markets.

There are many ways to compete. No doubt there are many regional differences, many customer segments, many products and to manage and intermediate. We have rapidly developed leadership positions in different but defensible ways. Wholesale load serving in New England. Electricity sales to C&I customers on a national scale. Complex risk management solutions for wholesale customers. We expect that we will reach leadership in certain gas and other fuel markets, which we determine allow for superior and defensible returns on a capital. As we scale these businesses we will benefit more from their interrelationships.

While the evolution in competitive markets will fuel our growth, it is also evident that our model will present opportunities in more conventional ways to add to our scale and profitability. The purchase of the Ginna plan might seem conventional. It is a solid asset with great cash flows and adds to our scale in the nuclear fleet, but it will also contribute to our competitive presence in New York and, hence, leverage our competitive supply business here. We have great confidence in the durability of our customer focused model and do not see large risks that must be mitigated. Always our guiding principle is relentless discipline and adherence to our capital allocation model and our hurdle rates. In other words, adding scale and reducing earnings volatility are worthy objectives but should only be pursued in the context of achieving good economic returns.

So while pursuing leading market share positions in competitive markets is our growth thrust, we have to acknowledge that success has and will breed opportunities in more conventional ways. When we supply approximately 30% of a load in the market, our degrees of freedom to acquire supply and creatively hedge risk are vastly improved. When we manage the most sophisticated physical marketing, trading, and structuring platform in the United States, others come to us for solutions.

This has become a business where success breeds success. It leads to getting the best talent, having the greatest access to capital, and leveraging the incremental scale of our business, and it also highlights the need to stay on track, execute and deliver on our promises. If we just do the things I know we can do, we will continue to grow and prosper.

Now, I would like to turn the podium over to Tom Brady who runs the C&I businesses.

Thank you, Mayo. Good morning, everybody. And we should be turning to Slide 19.

A little over a year ago we began to build a significant commercial industrial retail competitive supply business. We viewed this move as a natural extension of our existing wholesale supply and risk management capabilities. The acquisition of new energy gave us a 4,000 megawatt national platform. We quickly build to a new energy with a series of related acquisitions adding 1,000 megawatts, and with Alliance Fellon-McCord we added a leading supplier of natural gas, providing an enhanced stability to solve our customers total energy needs.

Overnight, Constellation transformed this new line of business from a Baltimore centered regional business to a national provider in leading markets such as New England, New York, the Midwest, Mid-Atlantic, Texas and California. We also grew organically last year, opening offices in Dallas, Detroit, Toronto, Syracuse and Calgary. By this means, we added over 3,000 megawatts of new business, bring our total load to over 8,000 and making us the leading national supplier. In each of the four largest markets New England, New York metro, Illinois and Texas, we serve over 1,000 megawatts.

Let's turn to Slide 20. We also have geographic diversity. Constellation New Energy with customers in 20 states and could two Canadian Provinces is in every competitive market. As you know, electric restructuring is most active in the northeast, Midwest and Texas. And typically, our best markets such as New York, New England and Illinois, are ones where the true market base cost of power is passed through to customers by the regulated utility.

Other markets like Pennsylvania and Ohio are large, but the cost of low rates set by regulation, they only work during times of low wholesale prices. Texas is yet another big market but with aggressive pricing. We have been successful growing that business profitably to over 1,000 thousand megawatts. Finally Michigan and New Jersey are new for us in 2003. And we are seeing significant progress.

The existing C&I market is healthy. We fully expect other markets to open but we aren't building that into our financial projections and we don't need it to attain our projected growth. Our business plan is focused on existing markets and states with firm commitments to electric retail competition. We are building scale in this business and continue to benefit from a first mover advantage as we invest in a sales force now to build revenue for the future.

Not only are we geographically diverse, we also serve a diverse group of customers. As you can see from this sampling, our customers spanned a wide range of industry and customer types. We are not unduly weighted in one industry and no one customer makes up more than a very small percentage of revenue. Many customers are well known names. We are serving 53 of the Fortune 100 and over half of that 53 in multiple regions. Others customers may not be household names but all consume a lot of energy. We have over 8,000 customers and our average customer load is 1 megawatt of electric and 90,000 cubic feet of gas.

Turning to Slide 22. The North American commercial industrial market that is eligible to shop is about 165,000 megawatts. Of that market, approximately 30% have switched to competitive suppliers and of that switched market, New Energy has a 16% market share. Our gross margin is has also diversified and mirrors our geographic diversity. With continued penetration, particularly in newer markets of Michigan, Ontario, Alberta and New Jersey our margin will be even more balanced. The benefit of being a national provider is clear. We are not overly dependent on any one region for market rules or pricing.

Our success is not just the result of acquisitions. Yes, you must buy smart. But integration is also important. The fragmented nature of electric restructuring makes it very difficult to enter the market with a single national platform. Instead, you need regional teams that have local knowledge about market rules. Constellation New Energy's regional sales, regulatory know how, product development and operational expertise provide real value to customers. This strong regional presence is complemented by Constellation's national approach, allowing customers to use a single supplier in multiple regions, as well as Constellation Energy's superior supply, origination, credit management expertise. We believe being a first mover nationally has scale advantages that we can leverage in the future.

Our results for 2003 speak for themselves. We exceeded all expectations, and in 2004 we expect to sell over 40 billion kilowatt hours of electricity, 250 billion cubic feet of gas, and generate almost $4 billion in revenue.

Turning to Slide 24. The C&I market is healthy and growing. Although we are pleased with our 16% share, the market is still very fragmented. We believe there is significant opportunity. We are planning to drive our market share to grow from 16 to 21% and expect the switch market to increase from 50,000 to 75,000 megawatts over the next three years, especially as customers begin to take advantage of the tools deregulation has provided them for managing their energy costs.

We expect this combination, modest share growth, coupled with market size growth to be quite powerful. Our customer contracts have an average term of 18 months and historical retention rates in excess of 80%. This creates an ongoing, sustainable renewal business and in addition to renewals, we plan to generate 3100 megawatts of new business in 2004. This is achievable and in line with new business generated last year. While growth is strong, the market environment is competitive. Our plan assumes realistic and sustainable average margins of $4 per megawatt hour.

Looking to the future, we see opportunities for continued success. We are embarking on a branding campaign that will brand all the C&I businesses under one name. Branding will not only increase customer awareness, but enhance our ability to offer both gas and electricity to the same customers. We will also be working to further integrate our acquisitions. As we achieve scale, we will streamline processes and improve our cost structure. Finally, we will continue to look at tuck-in acquisitions to fill in or broaden our business position. And all of this, of course, builds on Constellation Energy Group leading market position as the number one national retail C&I supplier.

Turning to my final slide, number 26. As you can see, we are proud to be part of our customers success. And yes, Gillette Stadium, home of the Patriots is a Constellation New Energy customer, and like the Patriots New Energy attributes it's success to hard work and focusing on the fundamentals.

Now you should be turning to slide 27 and I will turn the program over to Tom Brooks.

Thanks, Tom. Good morning, everybody.

Constellation Power Source is our wholesale risk management and sales arm. In the next few minutes I will highlight three key successes from the past year and discuss their implications for 2004. First, we continued our momentum in topline growth. Looking the beyond 2003 growth we also originated a significant volume of additional new business whose gross margin will hit our results over the 2004 through 2006 period. I'm brief you on the details.

Second, we broadened our customer business by extending the geographic scope in power, and by developing an upstream presence in natural gas and coal markets which have become underserved as the industry shakeout continues. Third, we protected the $1.5 billion in wholesale merchant gross margin through forward hedging and active portfolio management. We expect to maintain this conservative posture for the foreseeable future.

Our topline growth was very strong in 2003. We think of gross margin created in two categories. Current gross margin is realized in the current year, and future gross margin results from new customer business whose gross margin will be realized in future years. Our current gross margin grew by 18% to $186 million in 2003 and exceeded our plan by 9%. We experienced even faster growth in future gross margin, which nearly doubled to $171 million.

Before we transitioned most of our activities to the accrual method of accounting this would have been predominantly the long dated component of our mark-to-market earnings. In the last two years we grew current earnings while making the transition to accrual, so this future gross margin represents additional cash flow and earnings power that you have not yet seen in our results. We expect to realize nearly 80% of this $171 million between 2004 and 2006.

Here is the expected realization pattern of the $171 million of 2003 future gross margin that I just referred to. We show here two product categories that I'll talk more about. Four requirements power, which is the traditional core business, and customer products, which includes a number of customer initiatives that have broadened our business in the last two years. Our strong customer products results indicates the potential of our efforts to broaden our wholesale franchise. Realization of the 2003 future gross margin will add about $56 million to 2004 and $43 million and $33 million to 2005 and 2006 respectively.

Turning to slide 31 and the growth of our customer business. In serving customers we pursue opportunities that fit the merchant arm of an energy company. As an energy company, one of the core capabilities is managing the logistics of transporting, storing, receiving, and delivering physical commodities. We've combined world class risk management capability with a highly analytical approach to the physical system.

Relying on this backbone, we continuously design strategies to create additional value within our own portfolio of physical and contractual assets, and we've commercialized some of these strategies by helping our customers manage their own businesses. We designed a portfolio management approach to serve our own needs, but it also enables us to see and capture commercial potential beyond our own system. Certainly the full requirement service we provide the distribution utilities is precisely this type of product, and we've experienced strong growth by serving electric utility customers . Increasingly, we see opportunities to broaden our business by leveraging this capability further in power and into natural gas, oil and coal markets within our customer products category.

Now I'll talk about our market assessment and outlook for the full requirements product and customer products categories. Starting with full requirements power, this is a market we know very well. It has a well defined base of customers whose needs and buying patterns we understand. They typically procure power on the basis of competitive processes so price matters a lot. But in the last two years, reliable performance, credit strength and service quality have become increasingly important.

Here you see our assessment of the full requirements market size by geographic segment. Our target market is distribution utilities who competitively source their full load requirements. The size of our target market is about 130,000 megawatts nationwide, having grown about 30% over a year ago, principally due to our own extended geographic scope.

We show here our expected peak load for 2004 by region with a total of about 18,500 megawatts, up 15% from 2003. More than 80% of our 2004 load target is already under contract, with the remainder likely to be signed up in the first and second quarters. Our share of the target market should be about 14% in 2004, representing a small decline from 2003 due to our own geographic extension. We believe that our share of the target market exceeds that of any competitor. We experienced unit margins between $2 a megawatt-hour and $4 a megawatt-hour on most of our 2003 new load business. We haven't seen any significant trend upward or down ward across the entire market so our unit margin outlook for 2004 remains within this range.

Summarizing, we expect continued strong results from our full requirements business in 2004, with current gross margin more than doubling to $200 million. Importantly, more than 80% of that expected gross margin is already under contract from prior years transactions and substantially hedged and managed with the rest of our portfolio. In addition we expect to generate $35 million from new load business entered into during 2004.

Turning to Slide 34 and our customer products area. Customer products include a range of services that help our customers to manage their own energy commodity portfolios. Demand has been strong and the customer base has become increasingly underserved as the merchant sector restructures. In 2003, we generated $108 million of gross margin within this customer products category, with breakdown by product types shown here.

We also briefly summarize here the nature of the products and the customer classes we serve. Let me highlight a few. Generator hedge products refers to risk management services we provide to merchant generators. Since we sell a significant volume of power to distribution utilities, we regularly buy from merchant generators who have become an important customer segment for us. We are well positioned to serve their hedge needs, given that our load and supply portfolio is well diversified relative to locational congestion and unit outage risk. This portfolio diversity enables us to offer more flexibility in the purchase terms we can provide to generators.

Distributor firm quantity products refers to fixed volume products that we provide to distribution utilities who do maintain in-house supply functions, but regularly need to supplement their supply mixes with fixed blocks of energy as opposed to long-term load following services.

Mid market sales refers to short-term balancing services we provide to producers and consumers of energy on a daily and weekly basis as they manage their positions. These involve execution oriented purchases and sales, typically with relatively small volumes and low risk, which we manage through our own portfolio and in OTC markets.

Natural gas, oil and coal products includes a variety of services that we provide to producers and consumers. For example, during 2003 such services included the purchase of gas reserves from an independent producer, and the management of the full coal supply chain, from mine mouth to burner tip, for an owner of merchant coal fire capacity.

Finally, contract acquisitions and restructurings refers to opportunities to acquire or restructure various types of load and supply contracts from energy companies whose objectives have changed as the industry restructures. We saw continued flow of these opportunities in 2003 and we do not see the pace slowing soon. Our efforts to broaden the business through customer products contributed meaningfully to 2003. We see real demand for the broad slate of products we can provide.

The scope of our generation and load business has put us in a good position to meet the needs of many types of customers by providing products that fit well within our own portfolio. The market for customer products is actually much larger than the full requirements market alone and due to the proliferation of back to basics strategies, has become relatively underserved. As an indication of that, at the top left we show the physical power and natural gas volumes that we project to be reported by producers and marketers for 2003 converted to a total dollar throughput. In power and natural gas alone these physical volumes represent an annual throughput of around $325 billion. Indicating the vast scope of the economic activity driving demand for the physical products we can provide.

On the right, we show our assessment of these reported volumes by company type: producers, active merchants, and exiting merchants who are materially reducing their merchant presence. In both the power and the natural gas markets, a significant proportion of today's volume is being reported by exiting merchants or by supply oriented producers. Therefore, we expect to see continuing decline in the competitive intensity of the tailored physical products segment that we target.

Summarizing, our customer products area was a strong contributor in 2003 and we think there is plenty of room for growth. We expect that our market presence, customer relationships, and expertise will enable us to grow current and future gross margin generated by serving this segment in 2004.

Turning to slide 37 and our portfolio management activities. Our portfolio management objectives are to reduce earnings variability and to create value through active management of our portfolio of physical and contractual assets. We actively forward hedge. For the last two years, we have reported current year hedge ratios well if excess of 90%.

From an historical perspective, such a conservative position is not typical across the energy sector, but in a turbulent environment, we believe that earnings and cash flow stability trump all, so we have taken a low risk approach. Our expected power and fuel volumes are more than 95% hedged on an average for 2004. About 80% for 2005 and more than 70% for 2006.

In the table beneath the hedge ratios, you see our projected sensitivity to changes in power and fuel prices in 2004 through 2006. This is a simple analysis intended only to communicate that our exposure to commodity price changes in 2004 is limited and only moderate in 2005 and 6. For instance, if average power prices fell by $1 a megawatt-hour with no associated decline in fuel prices, our 2004 earnings outlook would decline by about 2 cents a share. On the other hand, if power prices fell by the same $1 a megawatt-hour and average fuel prices fell by an amount that left spark spreads relatively constant, a more likely scenario, our outlook would decline by only about a penny a share.

In addition to minimizing earnings variability, our portfolio management activities enhanced our performance. With the breadth of our customer activity, we continually see opportunities to capture value through dynamic portfolio management. The success of these activities depends on our expertise in physical energy markets, as well as the market discovery hedging and execution role provided to our trading group.

Here are three examples from 2003. First, in markets where we have load and supply at multiple locations, we actively managed congestion costs between specific points. The products we use to manage this risk are sold by ISO's in auctions, allocated to us as a load serving entity, or traded as OTC derivatives. We frequently see attractively priced opportunities to purchase or sell these congestion products on paths that are less commonly traded by most market participants, but fit our portfolio given its breadth. In pursuing such opportunities we systematically drive down our costs to serve load.

Second, we continuously optimize the mix of products that our power plants and contractually controlled resources produce. Electricity markets includes products for reserves, grid support, and load following, in addition to fixed blocks of energy. With 190,000 megawatts of new gas fired generation and significant gas price volatility, the value of nonenergy products has become much less stable. Price fluctuations have presented opportunities to create additional value by modifying our product mix dynamically on the basis of market demand. For example, in 2003 as gas prices increased, we frequently provided reliability products to ISOs instead of energy, improving our margins.

Third, we enhanced our coal supply chain. During 2003 we significantly beefed up our coal markets expertise. This paid dividends by enabling us to capture opportunities to reduce our coal costs. Prior to 2002, the company managed coal supply in the traditional fuel procurement format. This implied a fairly static, inflexible approach. A narrow coal specification accommodating only a few source mines, a fixed long-term rail contract that had been in place for more than a decade, and a small fleet of owned barges that brought coal from one terminal to our plants.

Starting in 2003, we restructured our coal sourcing approach to capture the benefit of the breadth of supply options available to us given power plants located on the water. First, we worked to increase the range of coals that we can consume. This required better coordination between our portfolio management team and teams operating the power plants, and eventually led to a big increase in our potential sources, including coals from Columbia, Venezuela, and South Africa. More competitive alternative enabled significant cost reductions. Also in 2003 we restructured our rail contracts to allow for more flexibility.

Finally, we recently entered into a long-term contract to purchase syn fuel at a significant discount to prevailing coal prices. In total, we expect this portfolio approach to yield a savings of $10 million to $20 million per year through 2007 relative to costs under the more static approach.

Summarizing, our portfolio management efforts drove good results in 2003. Wholesale merchant earnings stability in a volatile market climate coupled with $48 million of value creation above the 2003 forward value of the portfolio at the start of the year. For 2004 we plan to continue to manage the wholesale portfolio conservatively and we are confident in our ability to continue adding current gross margin by capturing portfolio opportunities as we broaden our customer business.

Closing with a few thoughts on 2004. We are excited about the market environment. We see continued demand with substantial opportunity to meet underserved customer needs as former merchants curtail their presence in competitive markets. We will continue to rely on our strong risk management capability and culture to enable us to grow earnings predictably with the emphasis on execution and we expect our customer business momentum to continue. We broadened our business in 2003 by providing more products to more customers and much more potential lies ahead.

Now, I will turn the podium over to Mike Wallace to talk about our Generation business.

Thanks, Tom. Good morning.

In the next several minutes, I will talk about Generation and its position in our merchant energy business. It is our mission to be a recognized leader in energy generation and a creator of shareholder value through safe, reliable and efficient operations while continuing to effectively grow and integrate new assets into the fleet.

Turning to Slide 43. All of our power plants operate in an unregulated, fully competitive environment. We are focused on continuing to create value through innovative interaction with our competitive supply and risk management colleagues to maximize merchant EBIT. We implement a very disciplined approach toward capital investment that demands solid economic returns for every dollar invested. We have achieved solid results in the past two years and unequivocally demonstrated our ability to create value for shareholders on an increasing and sustained basis.

Throughout the rest of the presentation I will demonstrate that we are well on our way to being a recognized U.S. merchant generation leader. Slide 44.

Our generation fleet is quickly and effectively making the transition from the past regulated environment to the exciting performance based competitive environment. Several objective measures and accomplishments suggest we are among the leaders of the pack. Here are some highlights from last year. At Calvert cliffs we replaced the steam generators on the second unit in world record setting time and set new records for continuous run in capacity factor for Unit No. one. We achieved top quartile production costs as we committed two years ago.

At High Desert, an especially complex combined cycle plant, we completed construction two months ahead of schedule, below budget, were named Platts power plant the year for 2003, and are achieving world class reliability of 98.6% from startup last April through the end of the year. At Nine Mile Point, we have continued integration into our fleet with significant increases in plant margin of safety, in equipment reliability and in capacity factor. After the August 14th blackout we were able to quickly and safely bring both units back on line. Even with the blackout, our Nine Mile Point capacity factor last year was the best ever experienced in the history of this two unit plant.

And at our coal plants, we are increasing earnings through increased operating flexibility which supports a broader array of coals allowing more competitive fuel procurements. Finally, we were the winning bidder to purchase the Ginna Nuclear Power Plant. Actions are on track to close in record time by June 30th. Additionally, we are assessing steps that might be taken to accelerate power uprate of the unit. These results are an outcome of our disciplined approach to implementation of our business model.

Our goals include near term objectives focused on reliability, production capacity, and cost efficiency complemented with long-term goals relating to growth and top performance. In support of our goals we have established high level key objectives and detailed critical mission initiatives to focus our efforts. This provides the entire organization a consistent context, focus and accountability for meeting our objectives. Safe, reliable and efficient generation.

Slide 46. Our competitive merchant fleet has grown over the past several years. In 2001, we completed 1100 megawatts of new gas plants and added Nine Mile Point. In 2002 we completed an additional 2145 megawatts of gas plants and in 2003 finished our construction projects with the completion of High Desert. Of our added capacity, Nine Mile Point, High Desert , Oleander, and University Park contribute almost a third of our merchants gross margin and provide a source of high quality earnings.

In 2004, the new growth bar indicates the impact the Ginna plant will have once that transaction closes in June of this year. We expect the gross margin and bottom line trend to continue upward through megawatt-hour additions and the execution of productivity initiatives which I will discuss later. Operational excellence is the foundation of value creation for our merchant fleet. Our nuclear capacity factor has increased and is projected to continue to increase through implementation of our business plan through 2008.

It is notable at Calvert Cliffs that even with the steam generator replacement this year our capacity factor for two units combined surpassed 90%. In fact, we experienced a forced loss rate at the site which puts us in the top 10% of the industry.

For our fossil plants, reliability is the key metric and, as you can see from our performance, we have consistently improved over the last three years and anticipate having strong reliability in the future. Looking ahead to 2004, at Calvert Cliffs we are now driving toward top decile production costs and we will increase the output at the plant through replacement of the low pressure rotor and other improvements. For 2005 and beyond, we will obtain top decile production costs. In 2006 and 2007 our outage durations will increase while we replace the reactor vessel heads and make modifications which will lead to future reduced outage durations.

Turning to slide 49. During 2004 and beyond, we expect to build on the recent operational improvements achieved at Nine Mile Point as noted in my earlier remarks. Significant 2003 and 2004 investments in reliability and process improvements will enable us to achieve a sustained, long-term competitive position in productivity, outage costs and duration and electricity production. In addition, we plan to file for license extension on both units in May of this year.

During the spring of this year, we are rewinding the generator on unit two, and in 2005 we are replacing the low pressure rotor on unit one, giving us an additional 10 megawatts. Beyond 2005, we are planning power up rate work on unit two which will provide another 9 megawatts of output. With experienced Calvert Cliffs managers joining the Nine Mile team, and bringing the lessons learned from Calvert Cliffs as well as best industry practices, we will drive Nine Mile Point to top quartile production costs by 2008.

Slide 50. As we look at the aggregate nuclear fleet over the next five years without Ginna, our production costs per megawatt-hour are expected to decrease by more than 15% through the combination of improvements at both Calvert Cliffs and Nine Mile Point. Calvert Cliffs achieves top decile production costs in 2005.

In reviewing Nine Mile Point, we continued to believe it was a very good acquisition. In the immediate short-term horizon we will see a slight increase in production costs as we continue to execute performance improvements. However, an attractive long-term power purchase agreement for 90% of the output and a relatively low investment base, even after the cost of near term performance improvements, will enable us to capture significant long-term value for our shareholders. The successful execution of our planned 12-day outage earlier this month, as well as the actual performance of the plant over the second half of 2003, were very encouraging results. That performance, combined with our experience at Calvert Cliffs, gives us a high confidence level in the path we are taking for Nine Mile Point.

Next slide. Fleet optimization is the second part of the foundation of value creation for our merchant fleet and strongly evident in our fossil organization. We have aligned our non-nuclear fleet management to complement the portfolio alignment of the competitive supply arm of our merchants.

In so doing we have been able to drive synergies between generation and competitive supply to create greater overall value for the merchants. As an example, we will continue to maximize our bottom line by broadening the types of coals used in our plants. In addition, we continue to seek value through ancillary services and products which can be offered by our competitive supply arm to meet the demands of the competitive marketplace.

Finally, through the efforts of our asset optimization group, we performed plant valuations and benchmarking which guide informed decision making for targeted investments, divestitures and plant shut downs to improve earnings.

Slide is 52. What does this all mean? It comes together on this chart.

The outcome of strong operational performance and an optimized generation fleet is increased productivity. The solid results already recorded for '02 and '03 provide a taste of what our fleet can accomplish. Looking at the 2004 to '08 horizon, additional cost savings over 2003, of more than $90 million will be realized as we implement best practices, deploy Six Sigma and continue to drive our fleet to optimum performance.

More over, the complementary component to cost reductions is increasing megawatt outputs of our assets where economically appropriate. We have a clear line of sight on initiatives to produce megawatt-hour increases which will generate more than $40 million of EBIT over the next five years. Over all, we are committed and confident that by 2008 we will create more than $130 million in additional EBIT from our current fleet.

Final slide. In summary, we have developed and demonstrated core competencies that are creating significant and rapid additional value from our generation assets. Operational excellence; A demonstrated strong safety culture; Crisp execution resulting in predictable reliability, lower costs, higher production and earnings growth; Fleet optimization; Identifying and using benchmark analysis to close performance gaps; Leveraging best practices across the fleet to achieve synergies and adding top talent to drive and sustain improvements; Asset acquisition and integration; The early completion of High Desert with immediate efficient operations; A disciplined and patient approach to acquisition opportunities such as Ginna; and focused management attention on successful integration.

In short, our Merchant generation is rapidly transitioning into an integrated competitive fleet complementing our competitive supply business. Thank you and I will now turn the podium over to Frank Heintz.

Good morning.

In the next half dozen slides I will highlight key attributes about Baltimore Gas and Electric Company, review 2003 achievements and 2004 outlook. Turning to slide 55.

Baltimore Gas and Electric is Constellation's regulated distribution utility yielding stable earnings and cash flow. Our mission is to safely, economically, reliably, and profitably deliver gas and electricity to our customers. We are regulated by the Maryland Public Service Commission and the FERC and we maintain strong working relationships with our regulators. Our revenue mix is 50% residential, 40% commercial and 10% industrial which allows us to avoid the economic ups and downs which other utilities with a larger percentage of industrial customers tend to see.

We have a solid franchise in an economically healthy region and the company is growing at the rate of 20,000 gas and electric hook-ups per year with delivery volumes expanding at approximately 1.3% annually. BGE's business is delivering energy not selling commodity. Annually we earn $840 million in electric delivery revenue, managing a $3.5 billion asset base including an extensive network of sub stations, and transmission and distribution lines.

Our electric delivery rates were established in the 1999 regulatory settlement and are frozen through June of this year for commercial and industrial customers, and through June 2006 for our residential customers. During this rate freeze period, all productivity gains pass through to shareholders and in this regard we have been approaching top decile in electric transmission and distribution cost management.

Now turning to slide 57. Much like the electric side of our business, the primary source of BGE's gas earnings can be found if distribution, not in commodity sales. Just over 20% of BGEs earnings come from the gas business and because of our weather adjusted rate mechanism these are BGEs most stable and predictable revenues. All of of our gas customers have freedom of choice for gas supply. Gas commodity expense passes through to customers. We have a profit sharing mechanism which provides incentive for BGE to make economical gas purchases and when we better the index both our supply customers and our shareholders benefit.

2003 was a strong year for BGE but certainly with challenges. Hurricane Isabel swept through our territory, causing widespread outages affecting almost three quarters of our customers. BGE was well prepared and responded with an unprecedented premobilization and restoration effort. Nearly 4300 BGE and out of state utility field workers from 27 states and Canada worked around the clock towards full restoration. I was most proud of our employees and their efforts when, earlier this month, BGE was honored with EEI's annual Emergency Response award for our performance in the Hurricane Isabel disaster.

In 2003, BGE also enjoyed success in our ongoing day-to-day efforts to improve our reliability and advance our capabilities. Among our more notable accomplishments, BGE implemented a new state of the art management system; signed a contract to privatize Aberdeen Proving Grounds 115KV lines and related substation; received PFC approval of standard offer service bidding procedures for 2004 and beyond; leveraged our Six Sigma and process improvements to increase effectiveness and hold the line on costs. And even with Hurricane Isabel related expenses and lost revenues of 12 cents per share, BGE produced strong earnings of 91 cents.

As indicated at top of slide 59, our ongoing vision is to become a recognized leader in energy delivery. We are a top quartile performer as shown by FERC Cost Management Data and the J.D. Powers Electric Residential Customer Satisfaction Survey.

In 2004 we are continuing our journey to operational excellence. We will be investing more in electric system reliability, increasing O&M for system maintenance and capital outlays for distribution network enhancements. At the same time we will continue our focus on process improvements and efficiently gains to better our performance metrics. This will assure that we meet customers ever increasing expectations for uninterrupted service.

Another key element of BGE's operational excellence is our continuing emphasis on hassle free service for customers. Along with other Constellation units, we are dedicated to furthering our Six Sigma improvement and 2004 will bring our second wave of implementation. As was stated before, we intend to be a Six Sigma leader in the utility industry.

Pursuant to the Maryland commission's approval of supply bidding arrangements, we will serve as electric provider of last resort and manage the transition of our commercial and industry customers when price freeze service ends on June 30th. In 2004, we look forward to building on BGE's 2003 success through prudent investment and crisp operational excellence, we will drive reliability for our customers and strong financial performance for our shareholders.

And now I would like to turn the podium over to Follin Smith.

Good morning.

Over the course of the next 30 minutes I will provide detail on our 2003 results and review our outlook for 2004 earnings, cash flow and balance sheet and then finally I will discuss the building blocks we see for growth beyond 2004. Now, as you you know, we through is preparation as a reference tool and we provide you with the information you need to be able to model Constellation's businesses. So I'll move quickly through certain informational aspects of the presentation and focus on the more complicated aspects of the story, and you will also find further modelling support in the appendix of the book that you have at your table.

On page 62, fourth quarter earnings were 71 cents per share. Special items of 4 cents were driven by a net gain on the sale of real estate investment. Earnings excluding special items 67 cents per share, 2 cents by above the high end of our October guidance range of 55 to 65 cents per share. Compared to the fourth quarter of 2002 earnings were up 26 cents or 63%. Now, a look at the segments starting on page 64 with the merchants.

The Merchant earned 52 cents per share, exceeding guidance of 35 to 50 cents per share. Compared to last year's fourth quarter earnings of 22 cents, earnings were up by 30 cents. As expected, the fourth quarter benefited by 15 cents associated with the EITS023 accounting change.

Now, overall, the accounting change hurt 2003 results by an estimated 15 cents, but the fourth quarter benefited due to the high level of gross margin originated in prior years. We had 7 cents of new accrual gross margin that was originated in 2003 and realized in the fourth quarter. Offset by 13 cents less mark-to-market origination.

Plants contributed 18 cents including incremental earnings contribution from our new High Desert facility and better performance at Nine Mile Point which had 44 forced outage days in last year's fourth quarter. Finally, price changes added an incremental 5 cents compared to the fourth quarter of last year.

Turning to page 65 and BGE. BGE earned 17 cents in line with our guidance of 16 to 21 cents, but 5 cents lower than the fourth quarter of 2002. We expensed normal fourth quarter weather in central Maryland in late 2003 compared to a cold 2002 fourth quarter. Additionally we incurred costs associated with the major November storm and some other net cost increases. Our other nonregulated portfolio of businesses lost 2 cents per share in line with expectations.

For the full year on page 67, our earnings excluding special items were 276 compared to October earnings guidance of 263 to 273. Both of those figures, of course, include Isabel expenses. Importantly, we were able to grow our earnings 10% despite the 12 cent impact of Hurricane Isabel and the estimated 15 cent unfavorable impact of the EITS023 shift to accrual accounting.

Let me turn to an outlook for 2004 starting with page 69. Our guidance for 2004 is $3 to $3.15 which represents growth of 9 to 14% over 2003. The range excludes the anticipated earnings contribution associated with the planned Ginna acquisition, which we won't include in guidance until the transaction closes. It also excludes certain special items such as gains or losses on the sales of noncore assets.

At page 70 starts a waterfall that walks through the factors that will contribute to 2004 earnings growth. We've used the middle of the guidance range in this analysis.

Starting with page 71, we have broken out for you the 2004 P&L impact of a full year of operations at our High Desert Power Plant including all plant costs and allocated interest expense. This plant started operating at the end of April in 2003 and we expect the extra four months of operations in 2004 to add 6 cents.

We expect the wholesale competitive supply business to contribute an incremental 49 cents this year. 41 cents of this year-over-year increase is driven primarily by the contribution of transactions already originated and scheduled to be realized. 8 cents will come from the portion of new origination that will be realized in the current year and from portfolio management.

Now looking at page 73. As you will recall from last January's presentation, we entered 2003 with $85 million of existing wholesale competitive supply transactions, scheduled to be realized in 2003. Now, in addition, we had 9 cents of negatives in 2003 which we don't expect to recur. It includes the negative impact of hedges, which didn't qualify for hedge accounting treatment, post EITS023 implementing. As you'll recall from our first and second quarter conference calls, we had a negative mark-to-market in 2003 on the hedges, while the associated accrual gains won't be fully realized until this year and then future years. Now, in addition, we had expenses associated with the syn fuel investment on which we did not recognize the tax credits in earnings, and I'll speak more about that in a moment.

Now looking at 2004, we've originated transactions which will add to the future gross margin of the portfolio such that in 2004 we have $176 million of accrual gross margins scheduled to be realized. So together, gross margin already originated will be up 41 cents year-over-year.

Now, as to new business, in 2004 we are counting on generating $223 million from newly originated transactions and from portfolio management. As you will recall, portfolio management is our quantification of how much we have improved expected realization of the accrual book in any trading profit.

Mechanically for any unhedged output of our plant or unhedged elements of our load serving portfolio, we forecast those at current market forward rates. CPS's job is to improve that outcome. Last year, as Tom discussed, portfolio management generated $48 million of gains compared to our forecast at the beginning of the year. Together we expect new business in portfolio management to add $37 million in current gross margins compared to 2003.

On the cost side, we will spend about $14 million more at CPS to drive growth primarily to expand our gas and coal capabilities. So the net of incremental new business margin and incremental cost to drive the margin is to add profits of 8 cents year-over-year. So together, wholesale competitive supply is forecast to add 49 cents.

Retail competitive supply is expected to contribute an incremental nickel compared to 2004. Essentially the growth in earnings is driven by our reduction in purchase accounting amortization. Beyond that, we are investing in the future at New Energy. We're plowing back in growth and gross margin as we build our national presence. We are assuming an 80% renewal rate in 2004 which is in line with historical, actual experience. We need new business of 36 million to meet our 2004 plan compared to $69 million of new business actually done in 2003.

A scheduled decline in the contracted PPA price on output from Nine Mile Point will reduce earnings by 6 cents year-over-year. Contract rates for the PPA at Nine Mile Point are projected to decline until 2005, after which they will once again climb. This PPA price pattern reflects the forward power curve at the time of the Nine Mile Point acquisition.

To help us monitor productivity at the merchant, and at headquarters, we will be breaking out estimated inflation separately. For 2004, we assumed increases in benefit costs of 10% for the merchant and headquarters, which is in line with national trends. For other expenses we assumed a 2% increase. In total we expect inflation on merchant and headquarters expenses to have a negative 10 cents impact on 2004. We expect negative productivity of 2 cents in 2004.

Given what we have learned since acquiring the Nine Mile Point facility we see a long-term opportunity to drive capacity factors in output by investing in this plant. We now anticipate spending an incremental $15 million of O&M at Nine Mile Point in 2004. Now, excluding the O&M investment at Nine Mile Point we will generate about $11 million of net productivity. That includes some positive results of a number of productivity initiatives, partially offset by incremental O&M investment in productivity initiatives that should bear fruit in the future. I'll talk a bit about productivity in a moment.

BGE's 2004 earnings are expected to be about in line with 2003's earnings. We will benefit from the absence of Hurricane Isabel in 2004, offset by the absence of several one-time favorables in 2003, and cost increases. Other items will drive a 9 cent reduction in EPS. The largest of these is planning for Calvert Cliffs to return to the very good capacity factors we have seen historically compared to extraordinary levels of 2003. So in total, the mid point of the earnings projection range is $3.08 for 2004.

Now, I'll dig into the details of our earnings by segment. First the Merchants. Starting on page 81. In total, we expect gross margin of $2.1 billion, up more than $200 million from 2003.

We expect our Mid-Atlantic fleet to deliver total gross margin of $885 million, or about 42% of our total merchants gross margin. You will notice that we have renamed this the Mid-Atlantic fleet compared to the frame work we used last year which called it the PJM region. What we are trying to do here is to monitor the fleet separate from competitive supply activity. And the merchants primarily Mid-Atlantic fleet customer is of course BGE.

The Mid-Atlantic fleet's margin will be about flat despite a shorter outage at Calvert Cliffs, because, as I just mentioned, Calvert Cliffs performed at extraordinary levels last year and we are prudently planning for its non outage plant performance to return to the very good levels seen in prior years.

We have certain plants under long-term power purchase agreements or PPAs which represent 28% or $589 million in gross margin. Four plants contributed to this piece of our gross margin. Our Nine Mile Point nuclear plant and our High Desert, Oleander and University Park gas fired plants. The increase in gross margin from $568 million in 2003 to $589 million in 2004 is due to a full year of operations at High Desert, partially offset by a decline in contract prices on the Nine Mile Point PPA. These plants are a good stable source of cash flow and we provided details on how to model their income in the appendix.

Competitive supply includes the wholesale marketing and services business and New Energy's commercial and industrial businesses. It also includes portfolio management gross margin achieved through optimizing the sale and delivery of output from our Mid-Atlantic and PPA fleets and trading activity. Now as I mentioned before, but let me reiterate how we will do this.

We forecast any unhedged elements of gross margin from the Mid-Atlantic fleet and the plants with PPAs at current forward prices. To the extent that CPS's actions improve that outcome you will see that in competitive supply. To the extent plant operational performance changes gross margin from the Mid-Atlantic fleet 885 you see here, we will include that amount in the Mid-Atlantic fleet.

The page 84. We expect competitive supply gross margin of $619 million in 2004, which is up from $426 million in 2003. Now, at that $193 million projected increase, $151 million is from wholesale and $42 million is from commercial and industrial.

On page 85 we dissect the $193 million of competitive supply growth. $166 million of the growth or 86% is already originated. $114 million from wholesale and $52 million from retail. $14 million of the expected increase is a scheduled reduction in commercial and industrial acquisition related amortization. So importantly, only $13 million of gross margin comes from assumed growth in the level of new origination.

If you turn to page 86. Drilling in on wholesale current gross margin, which is business both to be originated and recognized in 2004. We anticipate a $37 million increase or 20% growth in 2004. This is consistent with last year's growth in newly originated current year growth margins of 18%.

Turning to page 87. To help you model the contribution of our wholesale competitive supply business, we provided a projected range of margins.

Now, some of you like to think about incremental gross margin and the relationship to incremental operating expense growth. If general, the way we think about this is for every dollar of fixed cost and incentive expenses we add we expect gross margin to be 2.5 times that. We think this business should be able to grow 10 to 20% per annum for number for a number of years. But as I'll explain later, we are not counting on significant growth in origination to achieve our total company 10% EPS growth rate.

On page 88. We expect robust growth in the gross margin from our commercial and industrial retail business, New Energy, in 2004. In terms of volumes and margins, we expect it to deliver about 42 million megawatt-hours of power at an average margin of $4. These contracts also have an average duration of 18 months.

We had favorable events and risk management benefits in 2003 which took our average margin per megawatt-hour to levels we would not expect to replicate in 2004. In 2004 we anticipate an average gross margin per megawatt-hour of $3.50 on new originations. New origination margins, in the absence of one time favorables, will drive a decline in margins per megawatt-hour from those in 2003. Gross margin from our qualifying facilities is expected to increase modestly in 2004.

On page 90. Turning to costs below gross margin. We see higher O&M and D&A expenses in 2004 due to investment in reliability at Nine Mile point, investment to support growth at CPF and New Energy, and a full year of the High Desert plant that came online in April 2003. Interest expense will be higher as a result of bringing the High Desert plant on balance sheet at the end of the second quarter of '03. We took advantage of low interest rates last summer to lock in some attractive long-term financing on that plant.

Turning to page 91. On this page we've provided details of our syn fuel operation. We are recognizing tax credits associated with our investments in four Pace facilities which have a private letter ruling from the IRS. Our share of equity earnings at Pace are recognized in the qualifying facility line of our merchant gross margin, and tax credits, of course, contributed below the line, which brings our overall CEG effective tax rate to 36% this year and adds about 10 cents to EPS in 2004.

Now, in connection with the coal sourcing story that Tom talked about before, we made an investment last year in the syn fuel plant in South Carolina. That represents an up side element to our 2004 forecast and is not included in the numbers that we have shown you. We do not currently have a PLR on this facility, and as we think is appropriate under the FAS-5 gain contingency rules, we've not recognized the tax credits associated with that facility in earnings. If issued we would recognize a $35 million tax credit associated with the 2003 operations. Our tax credit will be reduced to 32% and in the end it will affect EPS by 21 cents this year.

Now I am turning to the utility and slide 93. We expect BGE to earn between 85-95 cents per share this year in the same area as last year's earnings. We will benefit from the absence of Hurricane Isabel in 2004, customer growth, and lower interest expense. Also by the absence of several one-time favorable items in 2003 and cost increases including systems, spending on reliability, and compensation and benefits.

Now, turning to our capital spending and cash flow outlook on slide 95. For 2003, cash flow for debt reduction was $338 million, and free cash flow was $243 million. You will note that we had strong cash flow at both the merchant and the utility. The merchants cash flow represented 50% of the company's free cash flow before dividends and pension contribution.

On page 96, you see our capital spending projections and our business plan. Our capital spending plan for 2004 represents an increase from the plan we presented this time last year. As we have said, we will deploy capital for above hurdle rate opportunities. Those include generation infrastructure investments which add to the gross margin, human resources systems which will lay the foundation for our future productivity improvements. At the utility we are also investing to proactively respond to the national call for enhanced system reliability.

In the bottom part of the chart we have given you, it's segregated, discretionary and nondiscretionary capital spending. As a majority discretionary capital spending is motivated by a desire to increase gross margin, and about two thirds of that could be deferred indefinitely without jeopardizing plant infrastructure. About a third of that could be deferred for a year or two.

On page 97 you see 2004 cash flow. We expect to generate approximately $360 million of cash flow for debt reduction in 2004. Both the merchant and utility will be strong contributors to cash flow. The merchant will have negative working capital as you would expect from a growing business. We see we've put a place holder for noncore asset dispositions.

We are currently soliciting bids for our geothermal plant in Hawaii. Also, when the environment is right, we will sell our Panamanian transmission and distribution company. We also have small amounts of real estate which we expect to continue to monetize.

Now turning to the balance sheet on slide 99. Debt to total capital for year end 2003 was 49.9%. An almost 300 basis point real improvement from a comparable 52.9% at year end 2002. We project debt to total capital to continue to decline to around 47% by year end 2004, from growth and earnings and strong cash flow applied to debt reduction.

Now, let me spend the last few minutes focusing on our long-term growth outlook. We have a clear line of sight on 10% EPS growth after 2004. And I will walk through some of the biggest issues and building blocks in our long-term growth outlook.

The biggest negative confronting us is the wind down of our competitive transition revenues which is outlined on page 103. The phase out of CPC revenues affects 2005, 2006 and 2007, resulting in EPS declines of 8 cents, 24 cents and 16 cents respectively. Cumulatively this is a $127 million pretax or 48 cents after-tax impact. On the other hand, we will be favorably impacted by the end of standard offer price freeze service in Maryland.

If you look at page 105 . In July of 2002 the roughly 400 largest BGE C&I customers rolled off of price freeze service in Maryland. In July of this year, price freeze service for all the remaining commercial and industrial customers in Maryland will end. BGE will conduct a competitive auction for its load obligation in a few weeks.

While being named provider of last resort is a modest gross margin opportunity for BGE, the more significant impact is on our merchant. For perspective, assuming Constellation sells the power currently devoted to C&I price freeze service in the market, we will earn an incremental $60 million in gross margin. That assumes that the merchant wins none of BGE's full requirements load market in the auction and earns no incremental margin associated, with all the additional components of the load serving contract. The possibility of winning that load is factored into our thinking on our competitive supply new business targets.

The same fact pattern is true for the 100% of the BGE residential load we are serving through 2006. Cumulatively, the end of price freeze service will result in a Mid-Atlantic fleet gross margin increase of $137 million. That coincidentally compared to the $127 million decrease from the CTC over the same time frame. As Tom Brooks shared with you, we are relatively highly hedged for a number of years out and we expect to become even more so as we move forward in future.

Turning to page 106. Mayo and Mike discussed, we are in the midst of a massive conversion of the deregulated parts of our business, away from the cost structure that was created by a regulated regime. We are intent on maximizing the value of each asset by taking advantage of the best practices from this industry, and from the rest of competitive industrial America.

Turning to page 107. Whereas up 'til now we, and others in the industry, have tracked the fruit of cost savings initiatives literally adding up, " Here are the cost savings initiatives that we achieved in the prior year", we are moving to a productivity definition akin to what many industrials companies use. That definition demands quantification of the all-in change in cost relative to output. It is more rigorous and unforgiving. We think the right metric is important in managing to results. We will be apply this metric to our generation and our staff organizations first.

On page 108. We're undertaking a number of productivity initiatives which should bear meaningful fruit and be especially meaningful in 2006 and 2007. Efforts to achieve productivity are deep and widespread. We are benchmarking to establish the goals and then providing the organization with the tools to achieve those goals. Including infusing the company with Six Sigma trained black belts to support to process reengineering.

At CGG, as Mike said, we are relentlessly benchmarking our plant's cost against the best in the industry and working to attain their cost profiles. Simultaneously we are working to expand the gross margin produced by our plant by increasing capacity where modest capital is required; buy shortening our standard refueling outages; and by managing our equipment for sustained higher reliability. All that means that earnings and cash flow will be permanently higher on our investment in generating assets.

We are rebuilding the infrastructure underpinning our legal, human resources, finance and IT staffs. And we're modernizing to build a platform from which we can move to implement the efficiency of world class companies. We are benchmarking our staff against all companies, not just utilities, and see meaningful potential by implementing process reengineering, shared services for accounting and other transaction processing approaches long used by corporate America.

In total, we have the visibility through benchmarking and organizational commitment to foresee over 150 to 180 million in productivity potential at our merchant and our staffs over the five year planning horizon. This is an important contributor to our comfort with the 10% EPS growth expectation.

Now, I'll turn to competitive supply on page 111. The growth for Constellation New Energy is ambitious but we think achievable. You can see from the blue parts of the bars, New Energy's existing backlog of business, coupled with it's historical high renewal rate, mean that new origination growth can be modest and yet drive powerful total gross margin profit growth. The green part of the bars indicates the level of new originations in New Energy's plan.

Our new business growth is planned at 4,600 megawatts in 2005. That compares to 2003 new business growth of 3700 megawatts and a very achievable 3100 megawatts forecasted in 2004. Although it is ambitious, we have been growing at 1,000 megawatt per quarter clip for the last two quarters. That momentum combined with an increase in the switch market allows us to believe that these levels are achievable.

For 2006 and beyond our new business growth projections are expected to level off slightly above the 2005 level. Now, turning to page 112. [Loss of audio.]

Topline growth from our competitive supply wholesale business is another important contributor to our 10% EPS growth story. We are less dependent on this element of the story than you may think. Our origination groups are focused both on gross margin to be realized in the current year and on originating a business backlog to be realized in future years. This is true in both our wholesale and C&I competitive supply organization. This chart lays out our existing wholesale accrual competitive supply portfolio, and in the appendix, you will find details of contracts by region and year of realization. The contracts will be reflected in future earnings as power is delivered to customers and we are paid. The margins are highly hedged and the quantity and pattern of realization is very visible.

In 2004, these preexisting contracts will add 63 cents to earnings and 37 cents in 2005. Now, by comparison, at the end of 2004, this -- at end of 2002, this 2004 and 2005 existing accrual contracts book stood at 43 and 22 cents respectively. That means that during 2003 wholesale competitive supply was able to add an incremental 20 cents to 2004's gross margin, and an incremental 15 cents to 2005's gross margin. And we expect this pattern of creating gross margin for future years to continue. Thereby building our backlog of future earnings.

Turning to page 113. Our wholesale energy business plan calls for current gross margin of $223 million to be realized in 2004. That projected level of new business implies a 20% year-over-year growth in current gross margin created. We, of course, also expect to continue to originate transactions which will create future gross margins. In 2003 we originated 171 million worth of gross margin to be recognized in future periods. 20% growth in business transacted implies that we will originate 206 million of gross margin in 2004 to be realized in future years.

In total, it is reasonable to expect that in 2004 our wholesale marketing and trading organization will create 429 million in value, some to be realized this year, and the remainder to be realized in future periods. For a perspective on that 20% growth in total gross margin created, last year we actually achieved 46% growth in total gross margin created, and the year before we achieved 76% growth in total gross margin created.

Now, on page 114. As the backlog of future business grows, new origination growth needed to support a 10% long-term Constellation Energy EPS growth rate is quite manageable. Let me be clear, this chart shows the growth in business origination needed to support 10% long-term EPS growth. This is a mathematical calculation, not the actual growth rates we expect.

We expect our new business to grow at levels which exceed the 2005 and 2006 growth rates included here. But the important takeaway is that new business originated can actually show no growth in 2006 and we would still achieve 10% Constellation Energy EPS growth, assuming the other elements of our business plan are attained.

To summarize, we see continued strong bottom line growth opportunities and believe 10% is realistic over the planning period in spite of the impact of the decline in our CTC. We believe productivity in Merchant, Generation and staff cost structure can add $150 million to $180 million over time. The enterprise freeze service adds meaningfully to the merchant's gross margin, and we expect competitive supply to continue to grow but don't have to hit on all cylinders. As we showed earlier, wholesale competitive supply origination can actually begin to decline as long as we hit the other elements of our plan.

Finally, because we will have achieved our target leverage ratio in 2005 in this organic business plan, we've assumed we would then undertake share repurchases to maintain a proper leverage ratio. This is very accretive.

In summary, we have a diverse set of growth building blocks. We are not relying on perfect market scenarios or flawless execution to achieve 10% growth. We have margin for error. The Ginna acquisition will add higher visibility. Accordingly, if we continue the operational excellence and pattern of execution that we've demonstrated over the past two years, 10% long-term earnings growth may well prove conservative.

Now, let me wrap up by providing some guidance for the first quarter of 2004. We expect earnings of 55 to 70 cents per share compared to 36 cents per share in the first quarter of 2003. We expect the Merchants earnings to range between 18 and 33 cents compared to a loss of 12 cents in the first quarter of 2003. A full year of earnings contribution from our High Desert Plant, as well as completion of the steam generator replacement at Calvert Cliffs, are expected to drive EPS upside versus last year. We also experienced losses last year on the timing related impact of hedges left behind in mark-to-market following implementation of EITS023.

We expect BGE to earn between 37 and 43 cents compared to 48 cents last year. The decline is drive by an assumed return to normal weather versus the cold winter of 2003 and by increased O&M and reliability spending. The other nonregulated businesses should lose 2 cents to break even compared to a break even in the first quarter of last year.

I will turn the podium back over to Mayo to wrap up.

Thanks, Follin and thank you all.

That is a lot to absorb. You are very attentive and we appreciate it. I would like to thank the senior management group here in their presentations. I also want to point out that we have a number of other Constellation employees here today and you're welcome to visit with them after the Q&A period.

The only thing that I would really like to comment on at the end, is that you know you have heard an awful lot. I hope you have grasped, I would say three fundamental elements of the presentation. The first and probably most importantly is the notion that this has become more of a customer centric business for us. That is where the growth it and what substantiates this 10% growth rate that we are so confident about.

I think, secondly, we keep trying to reinforce internally and therefore to all of you that we are disciplined in the way this which we deploy our capital. A not of nutty things going on out there in this industry and we really force upon ourselves the kind of discipline that you would all expect with your money. And then lastly, a lot of this plan really is all about execution now. We know where we are going. We have to do it well.

Everyone here is committed to execute on this plan and get it done, so that we have a real clear line of sight on the type of forecasts that Follin outlined for you. So with that I want to make sure we have time for a few questions and I will open up the floor and try to direct them to the appropriate person here on the panel.

Jack, do you want to --

Follin, when you talked about this synthetic fuel, the synthetic fuel slide. Basically you said that that upside of your numbers if you get the private letter ruling.

Can you give us an understanding of what the timeline is for potential approval of a private letter ruling? And then are those earnings sort of a one-time 20 cents gain or would you then start booking the tax credits on an ongoing basis through the sunset of the syn fuel tax credit through year end '07?

Let me talk a minute about this, Mike. In the context of developing the ability to source coal more broadly, we were approached by New Horizons Energy to help them with the facility that had ceased production. So in May we purchased a 99% interest in a facility that we have a right to terminate in February of this year. The facility had already had a private letter ruling, and nothing important with respect to the production elements of the facility have changed, so we do believe that the basis for the tax credits in this facility are sound.

When the IRS ceased rulings in the same quarter that we made this investment, we decided not accrue the tax benefits last year. We will only recognize the tax credits when we achieve the very high level of certainty that is needed for a gain contingency under FAS 5.

We decided we weren't comfortable in the fourth quarter even after the IRS announcement of 2003-70 because frankly the IRS sent very mixed messages with that announcement. They said they were resuming rulings but then they made very negative comments about the degree of chemical change in the synthetic fuel process in general. We are seeking the PLR ruling right now and we're very hopeful that we will receive a favorable ruling in the May or June time frame. Now, when that happens, our tax rate will be reduced to 32% for this year. And EPS will be increased by 21 cents.

Now, I said that we had the right to terminate in February and we have not made the decision yet as to whether to terminate or stay in this facility. So it is inappropriate for me to comment on whether it will or won't be in 2004's ongoing earnings. If we decide to extend, the value of the extension is 13 cents this year. Rather if we decide not to terminate it is 13 cents.

To make it clear, you have a catchup for last year's tax credits and then on ongoing basis it would be a 13 cent benefit relative to your current forecast.

Right.

Great.

Then one - second question. When you talked about the way you are forecasting competitive supply relative to to the Mid-Atlantic fleet and you talked about the auction that is coming up, just so I understand that correctly, to the extent that you are making an assumption that you win load there or that you continue to serve load, the gross margin is being -- is assumed to be booked a the competitive supply business and not coming directly from the fleets. To the extent that Constellation businesses as a whole is serving that load going forward as it transitions, the assumption is that power is being sold to supply and supply is reselling it and you're booking the gross margin at supply. Is that correct?

The part of the gross margin that is the difference, of course, between generation costs and for any unhedged elements, to the extent that we've already hedged certain elements of the PJM fleet which, as you saw, were pretty highly hedged. That is already included in the Mid-Atlantic fleet gross margin. To the extent we improve the outcome by either, you know, sales to BGE, sales to BGF, the improvement associated with that competitive supply load serving will go in the competitive supply line. And that -- and that sort of subsegment breakdown we did.

A couple questions. On the numbers you gave for productivity and then the Maryland contract opportunities to market. Are those numbers kind of an annual run rate number by the end of the period or are those accumulative?

It is the difference between 2003 and 2007. Cumulative change.

Cumulative.

And you have got a per annum breakdown on the charts as well so you can see the buildup to that cumulative number?

How about on the productivity? I don't think there was a --

We did not break that out. And I'm hesitant to give you a by year breakout of that.

The right way to think about that is, the heaviest part of that comes in 2006 and 2007. So think about it as a few cents at or for 2005 and then the heavy part comes in 2006 and 2007. And quite literally, there are many, many initiatives which we can show, you know, when the gross margin is added from initiatives that are happening at Generation fleet; when the new systems and reengineering should be complete; and so that is why a lot of this stuff that takes a long time to implement hits in the 2006, 2007 time frame.

Okay.

And then one question for Mayo on, I guess M&A opportunities. You guys have largely made most of your investments in customer oriented investments. Obviously you did Ginna recently. But what is your sense on where opportunities the next few years might be?

Do you see the ability to acquire more hard assets? It seems like it has been mainly financial buyers. But do you think there will be more focus there to some sense on that the M&A opportunity?

Well, sort of on two different fronts. I think that to some extent on the competitive supply side the opportunities are beginning to diminish. And that is fine with us because we see plenty now organic opportunities since we are in all states. We have both the solid power and gas platforms. So our view is, it is actually more efficient for us to enter certain markets or expand in certain markets organically.

On the generation side as everyone here knows there are hundreds and hundreds of opportunities with still few clearing. That is going to change at some point.

Certainly there is a lot of interest on the physical plant side from people even outside the industry, that is creating a different kind of dynamic. But I -- I think that we we'll continue for us to see interesting opportunities. Mainly because in these locations where we have big load obligations, we have more degrees of freedom around the way in which we hedge those positions both financially or physically, and so over time much like Ginna, the Ginna acquisition, you know, one would not say given its extended PPA that it is particularly relevant to the competitive supply business in the near term. But it is going to be very competitive and important to the business over the longer term once that PPA is off. And so I think over time we will see plenty of opportunities in that domain.

I also happen to be a very firm believer that the consolidation trend will continue in the business, probably accelerate. I have seen surveys amongst CEOs within the industry where 100% of them think they will be involved in some merger activity over the next five years which I find pretty stunning. But, you know, it really should -- this is a fragmented industry. And I think that many of the nation's problems get solved through some form of consolidation and this is too big a business and way too fragmented to not look at the opportunities. And not just with respect to operating scale leverage, which I think there is plenty segment by segment, but by virtue of beginning to solving some of the reliability problems , some of the long-term energy policy problems of the country, environmental problems.

We need larger providers that coalesce around certain policy initiatives to make things happen. I think a lot of people in industry feel that way. Most people don't know how to get there or you know what they should do in the near term. But I can tell you from Constellation's standpoint, we feel severely advantaged by virtue of having twice the growth rate of virtually anybody else in the industry. That is what is going to present us with the opportunity, if this community and others, see the wisdom of higher PE multiples associated with the growth rate that would be even better. But I think that we will see a lot of activity and for us certainly, the generation side in particular, is still very interesting to us.

I was wondering if you could comment on the upcoming Maryland auction? Follin, just make sure I got your comments, correct.

In the -- in the competitive supply business, when you talk about the enhancement, you haven't given any credit to what may potentially come out of you guys managing some of that load? There is no accounting for that in your guidance right now?

It is baked into our thinking. When you see the competitive supply new business target for this year, Carrie.

Yeah.

That is factored in to there.

So it's there. And what are you targeting? How much of the load are you guys targeting to win?

I guess I would respond somewhat more broadly. There are with New Jersey and Maryland soon upcoming, there are -- there are BGS and Polar Service auctions amounting to about 10,000 megawatts of peak load, so there is quite an array of opportunities in front of us. And in -- and you know in terms of - in terms of specific targets I probably don't have any to articulate here but.

Like 80%? You know, do you have a general range of how much you feel comfortable terming up?

I'm not sure I understood that question.

The amount of megawatts you have available, I guess, from your PJM fleet, the actually plant. How much of that you would like to have dedicated to these competitive auctions?

As I indicated for 2004, we are -- we are well over 90% forward sold on power and forward purchased on fuel. And 80% '05, a bit over 70% '06. So when we think about a 10,000 megawatt opportunity, we're thinking about supply from owned resources as well as contractual resources. So I would say, I would say our objectives aren't sort of limited to hedging strictly speaking.

And idea if that is not -- -- how much you would bid in that auction? You don't know.

I'm not sure really we would want to -

Fair enough.

I came with auctions commencing in a few days, and you know, it is probably not the right time to talk about our strategy.

Do you know are you going heavily more participate in the Maryland versus EGS's or any preference as to what you are looking at more?

I think I would prefer to leave it at that.

What about Ginna? There was recent comments by Energy East that they would walk away from the Ginna sale if they didn't get properly regulatory treatment, I was curious if you had any insight into that process?

Carrie, we are really fully confident about the likelihood of the Ginna transaction to close. There was extensive negotiation, if you will, around the terms that constituted the basis for closing the sale. And in fact, members of the Public Service Commission were observers to that whole process.

Secondly, the teams right now are working extraordinarily well, together. The RGE Energy East team and Constellation and, in fact, are ahead of schedule to support a close by the end of June. And the dialogue that has come from the Public Service Commission and its procedural orders are also encouraging to us that everything is exactly on the right track and we are totally confident the transaction will close.

Thank you. In one of the earlier slides, you indicated that cost savings initiatives generated about $63 million of lower expenses. I was wondering what that number might be, the estimate for 2004?

In 2004 we are starting to track productivity which you will see the definition back in the back of your presentation. It is change in costs, minus inflation, so it is a bit more rigorous than adding up what cost savings initiatives are, and I honestly can say I don't have an add up of just all the cost savings initiatives with me. But it will be all partially offset by some cost increases. What we have said is that Nine Mile Point will hurt the productivity calculation by $15 million. Other net you said is $11 million. And imbedded in that 11 million are some favorable partially offset by reinventments, literally plowing in an O&E expense into systems ,which is a key foundation both finance systems and human resources systems, key foundations for becoming more productive in all of our staff organizations.

Can you share with us why the forecast for lower margin on the C&I new origination business from what you historically achieved? You mentioned it was going to be, if I remember, 370 or so versus achieving in the high five, I guess, mid five range.

Let me restate the numbers for you. Which are on page 88. Okay. You see the gross margins are going be up $42 million. Already in there, already originated gross margin is up $52 million. And new business and portfolio management, year-over-year is a negative $33 million and that is what you are asking about. We're going from $69 million in 2003 to $36 million in 2004. There are about $20 million of favorable items. Some significant favorable things in 2003 that we think it's not prudent to count on being repeated.

And the other thing is we are counting on originating, year-over-year in our business plan, fewer megawatt-hours at a smaller margin. It is -- we are being prudent in terms of the level of new business originated. And the margins at which that will be originated. Do you want to add anything, Paul?

I would add that when we put our business plans together, we really are conservative in forecasting our margins. We believe that is the right way to plan for this business. And I would also point out that the numbers we are talking about today with regard to margins are still some what higher than what we told you we expected them to be this time last year. So we -- you know, we just she as kind of like a transition in the numbers more than anything that is underlying issue with the market.

Let me reiterate. We told you this time last year we would originate new business at a margin of $3.33. Today, I have told you that new originations last year were at around 4 bucks and that we are planning this year for them to be at about $3.50.. It is a conservative planning issue.

Can you hear me? In terms of the $4, for customer for C&I and, I think it's 2 to $4 for a full requirements, what is the discount that you are actually providing customers? On top of that? I mean who is losing from this process? You are making money by providing power to them. Who are you taking it away from? And how much do you have to offer the customer to get them to come along with you, that's number one?

And then, number two, in terms of gross margin for 2003 and 2004, I know you guys have knocked down the amount of mark-to-market. But if we could give you an idea, just roughly speaking, how much was mark-to-market in '03 and how much was in '04? Or will be in '04? Thank you.

Let me start off with, if I understand the question correctly with regard to commercial industrial. The customers that are stomping in many regards they need to buy the power. If you go back five years ago when there were structured markets, there were margins in the regulatory structure. As restructuring took place the products went out and in essence the margins went to the marketplace. What we are really doing is just taking margins, with respect to margins previously in the share of the market regulatory regime, and putting it into a competitive business.

On the wholesale side, I guess I would say fundamentally, we are constantly seeking to be the low cost provider. We typically provide power to distribution utilities through a competitive processes so providing the lowest prices is obviously a key. We are constantly seeking to effectively reduce our supply costs through, through a variety of portfolio management techniques.

So, so, certainly we look to sell power full requirements power at a margin that enables us to cover the cost of procuring it, and cover our risks. But, but, but fundamentally we are constantly seeking to be the low cost provider. As to the -- as to the mark-to-market question, I guess I -- I -- on '03 results we don't -- we certainly don't track mark-to-market as a line of business. Activity that is accounted for on a mark-to-market basis you see in a couple places.

One, portfolio management. And two, in the customer products area that I described. As to -- as to '03 results, in the -- in the component of the -- of the customer products result that was accounted for on a mark-to-market basis was about half. As to the portfolio management area, contribution of the mark-to-market activities was actually slightly negative, around about minus five. And in terms of our ongoing outlook, fundamentally we have no forecast for mark-to-market earnings. Simply because, at this point for us, that is purely the accounting outcome given the nature of the business we enter into, as opposed to the specific objective we set out today.

Let me add to that. It is explicitly something we don't forecast. We do have to make an assumption in cash flow and working capital.

The assumption we made is that there will be 40 million of mark-to-market earnings that are unrealized. To give you a perspective on what that bracketed number is in the cash flow. It is an assumption. It is what the accounting outcome would be that the transactions we'll be doing for customers. Something you don't know until you get there.

Before I ask my specific question, just to confirm my facts. Mike, the upgrade that was intended for Ginna was a small portion '06 and then conservatively speaking, a larger portion to come online in '08, was that the original plan?

That's correct. Total upgrade is 17% '06 to '08.

Here is my question for Mike and Follin. You know, if I remember correctly, at the time of the acquisition when you did your conference call, you all said that there was a distinct possibility of having the entire thing hit in '06, and that would significantly enhance the total returns. I wanted to inquire if you have had any further feedback or analysis on that which would lead you to lay odds on it? And what is implicit in your chart on page 52 for total growth in margin from generation?

Nothing has changed from our discussions when we first discussed the uprate. And in fact, things have only improved.

We immediately began working with RG&E, and we are now, to establish the team involving Westinghouse and other contractors, to develop the full plan for the power uprate, and to make as an assumption for that plan, full completion of the uprate by '06. So literally, as we speak our teams are pressing the plan to determine whether we can do all of the things that need to be done to get the full 17% in '06. We absolutely are on track for '08 and there is the distinct possibility it will be fully completed by '06. But I won't go beyond that in suggesting what that probability is.

And just to be clear. It is not in our business plan. Ginna is not in our business plan and not in our projections. We will put it in once the deal is closed. We think just mechanistically that's the prudent way to build a plan, is don't put in acquisitions until we've gotten them.

Jack, why don't we take one more and then we'll be around....

Follin, actually I had two questions. One is, do you have any assumption for customer attrition at the utility? I guess we are hopeful that power prices, if you win a lot of this auction, that power prices are even higher and that could result in maybe more customers leaving the system and buying power from somebody else.

We do, David and if you don't mind, I it will -- do you want to comment on them, Frank? We think they are conservative that we built into the plan.

We are anticipating that the C&I customer attrition that, various classes anywhere from 60%,will remain with us if they are small C&I customers, down to only about 30% if they are larger C&I customers. And otherwise those customers will move to potentially other suppliers of commodity - electric commodity supply.

And my other question was on the balance sheet. What is your targeted capital structure seeing some of this discretionary cash to buy back shares which you mentioned.

What we said publicly is we think our objective here is to maintain very strong investment grade rating. We think it is important for the business that we do that. And we think that failing to adapt the total capital for our business mix in the mid 40's area is about right and what we've said is, we will have achieved that in 2005. We said by the end of next we are we will be below 47%, or excuse me the end of this year at the end of 47%. 2004.

Great. Thank you all very much for your patience. And we will look forward to future earnings calls and seeing you all here next year. Thanks very much.