艾索倫電力 (EXC) 2004 Q1 法說會逐字稿

Good day and welcome to today's conference call. All sites are on the line and in a listen-only mode. Right now, I would like to hand the meeting over to your host, Mr. Mayo Shattuck from the Constellation Energy Group. Go ahead please.

Good morning everyone. Welcome to our first quarter 2004 earnings call. I do apologize for the late start. We had a brief technical staff SNAFU here so we are off and running now. Before we begin our presentation, let me remind you of our comments today will include forward-looking statements which are subject to certain risks and uncertainties. For a complete discussion of those risks we encourage you to read our documents on file with the SEC. Our presentation today is being webcast and the slides are available on a website would you can access at Constellation.com under investor relations. We will use non-GAAP financial measures in this presentation to help you understand our operating performance. We have attached an appendix to the charts on the website reconciling non-GAAP measures to GAAP measures.

We are now moving onto slide 4. This is that tenth consecutive quarter this management team has met or exceeded earnings guidance. Earnings excluding special items for the quarter were 66 cents per share or 83 percent higher than the 36 cents per share earned in the first quarter of 2003. The 2004 27 cents per share special item relates to the sale of our Hawaiian geothermal plant. As you will recall, this sale was part of our plan to divest underperforming and noncore legacy assets.

PGE had a terrific quarter and continues to be a stable contributor of earnings and cash flow. At the merchant last year, in the first order we experienced third-party plant outages during the February cold snap and an extraordinary move in natural gas-fired says. This quarter, we also experienced extreme gas and power price moves coupled with record January temperatures in New England. Once again, we demonstrated that our conservative approach to managing risk results and our consistently meeting earnings commitments.

Turning to slide 5. We're extremely pleased with our wholesale competitive supply businesses performance in the first quarter. We now have contracts in place which exceed our 2004 business plans, 18,500-megawatt peak load target. Examples of our origination strength include the mid-Atlantic auctions where we won almost one-third of the load up for bid and added 5380 peak megawatts to our load under management. In total we grew the size of our load serving portfolio by more than 16 percent in the quarter. In addition, auction wins hedged a significant amount of our mid-Atlantic fleets open length in an attractive price environment and reduced our merchants overall exposure to power prices by 70 percent. Our mid-Atlantic fleet is now substantially forward hedged through 2006.

As you know, we've consistently differentiated ourselves by limiting our exposure to quantity price changes over the business planning horizon. We want competitive supply origination, portfolio management success and operational performance to be the key drivers of our results, not changes in commodity prices. To this end, our load serving origination enhances visibility on the gross margin backlog that we will realize in 2004 and future periods.

Turning to slide 6. In total, during the quarter, our wholesale marketing organization originated $92 million of new business to be realized in 2004 and beyond. This amount represents more than five times the new business we contracted during the first quarter of 2003. Retail also had strong sales growth increasing peak load served by 8 percent in the first quarter to over 88 hundred megawatts. NewEnergy now serves 55 of the Fortune 100 companies.

Turning to slide 7. Our purchase of the RG&E nuclear station from Rochester Gas and Electric is preceding well. While the close is dependent on approvals beyond our control, we currently expect to close the transaction in the second quarter. For the past several months we've had an acquisition integration team on-site working with existing today GHANA (ph) employees towards this end. In total more than 150 employees are working to execute a seamless transition of all operation systems and personnel.

As you will recall when we announced the GHANA transaction, we anticipated upgrading the plant by 5 percent in 2006, and 12 percent in 2008 for a total upgrade of 17 percent. We've now taken steps that allow us to complete the expected 17 percent upgrade during the scheduled fall 2006 refueling outage. This will improve plant cash flow in 2007 and 2008. Accretion from the plant is substantially unchanged from what we showed you when we announced the deal in November. The benefit of an early upgrade is offset by the non-cash affect of declining interest rates on the decommissioning liability and related ARO expenses.

Turning to slide 8. We have built a unique company positioned for success that continues to excel as we pursue a differentiated strategy. However, the story this quarter is about execution. Driven by strong wholesale origination performance we've already achieved the load serving target we set for the entire year. We seized an opportunity to renegotiate and add more value from our South Carolina synfuel investment while executing our strategy of divesting noncore assets by selling our Hawaiian geothermal facility. In sum, we have a higher degree visibility on the year and feel comfortable raising earnings guidance for 2004 by 5 cents to a range of $3.05 to $3.20 per share.

We believe we're building a business that is incredibly valuable, is earnings consistency growth potential are unique in the energy industry. There is increasing demand for competitive supply providers who act as intermediaries in the marketplace. Aggregating energy products and managing risk for wholesale and large C&I customers. Strong retail customers switching trends toward competitive suppliers in deregulated states speak to this market phenomenon. This is one of the many ways Constellation adds real value for customers. The performance of our wholesale business and NewEnergy's ability to attract and retain its large book of customers suggests we are carving out a mark leading position in this growing market.

As you've heard, 2004 is off to an excellent start. What the pending close of GHANA and the solid strengths of BGE in our core competitive supply businesses, we see that our strategy is working, our discipline is paying off and we are pleased with our outlook for the remainder of the year.

That concludes my remarks. Let me turn the call over to Follin to review the financials for the quarter.

Thanks Mayo. Good morning everyone. Thanks for joining us today. I will start on slide 10. Earnings excluding special items for the quarter were 66 cents per share solidly within our guidance range of 55 to 70 cents per share. And up 83 percent from 2003's first quarter. All of our segments posted results in line with the guidance provided in January.

Turning to slide 11. PGE earned 43 cents a share this quarter at the high end of our guidance range for the 5 cent decline versus the prior year's first quarter. The largest single contributor to the year-over-year decline was weather. Weather this what was colder the normal, last year's first quarter was the fourth coldest on record in our Central Maryland territories since 1950.

Turning to slide 12. The merchant business earned 23 cents per share. This is in line with our guidance and up 35 cents from a loss of 12 cents in the first quarter of 2003. These higher earnings primarily reflect first on the favorable side, 17 cents related to reduced outage days at Calvert Cliffs Nuclear Station, where in 2003 we commenced replacement of the steam generator at Unit 2 during the first quarter.

Second, the 16 cent increase driven by growth in competitive supply business realized in the first quarter. Twelve cents at wholesale, and four cents at NewEnergy. As you will recall, last year in the first quarter, EITF-023 (ph) created mismatches between the accounting treatment of positions of the competitive supply portfolio which became accrual position and valid economic hedges which had to be mark-to-market. Because they didn't qualify the accounting hedges under FASB-133. The absence of that negative seven cents we saw in last year's first quarter plus another four cents of favorable hedge in effectiveness this year helped us by 11 cents on a year-over-year comparison.

Our High Desert Power Plant which commenced operation in the second quarter of '03 contributed an incremental 8 cents in this year's first quarter. And finally, our South Carolina synfuel plant added 4 cents versus last year. I will give you an update on this facility in a moment. These positives were partially offset by 7 cents of cost of our Nine Mile Point facility, primarily associated with our planned January outage and inflationary and other cost increases of 11 cents.

Turning to slide 13. In total, the Merchant realized 420 million of gross margin in the first quarter of 2004, up 148 million from the first quarter of last year. Gross margin from our plant at PPA (ph) was up 20 percent reflecting the commencement of operations at our High Desert facility in the second quarter of last year. Competitive supply provided the largest gross margin boost in the boost in the quarter. Higher margins and an increased volume of business improved quarterly gross margin by 109 million.

Turning to slide 14. The past quarter's 105 million competitive supply gross margin included 49 million of gross margin from wholesale, and 56 million from retail. The wholesale business growth primarily reflects the growing backlog and profitability of accrual load serving transactions. NewEnergy's gross margin of 56 million is up 23 million or 70 percent from last year. Growth in retail gross margin reflects business expansion and growth in peak megawatts and customers under management.

Turning to slide 15. We had a good quarter originating the business we need to meet our earnings projections for 2004. In total, we originated 91 million of gross margin to be realized this year and we have 180 million to go to meet our earnings and business growth targets for 2004. The wholesale competitive supply business entered into transactions were 56 million in the current year. Portfolio management was about flat for the quarter. We are pleased with this outcome as first quarter New England price spikes associate with cold weather in gas price volatility hurt portfolio management results.

We exceeded our 35 million January 2004 current year load serving origination target, entering them into transactions worth 50 million of 2004 gross margin in the first quarter alone. Customer products added 4 million. In sum, we've made good progress on wholesale new business and are not targeting 140 million of additional originations for the balance of the year.

NewEnergy entered into transactions which will add 35 million to gross margin this year. On a rolling twelve-month basis, we continued to experience renewal rates consistent with our historic 80 percent average. For the quarter, we achieved our 80 percent renewal target across the country excluding New England where wholesale prices were higher than utility rates. We expect New England renewals to be bound as utility prices are reset over the next three months.

Overall, NewEnergy's total load grew 8 percent in the first quarter. For the balance of the year, NewEnergy only needs to generate 40 million of current year gross margin to meet its 2004 business objective.

Turning to slide 16. Not only do we make progress on meeting this year's business and earnings growth projections, we are building a backlog of earnings for the future. As you see here our wholesale competitive supply business originated 36 million of gross margin to be realized in future years and 92 million in total. In addition, our South Carolina synfuel plant lagged 31 million of after-tax earnings in 2004, and 79 million after-tax to future years earnings.

Turning to slide 17. NewEnergy continues to succeed and profitably grow its business. In fact, NewEnergy has 38 million megawatt hours either delivered or under contract for the year. This represents over 80 percent of our 2004 planned megawatt hours. Additionally, we have a significant portion of 2005 megawatt hours contracted providing good visibility on our future performance.

Turning to slide 18. Let me give you some specifics on our South Carolina synfuel plant. As you will recall, we made an investment in this plant in May of last year but didn't recognize the credits in 2003 when the IRS ceased issuing private letter rulings. In the first quarter, we renegotiated the terms of ownership, undertook certain risk mitigation measures with respect to our tax exposure and began recognizing tax credits. Synfuel production in the first quarter added 4 cents to the bottom-line, and is expected to add another 14 cents in the second through fourth quarter. This 18 cents is an increase of 6 cents from the projections we provided in January for the South Carolina synfuel facility. This increase in profitability reflects incremental value our origination team captured through the renegotiation.

On April 15, we received a private letter ruling from the IRS on this facility. Based on this ruling, we're comfortable recognizing the 2003 tax credits resulting in recognition of 21 cents of earnings in the second quarter of 2004. We will treat that 21 cents as a special item in our second quarter review of results. While we have no plans to make further investments in synfuel capacity, we view this is another example in what is become a very valuable trend over the last year. The ability of our origination team to capture value upstream of us in natural gas and coal markets by applying the capabilities that have enabled us to serve utility customers in those markets.

In aggregate, our success in upstream markets has created more than 100 and pre tax value over and above our South Carolina investment. 90 percent of which will be reflected in our results over the next three years.

Turning to slide 19. As Mayo mentioned, we're pursuing a highly hedged strategy with the goal of reducing volatility associated with commodity prices. We believe that our shareholders value the earnings consistency that the strategy supports. In the table here you see an analysis of the sensitivity of our portfolio's earnings to changes in power and fossil fuel prices in 2005 in 2006. As you can see, the impact of price changes on our 2005 and 2006 earnings is modest. In 2004 we believe the impact changes in power and fossil fuel prices is negligible.

Turning to slide 20 and discussion of cash flow for the quarter. First quarter cash flow for debt reduction was 124 million, and free cash flow was 109 million. Cash flow in both the merchant and the utility was consistent with expectations. You'll see that working capital of utility was highly favorable due to a normal, seasonal reduction in gas inventories.

Turning to slide 21. Debt to total capital at quarter end was 48.5 percent, a 140 basis point improvement for the year-end, 49.9 percent. We project that debt to total capital will continue to improve to around 47 percent at year end resulting from growth in earnings and strong cash flow applied to debt reduction.

Turning to slide 22. Let me wrap up by providing some guidance for the second quarter, which is generally are seasonal low point for the year. We expect earnings of 24 to 39 cents per share compared to 58 cents per share in the second quarter of 2003. We expect the merchant's earnings to range between 16 and 31 cents, compared to 45 cents in the second quarter of 2003. The merchant will be down due to a shifting Calvert Cliffs scheduled outage period, cost increases, and finally, we had an exceptional origination quarter in last year's second quarter which we assume will not recur for guidance purposes. These negatives are partially offset by earnings from our South Carolina synfuel facility.

We expect BGE to earn between 7 and 12 cents per share compared to 13 cents per share in 2003, with the difference being primarily cost consistent with our plans for higher reliabilities spending. The other non-regulated businesses are expected to range between negative 2 cents and breakeven.

Finally, as I mentioned earlier, we expect a one-time 21-cent benefit related to recognition of 2003 tax credits from our South Carolina synfuel plant. We will treat this as a special item in our second-quarter reporting.

That concludes our prepared remarks. We will turn the call over to the operator for questions and answers.

Thank you very much. (OPERATOR INSTRUCTIONS) Steve Fleischman of Merrill Lynch.

Hi guys. Could you provide a little more clarity on the guidance change? My recollection was that the 12 or 18 cents of synfuel's was not in the prior guidance for the South Carolina facility? So, it almost would appear that while you're raising guidance 5 cents, that the earnings without the synfuel guidance that should be a little lower? Could you explain that a little better?

Yes, Steve. South Carolina synfuel does add 18 cents to our outlook. We've got some incremental costs associate with the Nine Mile Point outages, and reliability spending there. We've got some Sarbanes-Oxley cost which are bit higher than what we expected, and we're going to spend a bit more on some initiatives to drive future productivity. But, as you rightly surmise, we do have higher visibility net-net on the year, so we are only one quarter into the year so we do not want to take it up too much. We will think about revisiting guidance when we close the GHANA acquisition.

Just to clarify, there is no change in your view on what the core business looked like before the synfuel addition, and the fact that you are raising guidance only five cents which would be indicating more either conservatism, maybe an opportunity to spend a little more money in the near term, that kind of stuff?

That is correct.

Are you looking for me Steve to say that the disgruntled answers we do not to have the lowest forward PE in the industry?

No, I'm not. I just want to make sure you're not indicating any (technical difficulty) weakness in the rest of the business.

Certainly not.

Secondly, when you have now hedged in all of this additional power, I assume you have locked up most of the coal to serve that as well? And that is shown in your sensitivities. Could you give some flavor on that?

Let me answer the question in two parts. First, in terms of the hedge position and exposure to forward prices, for competitive reasons, we have never disclosed the details of our fuel positions. On the other hand, as you know we have consistently provided aggregate statistics showing you forward hedging for our fuel and power positions. Effectively of course those aggregate forward statistics are intended to indicate that on the forward basis we are very active hedgers, number one, we try to manage the portfolio as conservatively as we can. Number two, we try to maintain as you point to, maintain balance between fuel and power positions on a forward basis. And on a spot basis alike.

To give you -- I guess to give you an indication and certainly what we continue to follow that approach to give you an indication, as you know coal prices and natural gas prices increased over the quarter, so did power prices. The net impact of these price changes given our hedging approach over the 2004 to 2006 planning period was minimal. Our expected merchant gross margin over the period from a portfolio increased by about a bit by about $20 million. That representing about a half a percent over that '04 to '06 period.

I guess one last question, which is on -- it seems in the quarter there were a lot of cost increases that you highlighted both utility and particularly at the merchant. I just maybe, Follin, if you could give a little more flavor what that is comprised of?

You know Steve, if you will harken back to what we told you, first of all it's important I think to understand that it was all totally expected. Right? So this is all consistent with the business plan on which we based 10 percent earnings growth. A lot -- some of it had to do with supporting business growth. We had higher costs at both CPS and CNE, those are costs to support growth. We had higher IT costs and depreciation costs, a couple of cents. We're spending on productivity initiatives and investing, as we have said in Nine Mile Point and in reliability at CGG. So, you aggregate those, and it is all of it is either inflationary cost increases, or cost increases to drive growth.

Okay. Thank you.

Dan Eggers with CSFB.

Good morning. First question for Tom because we have him on the phone. Tom, you guys mentioned in the press release that there was greater volatility at least in the January that impacted a little bit of earnings power there where as another one of your peers in little different business talked about not enough volatility to make money in the quarter. Can you give us a little more color on what you saw in the first quarter and kind of how the second quarter started off?

Sure. I think really what we are referring to there is principally the effect of a very cold January in New England. And the resultant effect of that on energy prices of all types. As you are probably aware, January was the coldest in nearly 50 years in areas of Massachusetts, given that we serve load up there for a period of time. We were serving more load than we expected given higher demand and serving that load at higher prices than we expected, given obviously the price volatility. Certainly that effect during January caused higher supply costs within our portfolio management area. On the other hand, by the end of the quarter, I would note that our portfolio management was up about $2 million, indicating I would say that we're able to handle that January weather affect pretty smoothly.

Is there anything we should be aware of right now -- oil, gas, coal prices?

I guess I would say this. I think in general, particularly as to coal, we regard to current market conditions as an opportunity as opposed to let's say as opposed to a threat to be defended against. Certainly we will continue to manage the portfolio conservatively, but increasingly in the last year, the year and a half we have gotten more involved in coal markets as we described in January, we beefed up our coal market's capability significantly in the last year. We broadened the range of coals we can burn. We began managing our supply chain much more dynamically and given that are power plants are located on the water, we focused particularly on becoming effective in international coal markets.

All of this enhanced capability led to opportunities to reduce our own supply costs, but it has also enabled us to pursue opportunities beyond our own supply chain, serving producers and consumers of coal. Certainly as coal markets have become more volatile, we have become even more bullish on these sorts of opportunities. So I guess I would say in general we regard it as a net positive to our business.

Okay. Thanks. Looking at NewEnergy, it looks like you guys just gave origination that was going to consume this year. Can you give us coal origination in the quarter?

Can you give us that one more time, Dan?

It looks like for NewEnergy you give origination that is only applied to 2004?

Dan, our systems are such that we don't track the growth margin value of what was originated in the quarter. So, where as we have a projection for earnings for next year, and we understand that, and we haven't give you a point forecast for 2005 or anything; we told you that we expect 10 percent growth and we've given you the big picture building blocks of why. And then our systems allow us to track how many megawatt hours we generated, the margins of what we generated were consistent with our expectations and we can't tell you precisely how much gross margin was generated for 2005.

Okay. Contract length, give or tight take 18 months still on new origination or has that moved around at all?

Yes. It is still about 18 months.

Good. I guess last question, not to knock your knuckles too much on guidance, but based on what you guys would have for the first two quarters of this year would imply that you need to earn at least between 2 and 2.15 in the second half, and potentially higher based on holding something back it sounds like. That's a pretty good pickup. Anything we should be thinking about that is also going to layer in there on top of GHANA?

I guess the first of all, the pattern, if you look at last year's first half, we earned about 27 percent of our calendar year earnings in the first half. This year we are projecting it is going to be about 28 to 34 percent. So, the seasonal waiting between first half, second half earnings is about unchanged. We do have some factors that are going to kick in in the second half of 2004. We look at second half of 2004, the mid-point of the guidance range we just gave you would imply that we're going to earn 215. That compares to $1.82 the second half of last year. And some of the big chunky drivers for that year-over-year increase are -- first of all we had -- we've got an existing competitive supply book which is going to add 16 cents year-over-year. And you'll remember that as a big component of just building that backlog of earnings driving the year-over-year growth that we showed you last month.

Last year in the second half of course, we had Isabel hit us and the northeast blackout which hurt us by about 14 cents. Low country, the synfuel facility last year of course we had the cost and the tax credits and this year we will have earnings from that facility which drives about a 16 cent year-over-year swing. So you can see there are some big chunky reasons second half will be growing versus last year.

Great. Just one more. I apologize. On synfuels, what is the total earnings contribution in '04 versus '03, excluding the 21-cent pickup?

You're looking for the year-over-year pickup?

Yes. You have South Carolina and then you have the other plant which you didn't have for the full year last year.

Low country, last year we had 10 cents of cost, this year we will have 18 cents of earnings, so that is 27 sent pick up. And the other one, Pace (ph), the production will be down about 28 cents -- excuse Pace production will be down slightly this year which will cost about a penny. So year-over-year the pickup is 27 cents.

Great. Thank you guys.

Carrie Stevens with Morgan Stanley.

Just a couple of questions. I wanted to just talk about synfuel. I appreciate the deltas year-over-year. Could you now say what your total synfuel EPS will be for the Company on an annual basis?

It is 30 cents Carrie, which is just under 10 percent of earnings. You know, it is good cash flow, attractive business, but as we've said, we have no more plans to invest in synfuel facilities, so as the rest of our earnings grow, that percentage of total earnings will decline each year.

So Pace is only 2 cents in Low Country is 28? If that is the way to think of that?

No, of our earnings -- the numbers I just gave to Dan were deltas (multiple speakers) Pace is 12 cents; Low Country is 18 cents.

Got it. Sorry about that. Perfect. Do you know roughly the cash flow that is generated by this business in case we wanted to look at it on a present value versus including and current earnings for valuation, what that rough cash flow is?

Hang on Carrie. Carrie, you just take that 30 cents and multiply it by 168 million shares outstanding.

So that's the cash flow? Okay great. I was wondering if you could discuss the S&P credit action during the quarter? And maybe just kind of current thinking on your relationship with the credit agencies and how you are going to be financing GHANA acquisition?

Yes, Carrie, S&P, as you might imagine, you saw the piece that we put out after the downgrade, which took us down to a triple B+ corporate rating. I guess first of all, it is important to understand that there were no triggers from a Constellation performance perspective that made S&P downgrade us. We had met all of the commitments that we had laid out for S&P two years ago when they established the former rating. We had met every single earnings, cash flow and balance sheet projection that we had given them for that two-year period and continued to forecast meeting our projections. Not only we met all of our commitments, we have more liquidity; we have more cash, and no short-term debt, higher level of bank lines with longer maturities.

We spent a lot of time with them trying to get them to think about the nature of our competitive business relative to other competitive businesses. For example, we showed them if you take the cash flow that we will have from the utility, and from contracts already executed, done deals, we already have 2.5 times interest coverage for 2006. There aren't many -- I can't think of other competitive industry where a company can say that, which is an indicator of high, high visibility on future cash flows. We also spent a lot of time with them trying to build analogies to other industries, and we walked through risk factors, balance sheet ratios, of our business versus other industries that they had rated A+ and even AA, and showed that we have higher visibility on cash flows and yet we have comparable balance sheet ratios to these other companies. And S&P acknowledged the validity of those analogies. But they just said they want to see more track records for the deregulated industry in general, and at the end of the day, that is what this is about. S&P has decided to take a cautious view on deregulated energy, and they are including pretty broad generalizations in my view on how they think about deregulated energy industry. The good news is, they are happy with where they've got us now. Moodys, as you may have noticed put out a piece on us in mid-February affirming our ratings.

I might just add to that that obviously the industry sees certain process and substance issues with the rating agencies, and I have been asked as Chairman of the Finance Committee of EEI and as the Chair of a Department of Energy study on investor confidence to try to move in the direction of better transparency on the process with the agencies on behalf of the whole industry. I am sure you've heard from lots of other companies their unhappiness with actions over the course of the last couple of years. Obviously some were very much warranted, and some we believe were not so much warranted, but the importance to us of getting the investor confidence restored and certainly access to capital markets improved is very important to the industry. And I think we have a terrific CFO committee working on this. They visit all three agencies, there's a group of 12 or 14 of them including Follin, a couple weeks ago will be reporting into the EEI Board on progress to that effect. But what Follin just described is in our view a bit of a disconnect between our view of the stability of certain approaches to the deregulated markets versus what S&P believes to be the case.

We think we have a lot of education and conversation ahead of us to get them back on the page of understanding that there are ways to manage this business that have as much security as what they think of as the security of the regulated side. I think that that is an important mission on behalf of the industry over the course of the next -- really for the remainder of the year.

Two quick follow-up questions. Again, how will you be financing GHANA in light of the credit action? And then, second, a follow-up would be because of this action, you guys had been making modest acquisitions on the unregulated front, and have expressed your continued interest to do so. Is that -- now have to be kind of counterbalanced with a similar amount of growth in the kind of regulated or more annuity like businesses because if you go continue to get bigger and unregulated, they're going to continue to get more cautious? Or how are you going to approach your growth strategy with this in mind?

On the financing fronts, Carrie, what we have said is that we will finance GHANA in a balance sheet neutral fashion. From a balance sheet neutral prospective, S&P acknowledged that by some point next year towards the end of next year we will have a balance sheet that justifies our former A- rating. So how we plan to finance it is with somewhere in the area of 55 to 60 percent equity. And then we have been -- we have got some cash balances that we will for the remainder we will use the excess cash rather than issue debt or rather than use that cash to pay down debt.

The second point. We have perhaps I would say we're the lowest decile with respect to get to total capital in the entire industry at the end of this quarter and we will be at 47 percent by the end of the year. And on account of that, we really have no limitation with respect to access to capital, or really access to the strategic ideas that we have in mind and the things that we explore. So, the actions don't affect the strategy (technical difficulty) at this point, and we don't expect it to in the foreseeable future.

Great. Thank you.

Paul Ridzon with Key McDonald.

I had a couple of follow-up questions. Just a clarification on Steve Fleishman's question. What was your expectation for synfuel pick up in '04? It sounds like there was a 6-cent change from your get January guidance. Is that correct?

In our January guidance, Paul, we included no new horizons synfuel, but we indicated that if we opted to extend the new Horizons transaction, as you will recall, we had the right to not extend it. We said if we extended it, it would add 13 cents to our earnings. We are now saying it will add 18 cents to earnings because we increased the value of the transaction by renegotiating the transaction early this year.

You gave -- you said you were 80 percent sold for '04. Can you give us the '05 number?

It is about 97 percent.

One last question. You know -- kind of to achieve the 10 percent growth longer-term, at what point do you need to think about feeding the beast again as far as asset acquisitions? You kind of backed the trading up. The same balance of physical backing for your trading books?

I think the way that we look at it, as you know, in our five-year planning horizons that sort of bolsters the 10 percent growth rate thesis. The cash generated by the business we have enormous flexibility because of our payout ratio. Obviously we can address -- we address dividend policy as one application of cash. We can buy back shares as another, and then thirdly, we can deploy that cash towards higher earnings types of opportunities above and beyond the accretive affect of buying back our shares. As I think you know from prior presentations, we have taken that excess cash and chosen to deploy it against the buy back of shares, and that helps the accretion in later years. It is completely our expectation that there will be opportunities to deploy that cash into the third bucket at higher returns, but we are cautious and disciplined about how we are going to deploy that capital; and as a consequence feel like we have positioned ourselves in a more conservative spot. Always of course addressing issues related to dividend policy along the way.

But, at this point, I think from a modeling standpoint, we retain the utmost in flexibility by looking at it in this fashion, and if you are going to ask the follow-on question being are you looking at other things? I think as we said in the past, yes, we do look at the generation asset category. It something that is very interesting to us and GHANA is a good example of buying a great asset with solid cash flows that is in a strategic market of ours, and if we can find situations like that that have high net present value and accretive results, we are going to get interested in it. As you know, there is enormous amount activity on the generation side, and I can't tell you whether it is truly hot or not, but certainly there is a lot of interest. I suppose we're going to stay away from things that seem excessively hot because of our discipline.

On the other hand, I think that our acquisition history in the last two years on the competitive supply-side which has had enormous benefit and as you can imagine, if you just examine the absent from Great Plains last week about their acquisition of the 11 percent thesis strategic, the relative value of our acquisition of NewEenergy should easily be implied in all of that. However, we have built out NewEnergy to a point we are in all competitive states. We are growing organically at this point. We're putting more salespeople on the street and the idea is just to retain our national leadership position by virtue of expanding organically off of the C&I platform we have now.

When you look at your percent of your obligations that is backed by physical capacity, what is your comfort level? How would you see that percentage moving over the next few years?

I would say in terms of our comfort level, we have been quite able to manage our positions bilaterally both through combinations out of course our own generation but bilaterally through contractually controlled supply. So, I think our comfort level as high with managing the business as we are managing it right now. On the other hand, we certainly are interested in pursuing opportunities that fit the portfolio well and provide good returns as and when those things arise.

Thank you very much.

Paul Patterson what Glenrock Associates.

Good morning guys. Just a few quick questions. First of all what was the mark-to-market for the Q? And then I wanted to ask you some questions about slide 16? If you guys are looking that up, on slide 16, it looks to me like synfuels are actually being reported as part of wholesale competitive supply or is that just --? I saw that memo portion below there and I was trying to understand that? Then, in terms of the synfuel, it looks like you guys might be -- some of the synfuel benefit might be falling off before the exploration of the synfuel tax credit in 2008. Is that correct? Or is it a little more front-end loaded perhaps than the statutory synfuel expiration?

Synfuels, the Pace, the Low Country transaction falls off a couple of cents over the next few years, but then it expires when all other synfuels expires. Same with the Pace synfuel production. The point I was trying to make is, we expect that earnings stream to be static whereas we expect the rest of our earnings stream to be growing, so it will be declining as a percent of our total earnings picture. The chart 16, you just want me to explain what this chart means?

What it means and is synfuel actually part of wholesale competitive supply is that a subset?

No, the wholesale competitive supply is gross margin. You actually have some cost decision with synfuel up in that line but you don't have the tax credit. So, the wholesale competitive supply on that chart what you've got is what we originated in the first quarter, and when it will be realized. So it is 56 million will be realized this year, another 36 million of what we originated in the first quarter will be realized in future years for a total of 92 million of gross margin to be realized. And then we also, since there are costs up in that wholesale competitive supply associated with synfuel, we also memo-ed the after-tax value of the synfuel in South Carolina.

So, I guess I am wondering how much of that 56 million is synfuel associated? In other words, how much did you guys benefit from the South Carolina --?

There is nothing in the 92 associated with synfuel.

Okay, because just the top of that it says wholesale competitive supply and I just wanted to make sure that it is separate. You just put it on the slide for illustrative purposes? It is not really related -- one is not related to the other?

That is correct.

The reason, Paul, that it is on the slide in concept is simply that our investment in this facility developed fairly directly out of our efforts to manage our own coal supply portfolio. So nothing, no more direct connection than that.

Then the synfuels will drop off just a couple of pennies and just expire in '08? Is that the idea?

Yes.

I guess on the mark-to-market, what was the mark-to-market benefit that you guys had in the first quarter?

Mark-to-market was a negative 4 in the first quarter of this year compared to a negative 14 in the first quarter of last year. As you know, we don't treat that as a category of earnings in and of itself. It is in what we call portfolio management. Business activity in and of itself.

You guys used to show -- you did show in a last presentation a wholesale competitive supply accrual book at the end of '03 of 176 million? I was wondering if updating that what might be the situation that you have now for the rest of 2004? It was 176 million just for 2004 that was going to be realized -- my understanding is in '04 and then 104 in '05 or what have you? Do you have any update on that?

I don't have that with me, Paul. We can get there are through information such as -- this is old isn't it? I don't have that update with me.

That was great stuff then. Great. Thanks a lot.

Jeff Gildersleeve with Millennium Partners.

Good morning. Thank you. Most of my questions were answered. However, on slide 7, you talked about the accelerated upgrade impact, and that being offset by an increase ARO expense to your rising interest rates. Could you quantify that and maybe give us some sensitivity on basis points?

Yes, what we said is two different things affecting our earnings projections. First of all, the upgrade is going to add 4 cents over the '04 to '07 time frame and of course that is real cash earnings. On the other hand, changes in interest rates impacts the decommissioning expense, specifically, the way this works is the ARO liability is established on the date we close based on the net present value projected decommissioning expenses and what you do is you net present value those expenses at the triple B bond index which is down 75 basis points versus the date we announced the acquisition. Through a combination of about 25 basis points lower treasuries and then 50 basis points lower corporate spreads. So, that raises the accounting value of the liability by 50 million. So that increases book expense, clearly it is not a cash impact, but it reduces GAAP EPS by 5 cents over the '04 to '07 time frame. It is worth noting that I said it three times, it is not cash. We are receiving 202 million in decommissioning trust funds from the seller compared to this newly revised current liability estimated at 191 million. So we are fully funded, but the situation is the upgrade adds 4 cents of cash earnings, the decommissioning expense and interest rate takes us away 5 cents. So, accretion it's about neutral from the projections we gave you at the time that we announced the acquisition.

Okay and to that end, what percentage of your debt is floating-rate?

I think it is about 50 percent, Jeff.

Great. Thank you.

Thank you all very much for joining us this morning, and we will look forward to seeing you at the end of next quarter. Thank you very much.

Thank you for joining us, ladies and gentlemen. This concludes today's conference and you may disconnect.