艾索倫電力 (EXC) 2004 Q4 法說會逐字稿

Our presentation today is being webcast and the slides are available on our website which 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 and we have attached an appendix to the charts on the website reconciling the non-GAAP measures to the GAAP measures.

So here is our agenda for this morning -- I'll start with an overview of the Company; after that Tom Brady, who head corporate strategy in our retail businesses, will discuss NewEnergy. Next Tom Brooks, President of Constellation Energy Commodity Groups, will speak about our wholesale marketing arm; then Mike Wallace, President of Constellation Generation Group, will discuss our merchant fleet.

Ken DeFontes, the first new name on the stage here in the last -- since I guess our fourth presentation here in New York -- is the new President of BG&E. As you know Frank Hines (ph) retired last October. Ken has been with BG for 32 years and successfully led our electric transmission and distribution business through several major events in the last 4 years including a stellar hurricane Isabel recovery performance.

And then lastly, Follin Smith, our Chief Financial Officer and Chief Administrative Officer, will discuss our financials and then we will all take your questions.

2004 was a tremendous year for consolation. Our earnings excluding special items of $3.24 was the highest in the Company's history and represents a 17.4 percent growth rate over 2003's $2.76 per share. So we're now on slide 6.

In an industry where our companies seem more or less the same, ours is a well-differentiated strategy. In 3 years we have successfully established a diversified energy business. We are focused on a variety of customer types and we are relentless about meeting our customer needs. We have identified attractive market opportunities and we execute well to seize those opportunities and integrate our acquisitions.

We are growing our commercial platform, increasing our share in existing electricity market and entering underserved markets in gas and coal. At the same time we are running our existing businesses more efficiently, leveraging our scale in the competitive supply businesses and extracting productivity gains in generation and staff activities. We are also generating strong cash flow that gives us further opportunity to deploy capital at above hurdle rates to drive long-term earnings growth.

We have developed a culture of accountability and it's focused on execution. This means we sweat the details to deliver current results while laying the foundation for future growth.

Starting with the buyout of Goldman Sachs participation in our commodities group we have been disciplined investors. In both the NewEnergy and Ginna transactions, you can see that we are disciplined in our investment approach and we are developing a track record of successful acquisition integration. Our actual performance has been significantly better than our acquisition projections. We believe we are choosing the right details and we are doing an even better job -- the right deals and we are doing an even better job of integrating them into Constellation.

We're now on page 8. Today we are a fundamentally larger company with greater earnings power. Let's compare financial metrics for the last 3 years -- we have more than tripled revenues to $12.5 billion; we have grown EPS excluding special items to 3.24 per share, up 34 percent since 2001; and we have improved return on invested capital 1.3 percentage points to 8.2 percent. At the same time we have greatly improved our balance sheet, lowering our debt to total capital ratio 8 percentage points to 46.5 percent.

This chart also demonstrates the power of the business model built around satisfying customer needs. Peak load served in both retail and wholesale competitive supply is up from about 8,000 MW in 2001 to over 31,000 MW today. We now have 10,500 merchant customers outside our BGE regulated utility including 65 of the Fortune 100. Our market share exceeds that of our nearest competitor by over 50 percent.

Constellation Energy meaningful operates in all parts of the energy value chain while maintaining our strong roots by running a traditional regulated utility, BGE, which delivers stable earnings and cash flow. The Merchant segment captures our competitive businesses -- generation, commodities group and NewEnergy. Constellation Generation owns 12,500 MW of primarily base load coal and nuclear generation capacity.

Constellation Commodities Group runs a thriving wholesale competitive supply business acting as an intermediary between producers and consumers of electricity, coal and natural gas. The commodities group also manages the sale of our fleet's output in the fleet’s fuel inputs. Collectively this group manages a $1.7 billion book of business that is highly hedged.

And finally, NewEnergy, which we acquired in 2002, is the nation's largest supplier of electricity to commercial and industrial customers. It is penetrating deregulated markets to grow its retail competitive supply franchise in both gas and electricity and improve its strong market position. Constellation's combination of businesses spans the energy value chain providing a stable foundation on which to build the future.

We're on slide 10. Our 2005 earnings composition includes 31 percent from BGE, 43 percent from our generation fleet and 25 percent from our competitive supply franchises. In total our merchant business segment represents about two-thirds of our overall earnings.

Looking forward we are poised for future growth. We operate the leading national commercial platform for energy supply. We are extending our competitive advantage and aggregating market share in deregulated wholesale and commercial and industrial load serving. While we're not counting on it in our current planning horizon, over time we believe that continued market restructuring will provide further opportunities to expand our competitive franchises in the electricity markets. Capitalizing on our success in electricity markets, we are also pursuing underserved areas in coal and gas markets that provide promising growth opportunities.

Another key component to our ongoing success will be our ability to drive productivity gains by lowering cost and increasing output from our fleet. Finally, we are generating very strong cash flow and will pursue opportunities to prudently invest in projects that provide above hurdle rate returns. These are the foundations of sustained higher profitability.

Finally, today's higher commodity price environment should drive higher earnings over the planning horizon. Our nuclear mid-Atlantic fleet is highly hedged through mid 2006. Repricing of our mid-Atlantic's fleet output in 2006 should drive an increase in gross margin of about $150 million or 50 cents per share higher earnings in 2007 than in 2004. With strong fundamental growth in earnings and cash flow and the positive impact of higher power prices our future is very bright.

Turning to slide 12, our competitive supply businesses continue to grow. On the left chart you see our wholesale competitive supply market share. The wholesale deregulated market that we target has grown 30 percent since 2002. During this 2-year period we've grown our loads served to 19,100 MW of peak load or 14 percent of this market segment. Looking at 2005 we expect to serve 19,800 MW -- peak MW and capture 15 percent of the total wholesale target market.

NewEnergy has performed well, exceeding what we expected when we bought them. As you can see on the right table, we have captured increased market share in a growing market. Since 2002 the retail switch market has grown over 50 percent to 59,000 MW and we have increased our market share from 11 percent to 21 percent. We are beating the competition on price and service and we expect that trend to continue.

Having built a substantial competitive advantage in the electricity markets through rigorous analysis and scale, we are moving to leverage our expertise in underserved segments of coal and gas. We have committed 28 million in capital to supporting underserved upstream gas producers in 2005 and, as you'll see, we have earmarked another 50 million should those opportunities arrive. Finally, we have constructed an international coal procurement and distribution business to manage coal sourcing for third parties.

Turning to slide 13, the second key growth driver is productivity. As you recall, last year we promised that 2008 earnings would be $150 to $180 million higher than 2003's via productivity. We start to meaningfully deliver on that promise in 2005. We've laid the foundation with common process initiatives throughout the Company. We're teaching people to analyze processes using Six Sigma and other tools to drive the cost down.

Our fleet management approach to find one common template for operations positions us to replicate Calvert Cliffs' shorter outages and lower cost at Nine Mile Point. You may have noticed that we recently announced the elimination of approximately 150 positions between Calvert Cliffs and Nine Mile Point. We're getting more MW hours out of existing assets by replacing steam generators and LP rotors and by upgrading plants. Common systems platforms allow us to drive common processes for existing staff work. We are firmly committed to delivering a permanently lower cost structure and cost per unit which is an annuity for our shareholders in a deregulated environment.

Turning to page 14. We generate a considerable amount of free cash flow, especially considering our growth -- circling our revenues while reducing our debt to total cap ratio by 8.1 percentage points to 46.5 percent during the last 3 years. It is not in the corporate finance playbook to delever a company to such a degree as growing as fast as we are, so I give huge credit to a very sophisticated and disciplined finance staff in managing this transformation.

We've told you that we are looking for above hurdle rate opportunities in which to invest. If we don't find them we'll return the cash flow to shareholders via share repurchase or increased dividends. That said, we do see opportunities and we have proven our ability to deploy capital in a manner which improves shareholder value.

As we are growing our earnings and cash flow we are also building a broader recognition of Constellation among the business community. Constellation NewEnergy now serves 65 of the Fortune 100. On the roster of commodity groups customers are of course many of the nation's leading utilities and co-ops and units, financial institutions and energy companies. Our counterparties are the industry's major power producers and marketers. Our brand recognition is growing stronger. Our market research makes us confident that Constellation Energy's brand momentum is sustainable, an increasingly important asset for us.

Our peers in the industry are recognizing our dedication to execution, performance and excellence as witnessed by the Energy Company of the Year award; they're also acknowledging the values that underpin all of our actions as noted by two recent EEI awards for emergency response and assistance to the utilities hit by the Florida hurricanes. These are testaments to the quality of our strategy, our employees and our commitment to excel in all that we do.

Constellation is a leading advocate for competitive markets. We are working with policymakers and regulators throughout the country to help improve the effectiveness of both wholesale and retail markets. These markets provide meaningful economic benefits to consumers. Competition yields efficiencies and gives customers greater ability to manage their own energy needs. The significant expansion of PJM in the last 12 months with the addition of AEP, ComEd, DPL and Duquesne with Dominion soon to come further facilitates these mechanisms for bringing the benefits of wholesale markets to consumers and we expect the Midwest ISO to add to the momentum of wholesale competitive markets.

The potential for constructive policy dialogues about the structure and expansion of competitive markets is better now than it was a year ago and the atmosphere surrounding the policy arena is much better than it was 2 years ago. We anticipate that further progress in states such as Texas, Illinois, Ohio, Michigan and even California as well as the Canadian provinces will demonstrate the value and vitality of such markets and spur greater demand on the customer side for access to competitive markets.

We take environmental stewardship very seriously and we are tracking the progress of environmental regulation and the potential impacts on future years from probable new clean air standards. We expect to begin making capital outlays in the last years of this decade to meet the requirements of an EPA rule-making which is anticipated later this year.

Turning to slide 18, our strategy in businesses has proven successful to date. Since this management team came together at the beginning of November 2001 CEG's shares have appreciated 102 percent. When considering the dividends that we have paid this amounts to an average total return of 27 percent per annum. We see more to come.

Long-term stock price 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 price appreciation in a way that dividend yield alone cannot. Of course we recognize that dividends are an important return component. As announced yesterday, we increased our dividend by 17.5 percent from 28.5 cents to 33.5 cents per quarter. We continue to anticipate growing our dividend annually roughly in line with our earnings growth. Importantly, we strive to deliver a superior total return to our shareholders through a combination of both stock price appreciation and dividend growth.

Turning to slide 19. Building on the 17.4 percent EPS excluding special items in 2004, we are providing earnings guidance for 2005 of 3.35 to 3.60 per share which represents a 3 to 11 percent increase over a strong 2004.

Turning to slide 20. We are very proud of the fact that we have met or exceeded guidance in each quarter since this management team came together. Going back to last year's analyst meeting, we established a guidance range of 3.00 to 3.15 per share for 2004 and a longer-term target of 3.35 for 2005. We are not only pleased with that the results we announced today exceeded that guidance, but that we are also able to move our guidance up to a range of 3.35 to 3.60 for 2005.

Turning to slide 21. We are well positioned to deliver future shareholder returns and believe that $4.75 to $5.00 per share is attainable in 2007. Our fundamental growth drivers -- competitive supply, productivity and investment of excess cash -- will drive about 10 percent of that growth pushing us to around 4.25 to 4.50 per share by 2007. Assuming relative stability between power and coal prices, the rise we've seen in energy prices should make earnings approach $5.00 per share in 2007.

This concludes my prepared remarks and I'd like to turn the podium over to Tom Brady to discuss our retail competitive supply business, NewEnergy. Tom?

Thank you, Mayo, and good morning, everyone. Just over 2 years ago Constellation made a strategic decision to build a commercial and industrial retail competitive supply business. This move was a natural extension of our existing Merchant energy business. Beginning with the acquisition of NewEnergy combined with a series of companion acquisitions and fueled by organic growth, Constellation NewEnergy has become the number one supplier in the commercial and industrial sector. We should be on slide 23.

2004 has been an excellent year for our NewEnergy companies. Volumes of both electric and gas grew around 50 percent, exceeding our admittedly aggressive targets. We were successful despite the challenges of integrating acquisitions and selling power in a high wholesale price environment. Keeping with high wholesale prices which sometimes can pressure margins we achieved $269 million in gross margin, a 51 percent improvement over 2003.

As you may recall, we did benefit by $17.5 million of bankruptcy in California power crisis settlements during the year. Without these settlements gross margins still grew over 40 percent. We are benefiting from scale in the form of geographic diversity, national presence, creative product offerings and the ability to deliver superior customer service. Our market shares for electric increased to 21 percent, gas market share doubled and seamless customer service improved SG&A by 25 cents per megawatt hour.

Slide 24. The strategic vision of 2 years ago originated in our belief in competitive markets. As energy markets restructure the demand for NewEnergy's products become clear. Financially prudent customers reduce risk and lower energy bills as they avoid costly utility default rates by substituting Constellation NewEnergy for the power and gas component of their former bundled utility expense.

Slide 25. Constellation also has the capability to extend product offerings to consulting, advisory services and website energy management. Our (indiscernible) in the core brand has been providing consulting and advisory services since 1992 to customers like Toyota, Hanson and R.R. Donnelly. Our NewEnergy online presents customers with enhanced services building stronger partnerships. at Constellation we even build, own and operate central heating and cooling plants to meet special needs for customers such as Heinzfield (ph) in Pittsburgh and the Fashion Mall (ph) in Las Vegas.

Slide 26. NewEnergy is a national business with a regional focus, allowing us to be closer to the customer. We add value through regulatory expertise which enables us to quickly create customer solutions. One recent example is an opportunity in the Midwest. Throughout 2004 NewEnergy has been taking the lead to help shape the new Ohio Cinergy power structure. With detailed knowledge of power (ph) and rate structures we did find customer opportunities.

In mid December, once the regulation was final we were able to quickly react. Our team worked very hard with 30 customers during the last 2 weeks of the year saving them $1 million. The competition quite honestly was nowhere to be found. This is just one recent example of the value we provide to customers. It is the same drive for excellence that has allowed us to achieve three consecutive years of 0 complaints as reported by the New York public service commission. Our top competitor in New York has over 100 during this same period.

Turning to slide 27. On behalf of Constellation NewEnergy, National Analysts of Philadelphia conducted a random survey of our customers. 96 percent of our customers stated they were happy with their choice, 96 percent would sign up again, and 94 percent would recommend us to others. We are most pleased with these results.

Slide 30 now. As Mayo said earlier, we supply about two-thirds of the Fortune 100. We serve 20 percent of this group in multiple regions or with multiple products. Many well-known names like Staples, Kimberly-Clark and Ford are valued customers. In addition to these high-profile customers we also have a diverse customer base of over 10,000 customers across all industry segments. Our average customer load is 1.5 MW for electric and 90,000 cubic feet for gas. We are not overly weighted in any one industry and no one customer makes up more than a very small percentage of revenue.

Turning to slide 31. We are the largest retail in the commercial and industrial sector. At over 12,000 MWs we are number one for power and at 279 Bcf we are in the top 10 for gas. This map highlights our geographic footprint. Green areas show where we sell both gas and electric. Yellow areas are just open to gas and in the blue states we only sell electric. This year power load served topped 2,000 MW in three regions -- Illinois, Texas and New York. Three other regions -- California, New England and the mid-Atlantic are well over 1000 MW. Geographic diversity provides us North American presence to cross cell and, just as important, limits our overall exposure to unfavorable market conditions in any one region.

Turning to slide 32. This chart depicts the market coverage of the top 10 electric retailers. As you can see from the blue boxes, Constellation NewEnergy is the only retailer offering the full coverage of North America's deregulated markets. This positions us to uniquely serve national customers.

Turning to slide 33. The power market opportunity in the deregulated commercial industrial segment is 159 gigawatts, 29 percent of the total U.S. power market. Of this market opportunity only 59,000 MW, or 37 percent, have switched to a competitive supplier. Constellation NewEnergy has a 21 percent share of the switched market.

Slide 34. The switched market is a growth market. During the past 2 years the compound annual growth rate has been 19 percent. We expect this market to continue to grow, although at a slower pace, as more businesses become educated on the risk management and cost containment benefits we offer. We anticipate the North American switch market will grow 9 percent annually from now to 2007. This is in line with PEMA's projections.

As the switch market grows our business should grow at least at the same pace in mature markets and at a much faster pace in newer markets. We anticipate market share will improve from 21 percent today to 25 to 35 percent over the plan period. Our growth assumptions reflect the regulatory framework currently in effect and we do not depend on new markets opening.

For us 2004 was a year of building scale and critical mass. This chart shows market share growth by retail competitive suppliers who are in most of last year. As you can see, Constellation NewEnergy is the fastest-growing provider. This graphic also highlights the fact that growth is only being realized by national players. Regional and multiregional retailers seem to be losing ground. We should beyond slide 36.

NewEnergy's megawatt hour sales have more than doubled since we acquired the business. We expect volumes to grow at a compound annual growth rate of more than 20 percent during the next 4 years. In 2004 we delivered 44 million MW hours, 6 percent more than planned. We plan to deliver 63 million MW hours in 2005, a 42 percent increase over 2004. We presently have about two-thirds of this under contract, on track with our plan and comparable to our status at this time last year.

Slide 37. When we acquired NewEnergy in September 2002 it was a 4,300 MW business. During 2003 we made three tuck-in acquisitions adding 775 MW and over the 2-year period organically grew more than 7,200 MW. Next slide.

As you will recall, we entered 2004 planning to realize $4.00 per MW hour in gross margin. New business margin was budgeted at $3.50. Early in the year we did experience a significant run-up in wholesale prices resulting in compressed margins in some of our regions. As wholesale prices moderated we were able to realize margins of $4.45 for the entire year. Our plan for 2005 assumes margins of $3.35 per MW hour with new business margins in the $3.00 range. Business contracted to date supports this level and is consistent with our model when we acquired NewEnergy.

Slide 39. Now let's talk about the 12 trillion cubic foot commercial and industrial gas market. This market has been open to retailers more than twice as long as electric. As a result, two-thirds of the customers have switched to competitive suppliers. Of the 7.5 trillion cubic foot switch market we have a 4 percent market share, nearly double the share since entering this business in January 2003. The gas market is fragmented and served by various suppliers, many of which see this as an ancillary business. At Constellation we see it as an underserved market that benefits from a focus on customer service and customer satisfaction.

Turning to slide 40. The NewEnergy gas division, while very successful to date, has tremendous growth potential. We expect to grow sales to over 450 Bcf in the next 5 years. This represents a 60 percent increase. In recent years we have clearly demonstrated the ability to grow this business through both organic measures and acquisitions.

Slide 41. As we continue to see sales growth, focus on cost is critical. We are paying close attention to acquisition cost and the cost to serve. We are improving our metrics as we strive to understand the profitability of various customer segments and product lines. Beginning last year we made serious moves to develop the Constellation brand as well as become the low-cost service provider. This is a business where best in class customer service equates to being the low-cost provider. Also, our substantial decline in SG&A per MW hour has allowed us to pursue certain large load customers at meaningful net margins.

Slide 42. We believe success breeds future success. Our NewEnergy companies are well positioned as the industry leader. Serious customers expect to see us on the short list competing for their business. Our existing customers expect us to continue as their business partners.

Slide 43. But rest assured -- we are not complacent. We understand that being number one makes us a target of every competitor's strategic plan. The same was true this time last year when we first showed you this chart and, as you can see, the order of competition is the same, only the gap is bigger. I can assure you we spend every day dissecting this market, evaluating our business model and making adjustments to assure our leading position. Now let me turn it over to Tom Brooks.

Thanks, Tom. Good morning, everyone. In the next 15 minutes I'll give our outlook for Constellation Commodities Group, our wholesale sales and risk management arm. I'll cover three areas -- first an overview of our business; second our plan for each of our four key business areas; and third, I'll summarize our outlook for 2005.

Turning to slide 46. Our commodities group continued its strong momentum in 2004. Our gross margin grew by 43 percent to $387 million, about in line with our CAGR of 41 percent since 2001. While we're not counting on rates of growth as high as these forever, 3.5 years of steady success make us confident about maintaining healthy growth for the long-term.

Our full requirement power business continued its strong growth. In 2004 our peak load served grew 19 percent to 19,100 MW, yielding a 34 percent CAGR since 2001. In 2005 we'll continue to leverage the scale of our load and supply portfolio to drive profits.

Finally, we've become the leading player in North American power markets. Since 2001 we advanced from 13th to 1st in delivered volumes with a 7 percent share, 34 percent more than the next biggest player. While we care about profitability not volumes, we do like our leading market position. As these numbers suggest, we're all about performance; reliably delivering energy products to our customers and meeting our growth targets. Our track record makes us confident that we'll continue delivering on both fronts.

Turning to slide 47. We follow a simple business model, we're the wholesale sales and risk management arm of an energy company. We provide physical energy products to upstream and downstream customers earning margins by effectively managing our portfolio of owned and contractual assets. As our business has grown we've developed a meaningful edge in physical products.

We compete hard to be the low-cost provider, constantly leveraging our portfolio of scale to reduce our cost to serve our customers and preserve our margin. And we deploy a risk capital carefully and conservatively. With a big new crop of financial players in our business we don't want to compete on cost of capital or risk tolerance. We stick to our strength in providing physically delivered products and conservatively managing risk. Our customer marketing capability and consistent portfolio management coupled with the growing scale of our business are the keys to our success.

Turning to slide 48. We manage four key business areas, all based on the model I just described -- power products are our foundation and, as a compliment to our power business, portfolio management and trading leverages our scale to create additional value. And in 2004 we made substantial progress in developing coal and natural gas businesses; having laid that foundation we're confident that these will drive growth in 2005.

Now let me walk through each area turning to slide 49. Starting with our power business, it's comprised of two parts -- full requirements power and midmarket and generator products. Full requirements power is our sales of load following energy and capacity to distribution utility customers. It's an area we know well with its fine base of customers whose needs and buying patterns we understand.

Our target market of about 134,000 MW grew by about 3 percent in 2004 and we expect higher rates of growth in the next 2 to 3 years with potential for additional competitive procurement in the Midwest, Texas, and New York. We expect our peak load to increase by 13 percent in 2005 and about 60 percent of our 2005 load target is already under contract. We expect to sign off the balance in the first and second quarters, similar to our experience in 2004.

Our share of the target market should grow to 16 to 17 percent, (technical difficulty) a 1 to 2 percent increase over 2004. Our share growth assumption may be a bit conservative given recent history. For example, in the fall of 2004 we won about a third of the total load that we believe was awarded by utilities in the Northeast and mid-Atlantic regions. So our results make us confident in our ability to grow our share.

We have realized unit margins of between $2.00 a MW hour and $4.00 a MW hour over the last 3 years. Even with increased competitive intensity in 2004 we were able to maintain relatively stable realized unit margins by reducing our costs by leveraging our portfolio management capability and our scale. In summary, we expect that our market share will increase while realized unit margins will be flat to slightly declining.

Turning to slide 50. Midmarket and generator products include two groups of activities. First, midmarket sales includes short dated liquid hedges provided to upstream and downstream customers, relying on our ability to offer good execution, similar to an institutional sales effort within a bank. We built up our midmarket sales team substantially in 2004, roughly doubling our resources. We generated 26 million in gross margin, about 75 percent of that in the second half as we ramped up our effort. We expect to continue to grow this level of activity for the full year 2005 to yield about $45 million to $50 million of gross margin.

Second, generator products include the more structured hedge products we provide to power generators who typically seek to hedge price, basis (ph) to the liquid hub and quantity risk, all of which are quite manageable within the scope of our much larger portfolio. The transactions that we recently executed with Dynegy, El Paso and Elite (ph), through which we were paid cash to assume long-term power purchase or sale obligations, are examples of this type of customer activity and they will add meaningfully to our gross margin over the next several years.

We produced 11 million in gross margin by providing hedges to generators in 2004. With commodity prices at high levels we would expect to see more of this activity in 2005 yielding an expected 20 million in gross margin.

Turning to page 51. In summarizing the gross margin outlook for our power business, we expect growth of 20 percent in 2005. You should note that this is well below our 4-year CAGR of over 40 percent so our plan is based on reasonable assumptions. We expect this growth to be comprised of the following -- $20 million from the realization of pre existing contract value that already sits in our portfolio; and 34 million from growth in new business driven principally by our ramp up of mid marketing in the second half of 2004.

Turning to slide 52. Portfolio management and trading actively manages the option value embedded in our portfolio of customer load obligations and supply resources. We capture this value by adjusting the portfolio as market prices move, adding significantly to the intrinsic value embedded in the portfolio on a static forward price basis as modeled at the start of the year. The second smaller component is gains from trading.

Notably in 2004 our portfolio management and trading group significantly reduced the portfolio's overall exposure to forward price risk. You can see on the bottom left that our forward hedge ratios went up significantly by more than 20 percent for 2005 volumes and nearly 20 percent for 2006 volumes leaving us with very modest forward price exposure over the next 2 years. We also reduced, as you can see on the right, our mark to market value at risk by more than 45 percent from an average of $5.1 million in 2003 to an average of $2.8 million in 2004 at a 95 percent confidence interval.

Turning to slide 63. Of course the gross margin outlook for our portfolio management and trading will not be easy for you to model transparently. So let me tell you how we think about it. The principal driver of our PM&T results in addition to the skill of our team is the scale of our portfolio which enables us to see and capture the option value that I referred to. The best indicator of our portfolio of scale is our total full requirements power per MW hour volumes which drives most of our portfolio management activity.

In 2004 we delivered about 80 million MW hours to full requirements customers and created a portfolio management gain of $93 million adding $1.16 a MW hour or about 40 percent to the portfolio's intrinsic unit margin at the start of the year. In 2005 we expect to deliver 85 to 95 million MW hours to full requirements customers. At a more conservative leverage rate to that experience in 2004, we expect to generate about 96 million in portfolio management and trading gains in 2005.

Turning to slide 54 in our new growth initiatives starting with coal. In 2004 we built out a customer oriented global coal business based on our power business model and relying on the expertise we developed in optimizing our own coal supply chain over the prior 2 years. Key elements of the buildout included hiring 22 experienced coal and freight professionals principally based out of London; developing contractual relationships with coal producers and consumers globally; deploying a valuation and risk management platform to accommodate coal supply contracts; and building our coal supply backlog to 6 million tons annually leaving plenty of room for growth with a global market for sea borne coal of 350 to 400 million tons annually.

Our typical coal supply service is providing power generators their variable coal supply needs at market index prices in exchange for the right to deliver from multiple acceptable sources. Supply chain management and has become challenging for these customers because of substantial volatility in the prices of coal and freight as well as the price relationship between U.S. and international coals, so our services are in demand.

Turning to slide 55. The gross margin outlook for our coal services business is consistent with the strong backlog we created in 2004 and our current customer outlook. We expect to deliver 11 to 12 million tons to our coal services customers in 2005 at an average realized margin of $2.00 to $4.00 per ton across the whole portfolio with a resultant gross margin plan of $36 million. Note that of this target roughly half is already under contract and scheduled to deliver in 2005. We expect to contract for the remaining sales in the first half of the year.

Turning to slide 56 and our natural gas business. We made significant strides here in 2004, focusing on both upstream and downstream customers. Upstream we served small to medium-size gas producers providing marketing and hedging services. These producers are expected to invest more than $7 billion in new capital in 2005 and some can benefit from the services we can provide. The opportunity to serve these customers often involves our partnering in the form of relatively small investments in reserves at various stages of development.

We've identified and planned new investments totaling $80 million that we expect to make in partnering with gas producers in 2005 which we expect to yield $18 million of project margin this year. Given natural gas market conditions that look likely to persist for the foreseeable future we see this as a segment with significant growth potential.

Our downstream business is based on sales of standard products to LDCs, gas-fired generators and other consumers similar to our midmarket effort in power. We built out our gas midmarketing capability significantly in 2004 and we expect this business to produce gross margin of $5 to $10 million annually.

Turning to slide 57. Summarizing our 2005 earnings outlook from the natural gas area, we expect to generate $25 million in pretax margin, $7 million through downstream marketing, and $18 million upstream including our current portfolio and expected new activity.

Turning to slide 58. Having walked through each area of our business, let me now summarize our 2005 gross margin outlook. We expect our gross margin to grow 27 percent to $489 million. Strong growth but considerably lower than the 41 percent CAGR we've achieved since 2001, so we're comfortable that the assumptions in our plan are reasonable.

We expect the $102 million of gross margin growth to be comprised of three roughly equal elements. One, growth in the backlog of transactions already originated in 2004 and scheduled to be realized in 2005 of $31 million. Two, growth in new power business of $34 million driven principally by our buildout of midmarket sales. And three, growth through our ramp up of new business initiatives in coal and natural gas of $31 million.

We're confident in our business model based in large measure on our track record of solid and steady performance over the last 3.5 years. We believe that we're only just beginning to leverage the strength of our business model and the benefits of our rowing scale. 2005 looks like it's going to be a strong year and we're confident in our ability to maintain steady growth for the long-term. Now I'd like to turn the podium over to Mike Wallace for a review of our generation group.

Thanks, Tom, and good morning, everyone. This morning I'm going to talk about generation and its position within our Merchant energy business segment. It is our mission to be recognized leader in energy generation and a creator of shareholder value through safe, efficient, reliable operations while continuing to effectively grow and integrate new assets into our fleet.

Turning to slide 60. All of our power plants operate as competitive Merchants at the wholesale level. We are focused on creating value through an innovative interaction with our competitive supply and risk management colleagues to maximize Merchant earnings. With solid operational and financial results over the past 2 years, we have demonstrated our ability to create shareholder value on a sustained basis.

Throughout the rest of the presentation I will illustrate that we are well on our way to being a recognized U.S. Merchant generation leader, But let me first speak to 2004 accomplishments.

Slide 61. Looking at measurable performance that improved our competitive position, here are a few highlights. Replacement of Calvert Cliffs' unit 1 low pressure turbine rotor set an industry record, eclipsing the previous record by 3 days. Calvert Cliffs as a site produced 14.5 million MW hours, the highest level of MW hour production in the plant's history exceeding the previous site record by 5 percent.

Nine Mile Point unit 1 achieved the highest capacity factor in the plant's history, 93.1 percent, bettering the previous record set in 1994 by over a full percentage point. At Ginna we closed 20 days earlier than scheduled and executed a smooth integration that resulted in higher than expected earnings. In our fossil fleet, Brandon Shores unit 1, part of Constellation's largest wholly-owned coal-fired plant, was ranked number one out of 81 units when compared to the industry standard for unplanned outages. High desert continued to perform above expectation with plant reliability exceeding 96 percent.

To facilitate the integration of new assets into our portfolio we are leveraging our fleet business model. Now I will describe how we're driving productivity improvements.

Slide 62. Current and future results are driven by commitment to our strategic focus -- sustained improvement in reliability, production capacity and cost efficiency. The linchpin to continued improvement is our fleet approach to high-performance execution and economic leverage of scale. The fleet approach drives a robust business planning process that documents our 5-year objectives, the execution of required activities and individual accountability.

The fleet approach also standardizes procedures, processes and work management. This in turn drives operational excellence and results in improved productivity through lower outage duration, lower production cost, greater capacity from power upgrades and a more efficient fuel supply chain. Now let me now discuss our fleet business model in more detail.

Turning to slide 63. The fleet business model facilitates the sharing of resources and best practices between our fossil and nuclear assets. We continually benchmark ourselves against the best in class to identify the most critical gaps. We then leverage lessons learned across the fleet to optimize our processes, technology and people. Ultimately this approach has led to improved productivity and will continue to move us toward the top decile and quartile in production cost and capacity factors at Calvert Cliffs and Nine Mile Point respectively.

By example here is how my management team is driving shorter nuclear outages. The cornerstone of our outage model lies in detailed preparation, crisp execution and accountability. First, we freeze the scope 12 months before the outage. Second, we schedule every task to the hour but track to the minute. And third, we schedule to the person a specific set of tasks, clearly defined timelines and deliverables.

The results, if you were to ask our Calvert Cliffs employees how long their outages lasted several years ago, you would've gotten a response of about 40 days. On the other hand, if you ask our employees at Calvert Cliffs today you will hear a common response -- 29 days, 17 hours and 5 minutes. Now I'd like to turn your attention to nuclear benchmarking.

As we stated last year, investment was needed to improve performance at Nine Mile Point. The investments we are making and the work we are doing to fix individual pieces of equipment and raise our standards of performance and maintenance and operation leads to improvements in reliability. The results of the year-long effort can be seen in an increase in performance such as a unit 1's record capacity factor noted earlier. But we do not intend to stop there.

Our fleet model will enable us to achieve top decile production performance at Calvert Cliffs and will ultimately drive Nine Mile Point to top quartile performance. Let me now walk through the building blocks necessary to achieve these results.

Turning to slide 65. As you can see, five building blocks will drive cost and gross margin improvement. Again, crisp outage execution will be accomplished by preparing detailed plans and assigning accountability to the appropriate level. Disciplined lifecycle management will improve equipment liability resulting in higher capacity factors. Over the next 5 years we have a number of power upgrade projects that will increase plant capacity. As we grow our generation business will utilize standardized policies, procedures and processes allowing us to leverage our procurement spend.

The final building block is effective management of our human capital. By standardizing how we organize across the fleet we can leverage skill sets and standardize individual performance measurements. As appropriate we will look to reduce our workforce as exemplified by the announcement this week to eliminate 150 positions across the fleet. So translating productivity improvement into dollars, let's now look at slide 66.

As Mayo indicated, generation is the primary driver for productivity improvement through 2008. Now let me talk to several salient points in that regard. Bringing in skilled leadership in a robust effort to streamline processes across the fleet has allowed us to increase gross margin through more efficient outages and power upgrades as well as lowering cost by reducing labor resource requirements.

Leveraging best practices through our fleet approach will enable Calvert Cliffs to achieve top decile performance this year while driving Nine Mile Point to top quartile by 2008 and optimizing fossil economic reliability. Achieving this level of performance will result in $130 to $150 million of cumulative cost and gross margin productivity improvement all which will be sustained. In addition to these improvements, we continue to look for opportunities to increase earnings by expanding our fleet.

Given our strong belief in the viability of nuclear power to meet the long-term energy needs of the country, we continue to assess all forms of nuclear ownership. As an example we are creating the option to build a new nuclear power plant in the future with our submittal to the Department of Energy for co-funding of activities leading to an early site permit for a future plan.

Turning to slide 67. In summary, I have discussed generation's core competencies that are creating significant and rapid additional value from our generation assets. I've also described the "how" to our fleet business model. This approach will drive operational excellence by utilizing benchmark analysis, leveraging best practices to close performance gaps and achieving synergies that drive sustainable improvements.

A disciplined and patient approach to acquisitions such as Ginna will grow our fleet. In short, crisp execution will result in predictable reliability, lower cost, higher production and earnings growth. Let me now turn the podium over to Ken DeFontes.

Thank you, Mike, and good morning, everyone. I'm on slide 69. BGE has a proud heritage, serving as the oldest gas and electric utility in North America. As a transmission owner in PJM and a participant in the development of the nation's largest and most widely regarded RTO, we've taken a leadership role in assuring the reliability of the grid and supporting the addition of new members to serve more than 600,000 gas customers and 1.2 million electric customers in Central Maryland where we strive to become a recognized leader in energy delivery.

Turning to slide 70. BGE contributed 88 cents a share to Constellation's bottom-line, meeting or exceeding earnings guidance for the third consecutive year. We continue to get excellent customer satisfaction ratings, scoring in the top quartile in the J.D. Power electric residential, business eastern region surveys as well. We were also the top combination gas and electric utility in the gas residential survey in our region. We've made great progress in our efforts to improve productivity as we continue to invest in Six Sigma and process management. July of 2004 marked the smooth transition of customers off of Polar price-freeze (ph) service. Our Polar auction was very successful, and our Polar model is being recognized as one of the best in the industry as it supports the transition to competitive markets, while providing a return for our delivery business with limited risk.

Based on FERC data, we are a top decile performer in operating cost per customer for comparable utilities, in part due to continued effective deployment of new technology investments, such as the rollout of our mobile dispatch system to our field crews.

Turning to the next slide, looking ahead to 2005, we will continue to focus attention on our regulatory strategy. We plan to file with FERC formula rates for our transmission business, which will significantly reduce regulatory lag for the increased investment needed for the transmission system, and seen an incentive return on these new investments. We're also continuing preparations for the end of price-freeze service for our residential electric customers in July of 2006.

Our 2005 plan increases our capital and O&M spending to improve the reliability of our local delivery system, reducing interruptions and improving the response to outages. We are also implementing several improvements resulting from the 2003 blackout recommendations to assure continued reliability of the grid. Maintenance of our strong customer satisfaction ratings will be enabled through our hassle-free customer service program, in part by providing better Web-based service for both existing and new customers. We will continue to emphasize Six Sigma and process management in the pursuit of further productivity gains in how we deploy capital, reduce operating costs, and improve reliability and emergency response.

Finally, we are moving forward in our journey toward a high-performance culture and are beginning to address the long-term impact of our aging work force. Thank you, and I will now turn to Follin for the financial review.

Thanks. Good morning, everyone. I'm going to take you through over the next 30 to 35 minutes or so detail on our 2004 results, a review of our outlook for 2005, and I'll also spend some time discussing capital spending, cash flow, our balance sheet, and return on invested capital. Finally, I will provide some insight into our long-term earnings outlook. Starting on page 74, the fourth-quarter results. Fourth-quarter reported earnings were 76 cents per share. The special item of 3 cents for the fourth quarter represents workforce reduction cost, for an estimated 108 people in our generation operation. In addition, the generation operation plans to reduce another 42 positions in other ways, bringing the total reduction to the 150 positions Mike mentioned.

Now let me pause here to reset the bar on treatment of special items. We have been treating not only sizable workforce reductions and big restructurings like the sale of Cuna (ph) as special items. We have also been treating gains or losses on sales of noncore financial and real estate investments as special items. We have whittled that portfolio down now to 35 million of these noncore financial and real estate investments. So from now, we won't bother to call out future gains or losses, since they're likely to be small.

Earnings excluding special items were 79 cents per share, in line with our guidance range of 70 to 80 cents per share, and 12 cents or 18 percent above our fourth-quarter 2003 results.

Turning to slide 75. Looking at the segments, the merchant business earned 61 cents per share excluding special items, in line with our guidance of 54 to 64 cents. Compared to last year's fourth quarter, per-share earnings were set -- earnings excluding special items last year were 52 cents, and the merchant earnings increased year-over-year by 9 cents or 17 percent. Compared to last year, the fourth quarter benefited 6 cents from NewEnergy electric and gas, 4 cents from our Ginna nuclear plant, and as we indicated it would, the commodities group essentially began to focus on investments in building the backlog and building the future.

BGE earned 17 cents per share, in line with our guidance of 16 to 19 cents, and with fourth-quarter 2003 earnings. Other non-regulated businesses earned 1 cent per share, 3 cents higher than Q4 2003 earnings excluding special items primarily due to a tax benefit of a dividend from our Panama operations to take advantage of the new dividends received deduction on foreign repatriation created in the American Jobs Creation Act.

Turning to 76. For the full year our earnings excluding special items was 3.24, up 17 percent from last year and in line with our most recent guidance of 3.15 to 3.25. As you'll recall, our guidance heading into the year was $3.00 to $3.15 per share -- accordingly we're pleased with the outcome 9 cents above the initial guidance range.

The Merchant delivered 48 cents growth in EPS excluding special items; earnings benefited from our wholesale competitive supply, Synfuel facilities, the addition of Ginna to our portfolio; NewEnergy; a full year of our High Desert facility; and favorable bankruptcy settlements at NewEnergy. Partially offsetting these positives were higher coal costs in the mid-Atlantic fleet driven by rail delivery disruptions; lower gross margin at Nine Mile Point primarily due to PPA prices which were scheduled to step-down in 2004; spending to attain Sarbanes-Oxley 404 adaptation; and other expenses primarily including compensation and benefits increases and spending geared toward laying a foundation for future productivity items such as IT systems, investing in Nine Mile Point reliability and developing our generation fleet approach.

And to summarize the year from our perspective, we grew our competitive supply platforms, we benefited from Ginna and High Desert, and we were able to create this growth at the same time as we were able to reinvest in future growth in the business.

BGE operations were about flat at the net income line compared to last year. The 3 cent decrease in EPS is due to dilution from the 6 million share issuance to support the Ginna acquisition. The other non-regulated businesses are up compared to last year primarily due to the 3 cent tax benefit associated with the dividend received from Panama.

Moving to slide 78 and a discussion of 2005. As Mayo indicated, we've grown EPS excluding special items at a compounded rate well above 10 percent since 2002. As I'll discuss in this presentation, we continue to be confident that our fundamental building blocks for growth will take us to a 10 percent growth rate over the 5-year business planning horizon. The current level of commodity prices will add to that fundamental 10 percent growth outlook. For 2005 our guidance range is 3.35 to 3.60 which represents growth of 3 to 11 percent off a very strong 2004.

Moving to slide 79. This chart walks through the factors that will contribute to our 2005 earnings growth. We've used the middle of the guidance range throughout this analysis. Now let's walk through each of these drivers starting on page 80.

Wholesale competitive supply will be up 24 cents year-over-year; 12 cents is from a higher backlog. We have more transactions booked and lined up to be realized in 2005 than we did going into 2004. 12 cents is growth in business yet to be originated.

Turning to slide 81. For 2005 we have already originated power gross margin and hydrocarbons worth 221 million. The 198 million from power is the backlog concept we've shared with you in the past. These deals are highly hedged and accordingly the earnings are very visible. We also put in an expectation for 23 million of project gross margin from upstream gas and coal transactions entered into last year. Together this 221 million is up 35 million over the backlog this time last year.

You will see in the next section how we've built up our expectation for new business to be originated and realized in 2005 between power, gas, coal and portfolio management. Gross margin on power deals originated and realized in 2005 is expected to be up 34 million. We're conservatively planning, as Tom Brooks said, on loan serving margin being flat, slightly up versus last year. As Tom discussed, the growth is primarily from midmarket sales. We began to bulk up this area in 2004. We expect this growth trend to continue supporting our expectation of 49 million for the year or a year-over-year increase of 23 million in midmarket sales.

We're counting on gas to generate an incremental 15 million. We also expect the coal business to add 15 million more than last year. We've added 22 experts who are building coal supply relationships much like our competitive supply power relationships. They've already contracted with third parties for 6 million tons with an expected margin of $20 million. Our plan calls for a total of 11 to 12 million tons at approximately a $3.00 per ton margin of which half is included and projected new business and half is already under contract.

As you'll recall, portfolio management is where we show the benefits when competitive supply enhances the value of the fleet over the business plan forecast which is based on actual hedges and market forwards for unhedged elements heading into the year. In other words, it is how we track the value they add through their activities rather than just fully hedging the fleet at the beginning of the year and not touching the output and how it's managed. It's also where we show trading results.

In 2005 portfolio management is expected to deliver 96 million of value. This is a $3 million increase year-over-year which is conservative given the growth in volumes we'll deliver this year. In total wholesale competitive supply will be up 26 percent, strong growth but moderating from the rates they've actually achieved in the past few years.

Now moving to slide 82. To drive the 67 million of business creation growth to be realized in 2005 and to build a backlog for future years, we'll spend an incremental 33 million in operating expenses. The net result is a pre-tax earnings increase of 34 million, an increase in earnings of 12 cents per share.

Now moving to slide 83. Mid-Atlantic gross margin will be higher by 5 cents year-over-year absence of coal rail delivery problems which have occurred in 2004. As we discussed last quarter, we had to procure higher cost coal to support generation. Delivery issues have moderated, inventories are back up and we expect to realize the benefit in 2005.

Turning to slide 84. Earnings at NewEnergy will be 3 cents lower in 2005 versus 2004. NewEnergy had 6 cents of favorable settlements in 2004 -- primarily bankruptcy settlements. Excluding the impact of these, NewEnergy's earnings will be up 3 cents per share.

Turning to 85. After superior operating and income performances in 2003 and 2004, we expect NewEnergy's growth to moderate in 2005. As we've discussed in prior presentations, we expect margins in this business to contract in 2005 as higher margin contracts which are expiring are replaced by contracts more consistent with our $3.00 per megawatt hour acquisition forecast.

Both growth in megawatt hours served and operating leverage from the scale largely offset the impact of the expected margin compression. In 2005 we expect margins of about 3.35 per megawatt hour, $1.00 below 2004 levels. This is partially offset by 52 cents per megawatt hour lower operating expense. As margins firm and NewEnergy enjoys further success in its efforts to consolidate the retail competitive supply market, we expect earnings growth to accelerate in 2006 and beyond.

Moving to a discussion of Ginna. Ginna will be 5 cents lower in 2005 than in 2004. Turning to page 87. As you'll recall, we completed the Ginna acquisition in June of 2004 ahead of schedule with 11 cents of EPS accretion falling into 2004. 2005 earnings contribution is projected to be 6 cents. Compared to 2004 we'll benefit 11 cents from a full year of operation which is more than offset by 10 cents of loss gross margin and cost related to a planned refueling outage in the spring and by 6 cents of dilution associated with the full year impact of having the additional 6 million related shares outstanding.

Looking forward you'll notice a meaningful year-over-year increase in 2007's income due to the absence of a refueling outage and the 2006 completion of the scheduled 17 percent upgrade.

Turning to slide 88. Last year we outlined an aggressive productivity plan aimed at fundamentally lowering our cost per unit by increasing the output of our plant and decreasing our plant and staff cost. For 2005 we expect productivity to drive 21 cents of year-over-year earnings growth. This will be partially offset by inflationary cost increases.

As you'll recall, to help us monitor productivity in generation and at headquarter staff, we break out estimated inflation separately. For 2005 we assumed increases in benefits cost of 10 percent in line with national trends. For other expenses we assumed a 2 percent increase in line with CPI. In total we expect inflation at generation and headquarters expenses to have a -9 cent impact on 2005 earnings.

Turning to slide 89. In 2002, 2003 and 2004 we laid the groundwork for the delivery of the productivity we will see in 2005. We brought in what we believe are some of the best nuclear managers in the industry over the past 3 years. They streamlined processes at Calvert Cliffs which have allowed us to execute outages with incredible precision thereby increasing time the plant is up and running and producing gross margins and reducing the number of employees, contractors, services and materials to execute those outages.

Calvert Cliffs will be in the top decile of cost per megawatt hour this year. Now by our fleet management initiative to drive common processes between our plants, Nine Mile Point is poised to replicate the improvement track record of Calvert. It will take years for them to meet Calvert's cost profile but, as you can see, the low hanging fruit is large. This plant will add 48 million of EBIT in 2005. In total we expect the nuclear fleet to see about 56 million of higher EBIT in 2005 due to productivity initiatives.

Finally, we'll have a year-over-year favorable variance from the absence of 2004's Ginna transition cost, Sarbanes-Oxley 404 Act implementation cost and system implementation cost. The plans are detailed, we know what to do. Our team is experienced and has done it before. We just have to execute.

Turning to slide 90. We expect a favorable 3 cents from lower net interest expense partially offset by dilution related to shares for employee savings, comp and benefits and the dividend reinvestment plan.

Turning to slide 91. Net interest expense will be about 25 million lower or 9 cents favorable primarily due to a lower debt balance. This is partially offset by 6 cents of dilution related to newly issued shares to employee savings benefit incentive and dividend reinvestment plans. This excludes the 6 million shares associated with the Ginna acquisition; we offset the Ginna EPS by the dilution associated with those shares to give you a clearer picture of the Ginna accretion.

Moving to slide 92. We assumed the divestiture of our Panama transmission and distribution business in 2005 in our projections. As you'll recall, this is a noncore business which we intend to divest when we can get a reasonable price. It's performing well, but it's not aligned to our areas of strategic focus. With a general recovery in Central America under way we're assuming we'll sell it in 2005.

Now even if that sale happens at the end of the year, we will be required under GAAP to reclassify this operation to discontinued; accordingly it's earnings will not be in 2005 EPS even if a sale occurs towards the end of the year.

Turning to page 93. Miscellaneous other items hurt the year-over-year comparison by 11 cents. The biggest items here are the assumed nonrecurrence of two favorables in 2004; a 3 cent incentive fee pay out received in 2004 associated with an historic minority investment; and a 3 cent tax benefit associated with the Panama dividend. We'll also see an incremental 4 cents of depreciation associated with our new system implementation.

Turning to slide 94. I'd like to take you on a walk through the income statement. The information in this section is designed to help you with building your model. You'll also find more facts to help you with building your model in the appendix.

First, on slide 95, in total we expect Merchant gross margin of roughly 2.4 billion, up 240 million or about 11 percent from 2004. And we've discussed wholesale competitive supply in NewEnergy; let me give you some facts on generation beginning on page 96. We expect gross margin of almost 1.7 billion associated with the fleet of about 89 million from last year. I'll start with the estimated margin from the mid Atlantic Fleet. Before I do I'll digress to remind you how we come up with this line called mid-Atlantic Fleet. We know you want to understand how much we make from selling the former BGE fleet's output primarily to BGE.

In reality the commodities group manages the output of these plants along with all other PJM competitive supply activity in one regional portfolio in order to optimize the value. That's part of the strength of our integrated business model. Here we've simply taken the PJM regional portfolio gross margin and extracted notable competitive supply deals -- not off of our fleet such as participation in the BGF deals in New Jersey -- to approximate the mid-Atlantic fleet's gross margin.

We estimate mid-Atlantic fleet gross margin will increase by $20 million, favorable power prices and lower coal cost will be partially offset by the 20 million year-over-year of hurt from the winding down of our competitive transition charge revenue.

Turning to slide 97. Merchant EBIT will grow by 11 percent or 81 million. Lower debt and higher cash balances reduced net interest expense. After taxes we expect Merchant net income growth of 16 percent.

Turning to slide 98. Here we've provided detail on the changes in our O&M and depreciation and amortization. As you can see, O&M expenses are increasing by 107 million year-over-year primarily due to a full year of Ginna operations, costs to support margin growth at commodities and NewEnergy and inflation. These increases are partially offset by 63 million in productivity at our Merchant business.

Now moving to the utility on slide 100. We expect BGE to earn roughly 84 cents per share in 2005 which is 4 cents lower than 2004. 2 cents of the decrease is dilution which we discussed earlier, otherwise net income will be flat to slightly lower as growth in customers and lower interest expense is offset by higher O&M related to wage and benefit increases and spending on a combination of customer reliability and outage response initiatives as well as addressing new NERC recommended standards for system reliability. BGE continues to do a good job of delivering stable earnings and cash flow.

Now let's review capital expenditures and cash flow starting on slide 102. This chart presents the capital spending projections in our business plan. As you'll recall, we give you a capital spending forecast that includes known or reasonably likely investments. We don't include, for instance, M&A. Accordingly what you have is essentially an organic business plan.

Now, our objective is to identify projects that provide above hurdle rate returns and invest for the benefits of shareholders. Accordingly you may see increases from these projections as we move forward in time. Comparing this year's plan for 2005 to what we showed you last year for 2005, nuclear fuel is up about 62 million, 15 million for Ginna and 47 million for higher fuel cost at Nine Mile Point and Calvert Cliffs.

The generation plant line now includes 29 million of non-fuel Ginna spending. Upstream gas investments will add 78 million to our 2005 projections; 28 million is for existing projects and we've included a placeholder of 50 million for new projects. We'll evaluate possible investments one by one with a rigorous eye and we won't spin this if we don't see good projects with strong returns. You see BG&E CapEx growing for reliability initiatives. Of course we expect these investments to be in rate base (ph).

Finally, as Mayo mentioned, looking beyond 2005 most expect that the EPA will promulgate new rules which require reductions in NOx, Ox, and mercury by 2010. We've included spending of $100 million in the 2006 and 2007 time frame for our fossil fleet. If the rules are promulgated as we've assumed in these projections, there would be another 400 to 500 million after that in the last few years of the decade on these plants. The spending would be amortized over the estimated remaining useful life of these plants currently estimated at 30 years starting in 2010.

Turning to slide 103. In 2005 we expect to generate approximately 530 million of cash flow for debt reduction; 382 million of this relates to the assumed divestiture of our Panama operation and several transactions in which we restructured contracts for customers. You've probably noticed these by our recent press releases. In essence customers paid us cash in exchange for our accepting future obligations on their behalf. We bought and sold power at attractive prices at the end of the day.

One of these transactions notably provides a good long-term hedge to our fleet, another builds some important customer relationships. These were commercially attractive transactions which had the ancillary benefit of providing cash at essentially no cost. An outflow of 77 million for the realization of these deals in over the course of this year is included in the working capital line. So excluding the divestiture and customer contract restructurings, cash flow is projected to be 225 million. As you can see, we still expect to deliver a very strong cash flow after paying a new higher level dividend and investing for the future.

Now let's take a look at the balance sheet on slide 105. In 3 years we've reduced debt to capital by over 8 percentage points while delivering strong earnings growth for our shareholders. As we laid out for you in the third-quarter earnings call, we've targeted a debt to total capital ratio of 40 percent. As I said, in 2005 we're projecting cash flow of 530 million to be applied to debt reduction. We currently project debt to capital at the end of 2005 at about 42 percent.

Now I'd like to spend a moment looking at our return on invested capital, starting on page 107. The Company had an average return on invested capital of 6.5 percent in 2002. With the success of our operations over the last 2 years we've increased the ROIC to over 8 percent. Now as we look around the industry we think we've improved from what compares as a sub par ROIC to one that compares favorably with others and is appropriate to our cost of capital.

We've gotten there through smart investments like Ginna and NewEnergy which exceed the hurdle rates appropriate to the risk of those investments; smart deployment of capital by our commodities group and by eliminating sub earners like Guatemala and senior living facility. We see more to come as we drive more value out of existing assets through initiatives like productivity.

Moving to slide 108. Let me spend the last few minutes focusing on our long-term growth outlook. Starting on page 109, we expect our fundamental growth building blocks to drive about 10 percent EPS growth. The recent rise in energy prices will drive higher earnings through 2007 -- starting on page 110.

Mayo previewed for you our 2007 EPS potential of $4.75 to $5.00. That represents a compounded growth rate of 17 to 20 percent off the midpoint of 2005 earnings guidance. The long-term growth drivers are competitive supply business growth, productivity, reinvestment of cash flow and an increase in the value of the mid-Atlantic's fleet output. These increases are partially offset by inflationary pressures and infrastructure cost.

Turning to slide 111. The plan includes 65 cents of wholesale competitive supply growth in 2006 and 2007. We start with an existing accrual book of contracts which we expect to contribute 151 million of gross margin in 2006 and 121 million of gross margin in 2007. These contracts are highly hedged and a visible stream of future earnings.

Second, we expect a similar pattern in backlog creation in 2005 and 2006. Past experience has shown that about 50 percent of the total gross margin that is created by the commodities group in any year will be recognized in future years, the other half recognized in current years. This adds to the earnings backlog we harvest in future period.

Finally, we're counting on current gross margin business to grow 20 percent in 2006 and 10 percent in 2007, reflecting the planning assumption that growth will begin to moderate compared to history. In sum, we continue to view the commodities group business as a source of growth in future periods, but we are only counting on rates moderating from what we've actually achieved in prior years.

Moving to page 112. As Tom Brady mentioned, NewEnergy growth is the result of both growth in the switched market as well as the continued market penetration in existing markets. We've proven adept at retaining existing customers and developing new customers. We assume a customer retention rate of 75 percent with an 18 month average contract term in our business plan.

As you can see from the gray box on chart, we're planning on new business ranging between 4,600 and 6,000 MW each year. To put that in perspective we contracted 5,400 MW of new business in 2004 with similar renewal rates and contract terms. Accordingly NewEnergy's plan looks to be in line with prior performance and attainable.

Now turning to page 113. Earlier in the presentation I outlined for you the specific drivers of productivity for 2005. This chart shows the cumulative productivity gains that we're expecting through 2008. As we said would be the case, we experienced negative productivity in 2004 due to investment to build a foundation for future productivity. By 2008 we will have created 150 to 180 million of productivity gains which should drive about 2 percent per annum of EPS growth through 2008.

Turning to slide 114. I described the rigor with which we've applied the term in our 2005 productivity initiative; we've applied a similar approach to determining productivity sources over the '06 to '08 time horizon. As you can see from the chart here, we expect to get around 70 percent of productivity from Nine Mile Point. The size of the opportunity at Nine Mile Point was based on a comparison of this plant to appropriate benchmarks. Achieving these productivity settings would bring Nine Mile Point to the top quartile for nuclear production cost of plants that size.

We also believe this grows our opportunity to take advantage of capacity improvement and cost savings at Calvert Cliffs and Ginna. In addition we've identified opportunities to save staff cost even as we continue to grow the business.

Now let's take a look at slide 115. In the third quarter we outlined a 40 percent debt to total capital target. We expect to reach that sometime in 2006. Upon reaching that target we would hope to redeploy excess cash flow at above hurdle rate opportunities or return capital to shareholders. If we don't find the opportunities to reinvest we'll look at higher dividends or share repurchases. Rather than assume a reinvestment rate we modeled stock repurchases in this business plan. These are very accretive and they add 24 cents to the '06 projection (ph).

Turning to slide 116. So in addition to the fundamental building blocks for earnings of -- build growing competitive supply, driving productivity and prudently reinvesting cash, today's higher power prices should drive higher earnings in 2007. This chart demonstrates the approximate gross margin we expect from the mid-Atlantic fleet. It's important that you understand why our margins are going up.

One is we own nuclear units and nuclear fuel hasn't gone up as much as power prices, of course. Two, is the pricing on Maryland residential load. The Merchant sells a significant amount of its mid-Atlantic generation, about 13 million MW hours, to serve Maryland residential price free service customers. The revenue rate on this 13 million MW hours was set back in 2001 in conjunction with Maryland deregulation. Coal prices subsequently rose and we were not hedged in 2002 through 2006 on the coal purchases. So our coal prices went up while our revenues were fixed squeezing our margins.

This chart demonstrates the margins we've modeled for 2007 using a combination of what's already hedged in our portfolio and market prices for the unhedged element. As you can see, as our existing hedges roll off in 2006 and we're able to re-establish market level revenues in fuel prices for our entire mid-Atlantic fleet's output our margins will rise.

As you'll recall from our presentation last January, we had been assuming that the roll off of our competitive transition charge over this time frame would be roughly offset by power price increases. What we saw over the course of 2004 was an increase in forward power prices such that we now expect a large net increase in gross margin from these factors. As I discussed earlier, this run-up in prices and the resulting increase in gross margin augments our already strong organic EPS growth story.

Turning to slide 117. We continue to see value in being highly hedged and to pursue a strategy that has led to consistent and visible earnings growth for the past 13 quarters. It's our fundamental belief that investors value intermediate-term visibility on our growth from fundamental performance. While we're not fully hedged out through 2007, we have been working on balancing the book's exposure.

As you can see here, we have about proportionate exposure now to power and fuel in 2007. That means that as long as power and coal prices move in tandem, as they have historically, we don't expect changes in commodity prices to meaningfully change our 2007 earnings forecast.

Turning to slide 118. In summary, we think that Constellation's growth outlook is very strong. Our basis for this belief is very sound. We have a credible set of building blocks for continued earnings growth. In wholesale competitive supply we're counting on growth, but at a moderating pace compared to what we've achieved in the past. NewEnergy is assuming that commercial and industrial customers will continue to shop away from their local utility in increasing numbers than that their share of the switched market will continue to grow albeit at a moderating phase.

We will deliver significant productivity with the lion's share at our generation group. We've benchmarked to set reasonable targets and we have detailed plans to get there. We generate strong cash flow which we'll redeploy for the benefit of our shareholders and return to our shareholders.

Finally, when our hedges end in mid 2006, today's high energy price environment makes the output of our heavily nuclear fleet even more valuable. We've worked hard to balance our exposure to changes in power and coal prices to 2007. As long as the relationship between power and coal don't change meaningfully, our earnings should be in the area of $4.75 to $5.00 in 2007. We have to execute on each of these items. We're proud to say that execution has been our hallmark.

Now let me wrap up by providing some guidance for first quarter on page 119. We expect first-quarter earnings to be 47 to 62 cents. The first quarter is always a light quarter for us; in 2003 and 2004 we earned 13 percent and 20 percent respectively of full calendar year earnings in the first quarter. We expect Q1 to be 14 to 17 percent of calendar year 2005's earnings.

We tend to sell power with a flat price per MW hour but force shaped power, that helps make the second and fourth shoulder quarters strong. We also tend to do planned outages in the first quarter. This year's 47 to 62 cents compares to 66 cents in the first quarter of last year. The Merchant will learn 10 to 25 cents compared to 23 cents last year. The Merchant comparison would be up strong but for wholesale backlog timing and Calvert Cliff’s outage timing.

While the wholesale backlog will add 12 cents for the full calendar year, it will be 12 cents lower than prior year in the quarter with scheduled realization weighted to the back end of this year. We also benefit from the addition of Ginna, but Calvert Cliffs will start its outage in the first quarter this year compared to starting it in the second quarter last year.

We expect BGE's earnings to range between 36 cents and 41 cents, down from 43 cents achieved in the first quarter last year. The decline is driven 2 cents by weather -- we had a cold winter in 2004 -- and 2 cents by dilution. The other non-regulated businesses should break even in the first quarter in line with 2004's first quarter. Now I'll turn the podium back over to Mayo for a wrap up.

Thanks, Follin. I know that's a fire hose of information which is probably none of you moved during the fire alarm, so we thank you for your --. But as we always say in this January presentation, we really try hard to give you all the information to build your model. I think as you can tell, we're very optimistic about the future; we think we've built a great commercial front-end in a business where everyone else is going in the other direction and it really bodes well for us as we look at really all segments of the business.

So with that I'd be pleased to open up for questions and direct them to the appropriate response. Yes, Greg?

I have two questions, one in relation to the balance sheet and share purchase assumptions you're making. One of the things that was a little bit surprising this year and a little bit disappointing was that at the beginning of the year you lowered your debt to total capital target from 45 percent to 40. So that backed up a little bit by 12 to 18 months when we all assumed you might become truly free cash flow positive and start doing the things that you're now targeting for mid '06 and '07.

As your marketing and trading business becomes more and more successful on a larger portion of your total earnings, what can you do to assure us that that 40 percent doesn't become 35 percent, doesn't become 30 as the rating agencies maybe start to think about your profile increasing? And then I have another question.

Thanks for that question because it allows us to immediately get into our love for the rating agencies. I'm going to have Follin respond to that question.

Greg, S&P actually established the current rating assuming 45 percent debt to capital would be our ultimate target. And they also established our current rating -- looking at our business plan, which has not substantially changed from when they established the rating last year. So things haven't radically changed from the basis on which the rating agencies established the current rating.

On the other hand, we think it's important that we have a very strong balance sheet and credit profile for these customer basing business -- an investment-grade rating is very important for all of these customer facing businesses. We think it's important to driving longer-term shareholder value to keep the kind of balance sheet which will protect that. 40 percent seems like the right level looking out over the entire business plan horizon, not just over the next year or 2.

, Thanks. And the second question is there's a lot of very positive structural things happening in 2007 with regard to the mid-Atlantic fleet. People are ringing bells because they're so excited. As we look out past '07 I think there are also a couple other structural things that are both positive and negative. One of them is that you do generate a bit of your earnings from tax credits which roll off. If you could remind us how much that is. But then also you have what are currently below market contracts for several of your nuclear plants in New York and New England. If you could talk about those two structural issues and what the downsides and upsides might be post '07?

The loss of Synfuel earnings will be about 28 cents in 2008. We've just shared with you EPS of $4.75 to $5.00 for 2007. So this represents a headwind of about 5.5 percent of earnings. If you compare that to the headwinds that we have confronted in the past set for mark to market to accrual, coal cost increases, successfully overcoming the bleed off of the CTC -- all each of which was larger than that. It appears like a manageable headwind for that year in our business plan. We didn't share with you 2008 projections. That's getting a little far out. But we still believe 10 percent EPS growth in 2008 is attainable including that headwind.

Can you talk a little bit about what the current contract prices are for the assets in New York and New England and how they compare to current forward curves?

The Nine Mile Point contract rolls off in 2009 I believe. I haven't focused on the 2010 projections yet.

We're working on that this afternoon.

May, two questions. When you look in your generation fleet currently and you look at the volume that you're going to grow on your competitive supply side, (indiscernible) MW or MW hours, is there an implicit relationship that you have in your mind in terms of how much of the power needs for your competitive supply business should be coming from your own generation? How do you think about that as you think about more generation (indiscernible)?

I think the way in which we look at the business really distinguishes between those two; the competitive supply business is not dependent on our the owned generation side of the business. In some respects they can be managed separately. I think we tried to indicate to people that we are interested in building the generation fleet, gaining leverage and synergies associated with fleet management. However, there's clearly an advantage to the integration of the two in the competitive market.

So as a consequence our targeted acquisition interest would be in markets that are open to competition because of the leverage associated with that. There's no predetermined relationship between the two. I think we would only buy an asset if it met our own internal hurdle rates and isolation, but there's no question that when we buy assets in competitive markets it is leverageable. I think that we've often used the expression selling 10 percent of Nine Mile over and over again in the context of portfolio management; it is quite helpful to have the asset strength. But at the same time it is really not a limitation to how we approach the wholesale competitive supply business and retail for that matter.

And just one follow-up to that. As you're looking at acquisition opportunities out there (indiscernible) generation seems to be the area where you would have the most interest. Do you see opportunities where there are large retail customers to be had or acquisitions along those lines? Would you consider those? There are a few examples out there of a company that has a large retail portfolio. Does that make any sense for you or is the acquisition focus really going to be on primarily generation assets?

I think our acquisition focus really has been split into two domains over the course of the last 3 years. The pure asset acquisition -- I always hesitate to call them pure asset acquisitions since particularly when you are in the nuclear business the people are equally as important to the assets. But the other side of the coin obviously is that we have built in 2 years a business that will do $5.5 billion in revenue around the country purely from the foundation that we acquired first through NewEnergy and then all the related companies.

At the same time I believe that some major percentage has run its course in that we have built by far and away the largest commercial front end in retail. And as a consequence, the other acquisitions that might be available frankly are probably easier for us to go at more -- less expensively on an organic basis. So we don't expect to have a lot of tack-on acquisitions in that realm.

But I think that we are very development oriented. We have a department that's willing to listen to ideas but it has to be consistent with the strategy and it has to meet our hurdle rate. I think there is even some reason to think that diversification along the value chain is something that we would pay attention to. I think as a consequence you've seen our movement into oil and gas off a wholesale platform that's really an extension of the way in which we manage the power business and the wholesale commodities business.

So over time I would expect that, yes, we would continue to try to diversify the base of earnings. And if it comes through acquisition we'd be happy to do so and I think that we've proven our ability on the integration side to make them work.

Could I ask a follow-up on the repricing in the mid-Atlantic fleet because that's a big growth driver? Follin, you made a comment that some of that was hedged for '07. Can I imply that you've hedged the fuel and have not hedged the power or -- I'm not sure to what extent you're at limiter to comment -- or should I take it in the context of your overall earning sensitivity to commodity price number being a penny a share?

If you look at page 117, Leslie, you can see hedge ratios for 2007. I think the important thing to look at is sensitivity to price changes. If you look at the 2007 column, what you see is we estimate that if power was down $1.00 it would hurt our 2007 earnings by 5 cents. But assuming that fuel moved down at approximately the same rate, that would help earnings by about 6 cents. In other words, we have very much balanced our exposure to power and to coal out in 2007.

Of course, the natural unhedged state is we're much longer power than we are short fuel because we've got 50 percent of our generation is nuclear. So Tom's group has been working very hard on balancing that profile to reduce our sensitivity to commodity prices out in 2007 and has made significant strides, as you can see, on our 2007 exposure to commodity prices. Do you want to comment on that, Tom?

Two questions. First, in the share repurchase assumptions you made in the '07 guidance, are you doing that based on taking both free cash and retained earnings growth and keeping the 40 percent debt to capital or just the free cash flow? I.e., are you staying at 40 percent debt to capital?

We're staying at 40 percent debt to capital out through the time frame and I think what (indiscernible) from a 13 forward PE or something what the stock price would be and assumed we used free cash flow above what it takes to maintain a 40 percent debt to capital (indiscernible) shares in that.

And second question -- Follin or maybe Tom maybe could go through a little bit more explanation of the recent coal purchases. And I know, Follin, you went through that a little bit, but a little more about how the economics of these things work. You mentioned you get cash up front but it also looks like you're losing some cash in the process. What are the whole economics of these types of acquisitions?

It's just sort of broad concepts here. There are a number of Merchants who are, of course, interested in exiting long-term commitments either to buy or to sell power -- long-term commitments made several years ago. And in each of these cases we essentially assumed long-term purchase or sale obligations which fit very well with our existing portfolio, number one. And number two, where we received cash up front or at closing as a means to change the effective price in those long-term contracts to prices that are attractive to us.

So, essentially the benefit of that cash amortizes into earnings over time as the power volumes are delivered or flowed by us -- or delivered to us or delivered -- or we deliver them to the ultimate customers.

From an accounting perspective I think what you'll see, Steve, is we're trying to highlight what the cash flows are on these since they're so big and significant so you can understand our cash flow both with and without them. In the file documents what we'll do is work just to highlight these. We'll actually in the cash flow statement carve the up front cash received out as a financing.

I think, Steve, on balance from our point of view, these are actually quite simple deals, somewhat time-consuming to structure, but quite simple deals ultimately. And as our portfolio of scale has grown it's become more and more efficient for us to take on such positions and have them fit very well within our long-term portfolio.

(inaudible question - microphone inaccessible).

You hang it up on the balance sheet. The initial inflow we hang up on the balance sheet as a deferred revenue item. Then over time margin is amortized into income as we deliver or receive physical power.

I guess for Tom Brooks. Tom, we saw a lot of evidence that the New Jersey auction was not a particularly profitable event for a lot of folks. Last year we saw the First Energy auction not get done. Is this an indication that all the economics are going out of the wholesale business, there's too many people involved? Or does this mean that margins are going to improve because people can't figure out how to make money there?

I guess there are two different questions there -- First Energy -- the overall wholesale auctions on the one hand and First Energy on the other. As to overall wholesales auctions, the observation you made is that the margins have disappeared. That hasn't been our experience at all. In 2004 we experienced realized unit margins within the $2.00 to $4.00 range that we've experienced historically. It's our belief that the growing scale of our portfolio enables us to -- has enabled us to reduce our own cost of serving those full requirement customers in a way that enables us to preserve our own margins. But it hasn't been our experience across all the auctions that essentially margins have disappeared at all.

We've experienced relatively consistent unit margins with what we've experienced historically. And we feel like as we continue to leverage our portfolio management capability and our scale we think that's going to continue.

On First Energy I think that's a bit of a different story. I would say on balance we were fairly pleased that the auction cleared, that is to say that enough competitive suppliers showed up willing to provide power to enable the auction to clear. And that was probably no small feat because of course the MISO is not fully implemented yet. So there were meaningful uncertainties that potential suppliers faced in offering into that auction. So we were pretty pleased that the auction did in fact clear.

Of course the commission ultimately concluded that the price in First Energy's rate stabilization plan was preferable from the standpoint of rate payers. That's probably not a huge shock given that the rate stabilization plan was set at a time when prevailing market prices were quite a bit lower, number one. And number two, it was probably not quite as burdened by the uncertainties surrounding MISO implementation.

But I think our general read on First Energy was a pretty strong indication that competitive procurement can work in Ohio. And we're relatively optimistic that we'll see competitive procurement as part of the overall package there in the future. Clearly in the Northeast and in the mid-Atlantic competitive procurement has been an important element of driving power supply costs down for consumers and we're optimistic that a similar conclusion may be reached in Ohio.

Follin, on productivity gains since you guys are looking at the bulk of it coming from nuclear. You guys spent a fair amount of money in 2004 to further productivity gains. You're seeing more at the corporate level. Do you expect more to potentially come from the money spent this year than what's on that chart or were part of those gains really for laying the groundwork for new (inaudible)?

You're asking the question -- you spent a fair amount of money on corporate IT systems? Having good IT systems is a foundation for the generation operation to have the information it needs to manage its productivity. So being able to consistently access cost per square foot of our (indiscernible) waste process, that sort of information relies on having good information systems. The ability to grow at NewEnergy and at commodities -- a sound IP platform is necessary. So it's an enabler both to productivity and to the information we need to drive growth.

And let me elaborate a little further. It will also drive specific productivity. Like this year we're looking at we will evaluate a shared services organization where we pull transactions, processing into one organization to lower the cost of transaction processing. We'll evaluate how the Merchant executed its accounting function systems, we'll enable both of those and allow us to streamline and take cost out of the staff group itself. Of course, the absolute cost not for the staff groups is no small compared to the cost not at generation, that explicitly as a (indiscernible) million the productivity is pretty small relative to what generation can (inaudible).

I wanted to ask a question on slide 103. I just wanted to get some clarity on this asset disposition contract restructuring. First of all, is there any EPS impact associated with these at all? And I know you've touched on it, Follin, but if you could just elaborate a little bit more what's going on here in terms of these contract renegotiations. They have no earnings impact? Just the $382 million, just if you could elaborate a little bit on that. And then the second question I have is just a bookkeeping question on mark to market accounting. What was the gross margin nonrealized mark to market benefit in 2004 for the full year?

Andrew, if you can pull out mark to market and gross margin and what was not realized. I don't have that at my fingertips. And Paul, the other question was to talk about the contract restructuring?

Yes.

That's what -- when Steve was asking on (multiple speakers) to elaborate further, that's precisely what he's (multiple speakers).

Okay, that's fine. I wasn't clear whether that was the same thing. Okay, thanks a lot.

A question on slide 102. You give capital expenditures for portfolio transaction and gas investments. Can you just elaborate the amount that is going into the gas investments versus the portfolio transactions? And these gas investments, are they D&P investments -- drilling investments or where are they on the value chain and (inaudible) chain?

In terms of their nature these are essentially reserve acquisitions at various stages of development. And in terms of the pipeline we have $28 million of identified investments. And as Follin indicated, we have sort of established a placeholder in the business plan of an additional $50 million of such investments which will obviously make or not made dependent upon expected returns exceeding the appropriate hurdle rates.

Can you just elaborate -- the reserve acquisition business seems to be a pretty competitive business just as a naive look from the outside. What people did you hire in '04 and '03, what kind of process did you go through to build this (inaudible)?

Sure. In terms of what we've done both in natural gas and, in fact, in coal -- these are two areas which, of course, are fundamental drivers of our power business, number one. And number two, where we had the strong belief more than a year ago that our basic business model focusing on physical products could bring value to customers in natural gas and coal upstream and downstreams customers.

During 2004 in both areas we focused a very significant amount of effort building our capability in both areas. We hired a number of people both in natural gas and in coal. We built out a significant amount of infrastructure essentially valuation and risk management capability as well as a contractual infrastructure to enable us to do business with various coal and natural gas counterparties. And we built a significant -- new customer relationships and finally in both areas an important contractual backlog which will have a direct impact on our 2005 results.

So over the course of 2004 in both areas we were very focused in building our capabilities including our people capabilities in order to enable us to deploy our basic -- the basic business model that's driven our growth in power to the benefit of customers in these two areas. In terms of the magnitude of the impact -- again, as I indicated, as to '05, what we have in the plan, it's about $30 million of growth driven by these two sets of new business initiatives, coal and natural gas.

And given the infrastructure buildout that we've done, the people we've hired, customer relationships built, the backlog built, and frankly just given a track record of having experienced gross margin growth in excess of 40 percent 3 years running, we feel pretty confident that we're going to be able to achieve (indiscernible) growth in 2005 in these areas.

It is past 10 so I think what we'll do is stop the official presentation at this point. I really want to thank you all for your steadfast attention and we will be around for the next half-hour or so to answer any specific questions. So feel free to come on up and meet the management team. Thanks again very much.