艾索倫電力 (EXC) 2005 Q2 法說會逐字稿

Good morning and welcome to Constellation Energy's second quarter earnings call. All callers are in listen-only mode until the question and answer session of the call.. Today's call is being recorded. If anyone has any objections, you may disconnect at this time. I now turn the meeting over to your -- over to the Chairman, President and CEO of Constellation Energy, Mr. Mayo Shattuck. Sir, you may begin.

Good morning. Welcome and welcome to our second quarter 2005 earnings call. Before we begin our presentation let me remind you that our comments today will include forward-looking statements which are subject to certain risks and uncertainties. For a complete discussion of these risks, we encourage you to read our documents on file with the S E.C. Our presentation today is being webcast and the slides are available on our website, which you can access at www.constellation.com under investor relations. We will use non-GAAP financial measures in this presentation to help you under our operating performance. We have attached an appendix to the charts on the website, reconciling non-GAAP to GAAP measures.

So, we had another great quarter, delivering the 15th consecutive quarter of meeting or beating our earnings guidance. Earnings, excluding special items for the second quarter, were $0.66 per share, exceeding the high end of our guidance range by $0.04 per share. Compared to the second quarter of last year, earnings, excluding special items, increased $0.12 per share. Follin Smith and I will talk in some detail about our solid operating performance in the second quarter, but first, I'd like to say a few words about the very significant policy developments unfolding in Washington.

As you know the House of Representatives, yesterday, voted in favor of federal energy legislation and we have every reason to believe that the Senate will do the same, either later today or over the weekend. This bill is a victory for the electric power industry and will deliver important benefits to our consumers in the years ahead. We want to commend the President and the leadership of the House and Senate, particularly Senators Domenici and Bingaman, and Congressmen Barton and Dingle for their perseverance and hard work. As many of you know, we had the pleasure of hosting President Bush at our Calvert Cliffs nuclear facility late this month. It was an event that under scored the increasing level of public and political support for nuclear energy. That support is also reflected in the energy legislation in ways that we think are quite important. Finally, I'd like to again congratulate our employees on the fact that in June, Constellation Energy received the electric power industry's highest honor, the prestige 2005 Edison Award, in recognition of our leadership in the competitive energy market place. The award caps a truly successful year for the Company and is yet another testament to our strategy of focusing on competitive energy markets throughout North America.

Now, let me pick up the story of our operational success in the second quarter. So we're now on page 5. Following the record refueling outages at Calvert Cliffs and Ginna, we completed the nine mile point unit one refueling outage in a unit best 39 days. The successful completion of the outage represents significant progress towards our goal of attaining top cortile cost performance at Nine Mile Point and achieving our 2005 productivity target of $80 million. Wholesale competitive supply continues to show its' ability to profitably deliver on its' backlog of customer activity and to provide strong portfolio management results. We continue to focus on growth by originating new business that provides a solid foundation for future year's earnings.

We also completed the sale of the Oleander facility, a 680 megawatt peaking plan in Florida, for $206 million or about $300 per kilowatt. It was an attractive price and we are pleased to complete the transaction. It is demonstrates our disciplined, value different approach to capital deployment and asset allocation. We remain focused on competitive markets where we can leverage our core capabilities. While BGE's results were in line with it's plan, the gas businesses returns are below where they need to be. Accordingly, as expected, BGE filed a gas distribution rate case, which represents the first rate case filing in nearly six years. We requested an annual gas revenue increase of $52.7 million and expect a decision from the Maryland Commission at year-end.

On slide six, New Energy, our commercial and industrial retail competitive supply operation continued its' growth momentum into the second quarter and strengthened its hold as the number one CNI power supplier. At the end the second quarter this year, peak load served increased up 15,575 megawatts, up 64% from the second quarter of 2004. Market share also continued to grow, ending the second quarter at 24.5%. That represents a seven percentage point increase since the end of the second quarter last year. Looking at the names on the chart you will notice that we are not only the fastest growing provider, but also the only national marketer to significantly increase market share. We are benefiting from scale in the form of geographic diversity, national presence, creative product offerings and ability to deliver superior customer service.

New Energy is a national business with a regional focus, allowing us to be closer to the customer. Customers recognize the value we provide as evidenced by 77% of all electric customers with expiring contracts opting to renew with New Energy in the second quarter. New energy can now boast 73 of the Fortune 100 as its' customers. On slide seven, in the second quarter we acquired interest in two gas producing properties, in separate transactions, for $233 million. The properties are located in south Texas and Alabama, with combined crude reserves of 216 billion cubic feet equivalent based on independent estimates. We estimate 2006 production volume to be about 10.5 billion cubic feet equivalent. Using internal volume projections that are a bit more conservative than the external estimates, we expect these transactions will add $175 million to future earnings and 90 million through 2007 and 85 million in 2008 and beyond. We expect these projects to drive a return on net invested capital in the low to mid teens.

In addition to these investments, we grow our capabilities through the buildout of the gas team. During the second quarter, we expanded our gas operations in Houston, the north American market center, to enable us to better serve our customers and to attract the best talent. On slide eight. As you'll recall, our gas strategy is to leverage the skill sets that made us number one in the power markets. We are already have more gas presence than you might think. The commodities group daily volume of 2.5 billion cubic feet makes us one of the 20 largest wholesale marketers in north America, in addition, New Energy currently serves volume of 295 billion for gas for CNI customers. In 2003, we began to add wholesale capabilities and over two years have built a team that has all the requisite skills to originate and manage our investments in upstream gas. This includes experienced commercial people, geologists and production specialists. We are focusing on areas where we see opportunity.

On the upstream side, we're targeting middle market deals that are not the focus of money banks and big E&P players . Our down street business is based on sales of standard hedge products to LDCs and gas fire generators, similar to our mid market in power. The downstream landscape is evolving. Only two of the top 10 players from 2001 are still on the scene. Creating an environment of opportunity for us as an established energy player. Together we seek to create a vertically integrated business from upstream E&P to downstream customers. This model has worked well for us in power, where we serve customers who wish to sell undifferentiated commodity at the source, manage the detailed physical logistics and risks involved in moving the commodity to the customer. And often sell the commodity to the end customer in a customized structured transaction.

We think the skill sets of good evaluation on the front end, effective hedging and management of variable quantity and price risks, and structuring around customer needs are directly translatable. Our risk management capabilities, in particular, have helped us avoid sizeable surprises that many others in the power and gas industry have seen and will hold us in good stead in the gas business. On page 9, you'll recall the CPS walk from our January presentation. We told you our growth drivers for this year would be managing our wholesale backlog successfully to delivery, growing our competitive supply businesses and driving productivity gains. I'm happy to say, our market facing groups are turning in the strong year we committed to.

In addition, with this years' refueling outages behind us we have booked about 80% of the 2005 productivity target. Most of the significant actions required to achieve our calendar year target have been executed and we are well on our way to reaching our $80 million productivity goal this year. Based on the progress of each of our growth drivers, I'm pleased to affirm our 2005 earnings guidance range of $3.35 to $3.60 per share. We also remain confident in our ability to deliver on our 2007 earnings out look of $4.75 to $5.00 per share. With that I would like to turn the call over to Follin to cover the financials.

Thanks, Mayo. Good morning everyone and thanks for joining us today. Let's begin on chart 11. Recorded GAAP EPS in the second quarter this year was $0.68 per share. Earnings, excluding special items for the quarter, were $0.66 per share compared to the $0.47 to $0.62 per share guidance range. The $0.02 special item is related Oleander earnings that must be treated as a discontinued operation now that we've sold the plant. You will also note that, as required by GAAP, we've reclassified second quarter 2004 results to reflect Oleander earnings as discontinued operations.

Moving to slide 12. BGE earned $0.13 per share this quarter, which was at the top of our guidance range. At the net income level, earnings were up versus last year as benefits from customer growth and usage in electric and gas distribution and lower interest expense were partially off set by milder weather and inflationary cost increases. EPS of $0.13 was unchanged from last years' second quarter as dilution associated with incremental shares outstanding offset the net increase. Moving to slide 13, the merchant segment earned $0.51 per share excluding special items. This was toward the top of our guidance range of $0.38 to $0.53 per share and $0.09 hirer than the $0.42 recorded in the second quarter of last year. Productivity was a significant driver of the positive year-over-year variance.

As you'll recall from the January presentation, the lion's share of this years' productivity gains will be driven by reduced refueling outage days and costs associated with the refueling outages. In the second quarter, we realized $0.17 of incremental EPS via productivity. Combined with the $0.06 we recognized in the first quarter, we have delivered year-to-date productivity gains of $0.23 leaving $0.05 to go to reach our 80 million pre-tax or $0.28 per share target. As we said would be the case, on our call with you in April, the timing of nuclear refueling outages also drove $0.06 higher income in the quarter. This primarily reflects the fact that Calvert outage was in the first quarter this year versus last quarter of last year. Now, partially offsetting these positives, the Ginna acquisition, which closed in the second quarter -- late in the second quarter last year, drove a loss in the quarter due to the rescheduled refueling and dilution. This hurt the year-over-year comparison by $0.05. We also saw $0.09 negative year-over-year variance due to an accumulation of other items, including inflationary increases, the absence of favorable 2004 New Energy bankruptcy settlements, higher effective state tax rate and lower wholesale competitive supply new business compared to a strong second quarter last year.

Moving to slide 14. The merchant segment realized 562 million of gross margin in the second quarter of 2005, up 52 million from the same period last year. Gross margin from the mid-Atlantic fleet increased 22 million, driven primarily by the Calvert Cliffs refueling outage timing. Plants with PPAs added 32 million of gross margin. Our Ginna facility added 24 million at the gross margin level versus last year. As you'll recall, we closed the acquisition late in the second quarter last year. Nine Mile Point benefited 8 million from fewer outage days in the second quarter of 2005 versus the same period last year.

Now, let's drill down on competitive supply gross margin on page 15. In the second quarter wholesale competitive supply recognized 65 million of already originated business and realized 57 million of new business originated in the quarter. These results include both gross margin from the power and coal businesses and project margins from our growing gas operations. Project margin consists of the projected revenue from each project less the operating depreciation, depletion and interest expenses incurred at the project level. In total, wholesale competitive supply realized margin of 122 million for the second quarter of 2005, 4 million higher than the same period last year. As you'll recall, we told you that already originated business would be up this quarter.

Realization of backlog transactions, originated in prior periods, was up 27 million year-over-year. Also in line with our forecast for the quarter, we had a strong level of new business originated and realized in the quarter, compared to a very strong quarter last year. You'll see nonqualifying hedge mismatches in the second quarter drove a year-over-year decrease of 2 million. The items we call out here are quite specific. First the effect of certain market-to-market hedges of accrual transactions which did not qualify for hedge accounting treatment at the time of the ITF 023 implementation, second, we exclude hedges against sin fuel tax credit phase out risk, which do not qualify for hedge accounting under FAS 133. All other hedge in effectiveness and non-qualifying hedges are in portfolio management.

Moving to slide 16, this chart gives you the full picture of wholesale competitive supply origination because it shows earnings added to the backlog. Total origination for the quarter was 288 million compared to 89 million last year. Looking at the components, in the second quarter we originated 72 million of margin to be realized this year, roughly in line with the 75 million originated in the second quarter last year. We also originated 216 million of margin to be realized in future periods versus 14 million in the same period last year. This strong year-over-year performance was driven primarily by the two gas transactions Mayo mentioned earlier. We expect these transactions to deliver 13 million of current project margin and 162 million of future years project margin.

We calculate incremental backlog for upstream gas based on our internal expectations of production reserves through the expected life of the property on an undiscounted basis. We've ducted project level expenses and costs associated with assumed reserve base lending. In the box in the center of the page. You can see that year-to-date we've originated 51% of our current year gross margin target compared to 56% this time last year. On the bottom line of the chart, you see that including backlog transactions to be realized in future years, 73% of our total new business target is complete. This is well ahead of the origination pace. Based on the business closed in the first half of the year. We believe we're on track for our plan for adding to the growing backlog of future earnings.

Now moving to page 17, this chart provides an update of the backlog for our wholesale competitive supply portfolio. These accrual earning provide visibility into future periods earnings. The portfolio's highly hedged, it's a price risk. On an ongoing basis, we actively manage risk such as basis risks between regions or counter-party performance risk. Occasionally we choose to monetize or restructure contracts to manage these risks which may change the pattern of backlog realization. In total, pre-existing contracts will add 198 million in 2006 and 184 million in 2007. We expect this pattern of creating gross margin for future years to continue, thereby building the backlog of future earnings.

Turning to slide 18, our overall hedge percentages now incorporate the estimated proved gas volumes from upstream activity and any associated hedges. We've applied our highly hedged philosophy to the new gas transactions and hedged on average 80% of the volume through 2007. Overall, rising power and commodity prices have not materially impacted our competitive supply portfolio due to it's hedged profile. We continue to maintain a conservative bar which averaged 2.9 million for the quarter.

Now moving to New Energy on slide 19. As Mayo pointed out in his remarks, New Energy is poised for continued growth. In the electric business, peak megawatts served at the end of the second quarter of 2005, grew to 15,575, a 64% increase compared to the end of the second quarter last year. The increase in volume served drove a year-over-year increase in market share of seven percentage points to 24.5%. Delivered volume in the second quarter of 2005 increased 48% to 15.5million-megawatt hours versus the same period last year. Margins on newly contracted business remain consistent with our $3.00 per megawatt hour expectation and we expect our 2005 net realized gross margin, including business contracted prior to this year, to be in line with the previous forecast of A$3.35 (ph) per megawatt hour.

Also in the second quarter, we experienced electric retention rates of 77% in line with our plan demonstrating our success in deepening customer relationships and developing products that customers value. On the gas side, market volume served at the end of the second quarter this year increased 2% to 295 billion cubic feet compared to the end of 2004. Gas volume delivered in the second quarter this year grew to 66 billion cubic feet a year-over-year increase of 9%. This growth and strong operational performance drove a year-over-year increase in total gross margin of 19% excluding 2004's favorable bankruptcy settlement from the comparison to 68 million.

Now moving to slide 20. This chart shows our new energy volume backlog. At the end of the second quarter. We have 61 million-megawatt hours either delivered or contracted for 2005 versus the beginning of the year target of 63 million megawatt hours for the year. We were also successful in adding to our future backlog and have about 30 million megawatt hours contracted for 2006.

Now moving to slide 21, with half the year behind us. I want to give you a status report on our productivity initiatives. First, let's look at cost product productivity. Operating expenses at headquarters and generations were in aggregate, up 36 million in the first half of 2005. As you'll recall, we track productivity, excluding inflation. We also normalize out, extraordinary maintenance, which occurs at each fossil plant every few years and the lippo reimbursement of 18% of Nine Mile Point unit 2s' cost, because these items fluctuate from year to year and cloud the overall productivity picture. The analysis demonstrates that our costs are 50 mill -- 50.6 million lower in the first half by virtue of our productivity initiatives. On the gross margin side, shorter outages and incremental capacity from low pressure rotor replacement has added about 400,000 megawatt hours of generation this year.

That's an increase in gross margin of 13.9 million. Together our productivity initiatives added 64.5 million to the bottom line in the first half, representing 80% of our calendar year target of 80 million. Turning to slide 22, you can see that we have started to meaningfully deliver on our promise that 2008 pretax earnings would be between 150 to 180 million higher than 2003's via productivity. These gains will create a lower cost structure, which is an annuity for our shareholders in our deregulated environment and which increases the return on your investment in Constellation.

And turning to the slide 23. Year-to-date, cash flow per debt reduction was 322 million. Merchant capital expenditures include 211 million cash paid for the upstream and the cash invest -- upstream gas investment that we discussed earlier. The capital deployed in these transactions puts us slightly ahead of the plan we outlined in January, in which we'd earmarked 138 million for gas and other wholesale portfolio investments. Essentially, we saw attractive opportunities, with longer durations than we might have expected at the beginning of the year and took advantage of them. Other nonregulated investments includes 39 million for the Cogenics acquisition that closed in the second quarter. As we discussed with you on our last call, we generated 218 million in cash from the sale of our Oleander plant, including working capital adjustments, which is reflected on the asset disposition line of the merchant.

Now moving to slide 24, net debt to capital at quarter end was 43.7%. A 280 basis point improvement from year end 2004's 46.5%. During the second quarter we retired 300 million of maturing debt with cash, which reduced our total debt outstanding to 4.9 billion. We project net debt to total capital to end the year at about 41%. Consistent with the updated forecast provided in the April call. Reflecting the proceeds of the Oleander sale and capital deployed in the two gas transactions. We remain on track to reach our 40% net debt to capital target in 2006.

Moving to slide 25. As you focus on your model for the second half. A little perspective on the timing of our biggest year-over-year growth drivers may be helpful. The right hand column is essentially the year-over-year drivers we shared with you in January. The first column on the left is year-to-date actuals. The center column gives you some facts about highly likely items. First we targeted 80 million of productivity this year, including gross margin and cost productivity. Most of this was driven by record nuclear refueling outages and hence was realized in the first half the year. We have $0.05 to go in the second half to achieve our full year target. The second line shows our wholesale backlog of customer activity originated prior to this year.

We told you to expect $0.12 favorable for the year as we realize these actions $0.11 of this occurs in the fourth quarter. We've also detailed our forecast for fairly firm items such as the absence of favorable 2004 bankruptcy settlements at New Energy and lower interest cost off set by dilution. Now are the remainder of the items, you can do the math and see what we need to achieve to get to the middle of the guidance range. You'll see that competitive supply and new business needs are very reasonable. You should be aware, though, that we're seeing a number of business opportunities in wholesale competitive supply which could add current year operating expenses build fought future years potential.

Now moving to slide 26 in our guidance for the third quarter. We expect earnings to be $1.02 to $1.17 per share compared to $1.20 per share, excluding special item, in the third quarter of 2004. BGE should be roughly in line with last year. The merchant segment is expected to earning between $0.88 to an $1.03 compared to $1.05 in the same period last year. We will benefit from higher wholesale supply backlog recognition, but this will be more than off set by lower competitive transition charge revenue as some commercial customers begin to complete their CTC obligation. Now that concludes our prepared remarks. We will turn the call over to the operator for questions.

Thank you, ma'am. We will now begin the question-and-answer session. If you'd like to ask a question, please press star one on your touch-tone phone. You will be prompted to record your name. To withdraw your request you may press star two. One moment please for the first question. Our first question is from Robert Rubin from Deutsche Bank.

Good morning, folks. Two quick questions. Regarding EMP, this is a new development. What kind of growth do you see in terms of adding proved reserves? How do you see yourselves competing relative to other players in that segment? Can you give us some more color there?

Sure, Robert. This is Tom. You know, our expectations for that upstream business, I think as we have been describing our efforts to develop the business over the last year or so to you, really are to apply the business model that's driven our success in power over the last four years to the, you know, the gas business in general, upstream and down. In terms of our efforts to build the upstream business, we've certainly made significant efforts over the past year to build the capabilities within Constellation to enable us to do valuation and risk management and have built quite a strong team to support the business. In terms of growth plans, I guess what I'd say is, much as we have done throughout other areas of the business we're going to invest when we see returns that ,you know, that exceed our hurdle rates. You know, in terms of, in terms of expectations for the year, we do see a good pipeline of opportunities. I wouldn't say that we have any, at this stage, any specific targets in mind in terms of, in terms of capital deployment through the balance of the year.

Got it. And then, following weather in the third quarter, it's been kind of hot, what kind of weather are you factoring into your guidance?

The weather has probably been a $0.01 or $0.02 favorable compared to last year. On the other hand, we've had people out working all night every night due to the strain on the system, and so, you know, operating expenses will be up a bit so net net, you know, maybe it's going to add a $0.01. We're still -- still assessing it.

Okay, good quarter. Thanks.

Thanks Robert.

Our next question is from Steve Fleishman of Merrill Lynch.

Good morning, Steve.

Hi. I guess, first question, on the E&P, who -- are your people going to be operating the business?

We will contract for the operation side of it.

Okay. And is it in terms of the hedging of the gas and putting it in the portfolio, is there difficulty in matching -- mismatch in terms of hedges, in terms of accounting? I.E.at production, can you accrual account the hedges I guess is the question?

There's really not much hedging complexity with this sort of production.

Okay. And then, any update on your activities in the coal business?

Yes, on balance, Steve, I'd say things are going across the, you know, both the two new business initiatives, that is to say coal and gas, things are going -- things are going quite well. I would say really tracking with our plan that we laid out in January. On the coal side and just as reminder, I think we told you in January, that we expected 36 million of gross margin from coal and 25 from the gas business, you know, in total again, we feel like midway through the year they're tracking pretty consistently with the plan. Coal -- coal might be slightly under and gas slightly over, but probably, probably at this stage halfway through the year putting too fine a point to get super precise given the newness of the business.

Okay. And then, maybe just circling the loop. Obviously with these acquisitions you're getting a lot more out of gas probably this year and future backlog than you were initially projecting. You know, but on the flip side then, how is the power business going? Are you seeing the power opportunities slow down or is it?

No, I would say power is likewise tracking about on plan. These, these gas investments do not, do not cause us to significantly exceed our plan for gas for '05. I mean, there is, there's a lot of future backlog. A lot of future backlog to them as I think Follin indicated in her remarks. These'll yield about 13 million of project margin in '05.

Okay. Then, one last question on any update that you're hearing on the capacity, the RPM plan in PJM?

Probably not more than what you heard. I don't think -- at this stage, capacity markets overall I think, it's, it's a bit early to project either, you know, either dollar impact or timing. Reasonably likely that, that there would be some net benefit to us but it's -- just given the uncertainty on the exact details and particularly on the timing it's a bit, a bit early for us to really say more than that.

Okay. Thank you.

Our next question is from Gregg Gordon of Smith Barney.

Thanks, a little bit more on the E&P properties. I mean the price you paid looks like it's significantly below prices we have seen in the market for assets. Is there something about the properties in terms of their quality or the finding and lifting cost that allowed you to get such a, such a good deal?

You know, I think, I think -- I guess I'd say bear in mind that our internal volume estimate's more conservative than the external estimate of 216 -- 216 BCF, you know our internal estimates are certainly a bit more conservative than those. We -- you know, in, all up, we saw these as attractively priced deals with good returns, but, but we don't -- they're not extraordinarily different from market.

Okay. And of the 90 million in backlog for '05 to '07, you've indicated 13 million of that's in '05.

Correct.

Can you give us a daw of how much is in '06?

I cannot.

Okay. And the way that you calculate that. You're calculating that just on the volumes that you've been able to actually hedge or are you giving us a mixture of what you've hedged plus what the forward curve would indicate what you can realize?

Well, I mean yes, but recognize that we, as Follin indicated we hedged 80% within a very short period of time of having entered into the transaction. So, so very substantially based on, not forward curves, but, but hedge levels.

Okay. And that -- is the 2005 production, consistent with what you said, 2006 production is at 10.5 BCFE?

I -- I don't actually have a --

You can get back to me. Follin, I've a question for you.

Hey Greg, let me answer your earlier question. You asked what was the add to the backlog for 06 and '07. In Mayo's comments toll you it was 90 million through '07. We've told you it was 13 million this year. It's another 38 million in 2006 and the balance of that 90 in 2007.

Thank you. On the retail -- retail being 97% of plan and productivity being, you know, a good way towards meeting plan and you being only halfway through the year, why don't you feel comfortable at this point endorsing either the higher end of your guidance or perhaps moving to a slightly higher range?

Well, as you know, the first half of the year, Gregg, is, this year, it's 37 to 40% of our full year guidance. Last year it was 38% so, we're moving on pace with where we were this time last year in terms of the seasonality of the business but we've still got a lot of our earnings hanging out there in the second half. We -- wince we announced guidance of 335 to 360 we sold the Oleander facility. Reclassifying it to discontinues ops has reduced earnings probably about a nickel when you take the loss of its earnings of $0.07 offset by a half year of having the cash and effecting interest. So by not changing our guidance we have effectively increased the amount of earnings required to reach our full year target, excluding Oleander, and we're having good solid progress on the market facing operations. We still have significant wholesale business to originate and lastly, we may take the opportunity to build for the future this year. Which means we could drive higher calendar year operating expenses then were in our initial forecast to you, to create future earning stream. So take all of that put together, you know, it's early in the year, we've taken out Oleander. We will evaluate our ability to you know, add some things that would build for the future and we think full year guidance of 335 to 360 is appropriate.

Okay. One final, quick question. In your 475 to $5 guidance, this piggybacks a little bit on Steve's question. Did you build anything in for the potential of incremental capacity revenues from the implementation of RPM?

No.

Thanks. Have a good morning.

Thank you.

Our next question is from Shar Khan of SAC Capital.

Good morning. Follin, if I'm looking first half plans with PPA, the gross margin is up on a year-by-year half basis nearly 94 million and you were expecting 78 million for the whole year in your January forecast. First of all, I hope my numbers are correct. I'm just trying to understand, isn't this going much better than planning? That you've already achieved the forecast incremental from the PPAs. I'm trying to understand whether there's something in the second half which is going to be a little bit different?

Well, Nine Mile Point's outage was a bit better than we-- than we would have projected. It falls in plan with the PPA's gross margin. And, on the other hand -- so that's, that's better gross margin productivity, on the other hand, cost productivity's slightly below what it was going to be. So, the mix of how we'll get there on productivity slightly different. So, so I wouldn't count on that, you know, taking the difference between that, the two numbers you cited and counting that as incremental earnings for the year.

Okay. Then, could you just give us-- you might have, I might have missed it. What is the gross margin break up in new energy, between electric and gas? The 68 million, how is that broken up?

You know, we have never broken out the detailed components of the new energy business between electric and gas. Gas is so much smaller it doesn't seem meaningful for us to start providing tracking for that separately for the street.

So the majority of the gross margin is then, can we assume, electric?

Absolutely.

Like more than 90%?

More in the area of 80%.

Okay. And just future, will you be able to just -- as this gas is becoming more a part of the mix, will you be able to provide the break up of the backlog between power, coal, and gas going forward, or something you can look into?

We think that since gas and coal are so nascent, for 2004 as you know, beginning in the year, we decided every quarter we would not be tracking in detail their progress, versus the projections. As they're getting more meaningful next year, we will re-evaluate as we lay out our reporting pattern for next year.

Okay. And can I just ask you, the success at New Energy and you know, nearly achieving '97. Could you just tell us a little bit more of what's happening in that market right now?

Why don't I ask Tom Brady to comment on that.

Okay. As we've demonstrated, the sales volumes delivered are up significantly this year versus the same time last year. We're on track to meet our goals and we're seeing reasonable growth in the overall switched market. I would say since the beginning of the year we've probably seen that market grow about 8% as we have seen our market share grow in addition to that. And we're seeing -- all the markets are showing right now, strong growth and we are seeing really good growth this year, New England, mid Atlantic, Texas and the New York area.

Okay. Thank you.

Our next question is from Dan Eggers of Credit Suisse First Boston.

Good morning.

Good morning, Dan.

You guys have talked a lot, obviously, about the '07 hedge position and visibility after that. I was wondering if you can give any color, and I know this is asking a lot, on '08 where hedges stand and how much exposure you guys have in the market at this point?

We're probably not ready at this stage to start giving details on '08. We have seen opportunities to sell some, to sell -- to do some 08 hedging and certainly as we have in past, you should expect us to follow the pattern we followed in past years where we see opportunities to hedge at attractive prices, certainly we'll avail ourselves of them.

Okay. Well the E&P acquisition is topical today, we have seen a few assets trade hand insist the power business. Are you guys seeing any opportunities, as far as anything that looks compelling from the acquisition perspective on that end and, you know, I guess, to that point, any thoughts about expanding outside of the U.S. given the disparody in multiples multiples between the U.S. and international assets today?

Well, I guess, I -- I'd comment first on the domestic market. You know, as you know, we're pretty much in the flow of the assets that are available and trade. I would consider ourselves pretty active in, you know, that evaluation process and correspondingly pretty disciplined with respect to, you know, how we approach the processes. I think we probably have a view that we, you know, we have a greater interest, I suppose, in the expansion of the nuclear fleet as a fleet operator and since there are fewer competitors in that space we are -- probably perceive ourselves as being more competitive.

None-the-less, we continue to look at assets in other fuel types and I would expect that you'd see us, you know, continue to take that pattern going forward. I think on the international side. Obviously because of the operations in the UK. We have greater visibility of, you know, similar opportunities and I think the, you know, the coal business is going well and we will probably approach it in the same way that we might in the U.S. but I would say that at this point that's pretty exclusively focused on the UK market, which looks like a mini PJM and acts like it, then -- you know, we understand the market dynamics.

Got it, thanks. I guess just -- I know coal is a small but growing piece of the business, Tom, have you seen with kind of the PRB issues and people who have been talking previous about importing coal west to east? Are you seeing them show greater interest in looking into international opportunities and is that -- any opportunity to get ahead of kind of a longer term growth rate for that business?

You know, we have -- we actually have seen some growth in opportunities to deliver to domestic customers as well as International. You know, I am not sure that -- I don't, I don't think the, you know, recent incursion of more, more PRB coal further east has had -- had all of that much of an impact though.

Okay. Thanks, guys.

Our next question is from Leslie Rich of Columbia Management Group.

Follin, could I ask you review the third quarter drivers in the merchant business again? In the second half? Second half, second half driver?

All right. Let's go to page 25, Leslie. What you see here is, the right hand column is essentially what we provided to you in January. The variances for growth drivers. Now, you've heard me say we attained $0.23 of productivity in the first half and that we're targeting $0.05 in the second half. The whole sale backlog, so that's transactions that were originated before 1-1-05, right, and just are expected to be realized this year. That was, we told you $0.12 for the full year.

Now the pattern of that, Leslie, is such that, just the pattern of what happens to be when the transactions are realized in the portfolio, is such that $0.11 of that falls in the fourth quarter. Now, new business, we told you for the year, We were targeting $0.12 and what you know is year-to-date, new business originated and realized this year, has driven $0.0.5 in the first half. Ginna, we are -- in the first half, the year-over-year decrease in Ginna was driven by having an outage in the second quarter and Ginna is marching along where it needs to be for the year. New energy, you see that we are counting on $0.05 for the full year.

Excluding some bankruptcy settlements, which were favorable last year, and those fell in the second and third quarters in last year and create negative comparisons year-over-year. Interest, net of dilution associated with higher shares outstanding will help us buy $0.06 per share this year and that's primarily due to lower debt outstanding and then we said that there would be inflationary pressures and a number of other small things which would, in aggregate, take earning down $0.21. Now, so-- so my commentary on the over all second half estimate was, you can assess things like how much new business we have to get done in the second half of the year to think about what you want to project for our earnings for the second half of the year. But I also wanted to point out to you that, you know, similar to with a we did last year, when we are making, you know, good head way on meeting our committment for earnings growth, we will also look at the possibility of layering in expenses associated with, you know, adding operating costs to build for the future.

Right, but on the next slide, your merchant guidance for '05, you said something about lower CTC revenues and higher competitor supply.

Yes, I pointed to two notable items in the third quarter. One is the competitive transition charge, which, as you know, we've been talking about for, for a long time and which rolls off this year, next year, and the following year is starting to bleed away now, and ...

...That's it that's in Maryland?

Yes.

Then, what was the second part?

And the second part was that that will be partially off set by the fact that we've got some backlog. The backlog recognition scheduled for third quarter of this year will be higher than third quarter of last year?

Okay. Okay, and then finally in Texas, could you just give an update for new energy in Texas. Your chart for market share was nationwide, right?

This is Tom Brady, Leslie, and that's, that's correct but Texas has been our largest growth market now for the past year and a half in the retail sector, and I generally do not give out market share on a market by market basis. But it is very well into the double-digits and it is now a market where new energy serves over 4,000-megawatts of customer load. And so, it's become a good market for us.

And are you seeing margins that are different from your expectations.

No. The margins are on expectations and Texas has been an area where if you go back two years ago, we were looking at Texas and had a relatively small position in the margins were really quite thin and the team put together a strategy of staying in the market and then as the market expanded, being able to drive the margins up to levels that are comparable with the overall business, so, we're very pleased with the Texas market.

Thank you.

Our next question is from David Reynolds of Tribeca Global Management.

Yes, good morning. I'd like to go back to E&P situation just for a minute here. I was wondering if maybe you could give us us a little bit more detail on the break down of the asset base? How much of the numbers you have seen are proved developed and proved undeveloped? Whether or not they there are probables associated with this and I am guessing probably not, but maybe you can tell us who you bought this from?

You know, at this point, at this point, you know, we've, we've given you obviously a proved reserve estimate -- third party estimate of proved reserves, and -- and we're not ready at this point to give further detail on other categories of reserves.

Okay. So, all you're saying at this point is that 216 is a third party estimate of proved reserves. No splits on what is developed, undeveloped and/or anything unprobables.

Yes.

Okay. I guess, from a strategic standpoint and I assume, by the way, that we're not going to know who the seller was.

That's correct.

Okay. From a strategic standpoint, I guess the question I'd like to get to here is particularly in the area where you are buying the gas reserves, it is a pretty 'funjible' situation between gas in the ground and gas on the open market. When you combine that with significant cost increases that virtually every on shore developer is dealing with, why invest the money here? What strategic advantage do you have as opposed to letting somebody else produce the gas and you buy it from them?

Well, let's see. Specifically, as to this transaction, these two transactions ment we saw good returns. More generally and sort of from a strategic point of view our, our -- the essential driver to our success in power has been our ability essentially to help customers to manage volume and price risk. Volume variability and price risk. And we believe that the our, our business model, our approach is quite transferable to gas and we think in terms of reserve acquisition like this one, you know, those same skills very much apply.

That is volume variability and price risk, understanding them from a valuation standpoint, understanding them from a risk management standpoint, and, and you know, we think that there is a good opportunity for us from, from -- to build a balanced mix of customers. Upstream customers and downstream and to leverage our portfolio management capabilities as sort of the key to providing value to these customers on both sides. So, so -- from a prospective of long term strategy, we think this acquisition fits well with the over all objective of building a gas business. It's very much the analog of our power business.

Do you have -- you've talked about the expectations for what kind of margin contribution these properties can add over the next couple of years. Do you have in place the equipment, the regs, the crews, the pipe tie-ins and everything necessary to meet those targets now or will those be things that have to be worked on as part of the, you know, the ongoing business development of that in order to meet those numbers.

Some of both, again, on the operations side, we'll -- we'll either be in business with partners or, or -- or hiring contractors to carry out the operations activities for us.

Okay. Thank you very much.

Once again, if you would like to ask a question. Press star one on your phone. The next question is from Scott Soler of Morgan Stanley.

Follow on to Dave Reynold's questions regarding E&P. In order to service a growing book in gas, does that suggest that y'all are going to continue to buy gas reserves? And then secondly, do you perceive buying gas reserves [inaudible] ramps up the risk a bit in that business or is there something y'all are doing with regard to your -- to the business in terms of how you manage risk and put it in a book that you don't feel it's as risky as if another company in the sector would be buying E&P assets?

Let's see. I think in terms of our risk management approach, we certainly intend to follow what is similar philosophy to the one we've, we've employed, you know, across the portfolio for the last four years, that is that, you know, you should expect us to be pretty active hedgers. There of course is a volume variability risk component to this that's, that's distinct from, let's say, the risk of unit outage on the power side but has, has many similar characteristics in terms of, in terms of, you know, how we analyze the risk and how we manage the risk. So I don't expect this to dramatically change, you know, our overall risk profile. Does that get at, get at your question?

Well, that was the second question. My first question is does the Company plan on continuing to buy gas reserves from E&P companies or take working interest in certain properties with other E&P companies to grow that business?

Yes.

Okay. All right. Thanks.

Sir, at this time I am showing no further questions.

Great. Well, we want to thank you all for listening in on the second quarter. We await this morning the results of the Senate vote, which has other, you know, interesting opportunities for the electric industry in particular. We're very pleased with the components in the bill and so we have our fingers crossed. With that, we'll look forward to reporting on all of that next quarter. Thanks for joining us.

This conclude today's conference call. May disconnect at this time. Thank you.