艾索倫電力 (EXC) 2005 Q4 法說會逐字稿

Good morning and welcome to the Constellation Energy fourth quarter 2005 earnings call.

At this time all participants are in a listen-only mode. During the question-and-answer session, please press star one on your touch-tone phone.

Today's conference is being recorded. If you have any objections you may disconnect at this time.

Now I will turn the meeting over to the Director of Investor Relations for Constellation Energy, Mr. Kevin Hadlock.

Thank you. Good morning, everyone. I'm Kevin Hadlock, Director of Investor Relations for Constellation Energy.

Welcome to our fourth quarter full year 2005 earnings call. I'm glad that so many of you could join us today.

Before we begin this 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 SEC.

Our presentation today is being webcast and the slides are available on our Web site which you can access at constellation.com under Investor Relations.

On Slide 3 we will use non-GAAP financial measures in this presentation to help you understand our operating performance. We have attached an appendix to the charts on the Web site reconciling non-GAAP measures to GAAP measures.

On Slide 4 this communication is not a solicitation of a proxy from any security holder of Constellation Energy. Constellation Energy intends to file a registration statement with the Securities and Exchange Commission that will include a joint proxy statement and perspective and other relevant documents to be mailed to security holders in connection with the proposed merger of Constellation Energy Group and FPL Group.

With that, I'd like to turn the time over to Mayo Shattuck, Chairman, President and CEO of Constellation Energy.

Good morning, everyone, and thank you for joining us on the call.

As you all know, our practice over the past four years has been to meet with you in New York City to review prior year results and to present our business plan. Given the merger, we decided to have an extended phone call.

The approach today is fairly consistent with the presentation we have made historically. Importantly, the substance of the outlook you'll hear is entirely consistent with what we have told you before.

Here is our agenda for the morning. First, we'll address our stand-alone pre-merger business plan and I'll start with an overview. After that Felix Dawson, President and co-CEO of our Commodities Group will discuss wholesale competitive supply operations.

Tom Brooks, Chairman of our Commodities Group and George Persky the other President and co-CEO of the Commodities Group are also here with us this morning. Next, Tom Brady, who heads Corporate Strategy in our retail businesses will discuss NewEnergy. Then, Follin Smith, our CFO and Chief Administrative Officer will cover our financials.

In the interest of time, Follin's presentation will provide some highlights of the generation and BGE outlook as well. Mike Wallace and Ken DeFontes are here to take questions.

Lastly, I will share a few thoughts on Constellation Energy's pending merger with FPL Group and then we'll take your questions.

If you turn to Slide 6.

For 2005 Constellation earned a record $3.62 per share excluding special items and certain economic non-qualifying hedges. This represents growth of 16% over 2004's adjusted earnings of 3.12 per share above the top end of our guidance range of 3.60 per share.

Exceeding the guidance range is even more impressive given the loss of earnings contribution from Oleander and Panama which were sold in 2005. At the beginning of the year we described our forecasted EPS of 3.60 as representing an 11% growth rate.

As GAAP required restatement of both 2004 and 2005 results to exclude $0.12 of earnings from Oleander and Panama, the year-over-year increase is actually 16%, a great year. Additionally, we have met or exceeded our earnings guidance for 17 consecutive quarters, a significant accomplishment that is indicative of our commitment to deliver what we promise.

Turning to Slide 7.

As we enter the next phase of our growth in evolution it is extremely gratifying to reflect on what our employees have achieved during the past four years. This team has created a leading competitive position that combines our superior risk management skills and intimate knowledge of physical energy logistics with an intense focus on meeting our customer's needs.

As a result, we are now in a position through our proposed merger with FPL Group to become an end game player in a consolidating industry.

In terms of our financial performance we have achieved superior results leading to significantly enhanced shareholder value. Our adjusted earnings per share have grown nearly 50% since 2002, or 14% per year on average.

And looking at Slide 8.

Our success in growing the business has translated into significant value for our shareholders. Since the team came together in November 2001 Constellation Energy shares have appreciated 159%.

When considering the dividends that we have paid, this amounts to an average total return of nearly 29% per annum.

We have significantly out performed our peers in the S&P 500 Electric Utility Index in the broader markets as well as the market recognizes the strength of our business model. We are well positioned to continue that trend.

We understand that dividends are also an important part to our shareholder base and have maintained our commitment to grow dividends approximately in line with our earnings growth. Yesterday we announced that the board approved an increase in the annual dividend of 13%, or $0.17 from 1.34 to 1.51 per share.

We have also indicated that as part of the proposed merger with FPL we would increase our dividend to match FPL's upon closing. Including yesterday's dividend increase, and based on FPL's current dividend, Constellation shareholders will receive an estimated increase of 53% in their dividend payment. In total this will be 114% increase in the span of four years.

Turning to Slide 9.

Several years ago we committed to competitive markets in the belief that they would continue to grow and become a greater part of the demand landscape. We were determined to be a player in that market and the model we employed to get there is essentially a simple one: build and leverage scale in our core businesses and markets and drive down costs to bolster our competitive position.

We continually looked one step ahead to the next growth market in ways that logically extended our current competencies. Our model has created continual opportunities for future success.

To drive Constellation's position as an end game player in a consolidating industry, we want to expand our participation along the full value chain in a balanced way diversifying our exposure to any given region or regulatory framework. We believe the ideal platform for our strong commercial front end includes the support of balanced deregulated generation in each region and a strong balance sheet.

To ensure that we are efficiently using investor capital, we have committed to grow the platform with a disciplined investment approach. If we do not find opportunities to redeploy capital in projects that provide sufficient risk adjusted returns, we will return it to shareholders.

Finally, while we enjoy a strong leadership position, we must continue to focus on driving greater efficiency and lower cost in our generation fleet, headquarters and throughout our competitive platform. We have come a long way to achieving the criteria we see is necessary to be a long-term leader in this market.

I'd like to spend a few minutes this morning reviewing what we've accomplished towards these goals as well as where we go from here.

On Slide 10.

In recognition of the fact we may have some people on the line that may be new to Constellation and unfamiliar with our story, let me take a minute to walk through our growth and changes of the past few years.

Through a series of strategic moves, Constellation has evolved into a leading competitive supplier. Today, Constellation Energy meaningfully 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 about 12,000 megawatts 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 output and the fleet's hedgable fuel inputs.

Finally, NewEnergy, when we acquired in 2002, is the nation's largest supplier of electricity to commercial and industrial customers including 70 of the Fortune 100. 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 span the energy value chain providing a stable foundation on which to build for the future.

Turning to Slide 11.

Deregulation created an entire class of customer needs and Constellation Energy is on the forefront of creating products and services that meet those needs. We have created an unmatched competitive position by combining our superior risk management skills and intimate knowledge of physical energy logistics with an intense focus on customer needs.

We have every reason to be confident about our growth prospects for the future. On the left side of the chart, you can see that we have become the number one player in electricity markets from number 13 four years ago, and the number seven gas marketer from number 17 in 2004.

In wholesale power load serving we have an estimated market share of 40% in NEPOOL and 30% in PJM. Overall our share of the target market is 17%.

In NewEnergy we continue to significantly out pace the competition and have 15,500 peak megawatts under contract. We are pleased with the performance of this business and continue to see great opportunities for growth.

On Page 12.

We are not only big in deregulated markets but we are also balanced across regions. This chart shows our peak load versus owed generation capacity.

In PGM we had just over 6400 megawatts of generation and 14,100 megawatts of peak load with a 55% load factor.

This is a vary balanced position. However, in the other major deregulated regions of NEPOOL and ERCOT, we have built a substantial customer facing business without the support of significant generation capability.

Through the merger with FPL we will become more balanced between generation and load served which will allow us to build a virtual utility and to create a powerful competitive position from which to grow over the long-term. Adding FPL's generating assets to Constellation's load serving business in NEPOOL and ERCOT, creates that powerful long-term competitor in the deregulated regions and in the near-term will drive some real benefits like maximizing the value of renewable energy credits, ancillaries and capacity products and avoiding hedging costs of crossing the bid/offer spread.

Now on Page 13.

We are very proud of our risk management capabilities and have an unparalleled track record of avoiding surprises through strong risk management. In our customer facing businesses, strong risk management means that we obsessively dissect and quantify risks with precision.

We price all risk components in our products and manage our portfolio to minimize unacceptable risks. We constantly assess our performance with hindsight to ensure that our risk analysis were good and we refine them as we move through time.

In trading, we have achieved strong results while only placing moderate amounts of capital at risk. By taking trading positions in physical markets where our competitive skills and deep knowledge of market information gives us an advantage, we have consistently had high returns on capital at risk.

On Page 14.

We began the year with a pretax productivity target of 80 million. We had a phenomenal year and exceeded our 2005 plan by 10 million to recognize total 2005 productivity of 90 million.

Our generation fleet drove the vast majority of these gains with 41 million in gross margin improvements and cost cutting associated with nuclear outages. Another 30 million was additional generation savings due to a strong fleet management approach that resulted in reduced labor and materials expense.

Constellation Energy headquarters also realized significance savings primary in the areas of reduced SOX costs and lower spending on IT projects. For 2006 we plan to deliver an incremental $40 million in productivity gains by leveraging our fleet management approach and further reducing outage days.

We remain firmly committed to delivering a permanently lower cost per unit structure which enhances our ability to compete and results in an annuity for our shareholders in the competitive environment.

On Page 15.

While growing the businesses critical to our success we would not be able to take advantage of the market opportunities without a solid balance sheet. Constellation has been able to grow the business rapidly and improve our balance sheet at the same time.

We continue to improve the strength of the balance sheet and expect to be at 41.6% net debt to capital by the end of 2006. Follin will talk more about this in the financials.

On Page 16.

Let me spend a moment to discuss the current Maryland regulatory environment. As we have been discussing with you for a number of years, price free service for BGE residential customers ends in June of this year.

As a result of higher energy prices, residential customers will see higher power prices beginning July 1st. Because the percentage increase is expected to be large coming off six years of frozen prices at a level 6.5% below 1993 rates, the PSE opened a case to consider a more measured transition to market- based prices.

The staff recommended a deferral approach which caps the deferral amount at about $280 million and phases in the impact of the higher prices over an 8-month period followed by a 15-month recovery period. The proposal specifies certainty of cost recovery through the creation of a regulatory asset.

The staff has recommended that participation in the deferral plan should be voluntary on an opt-in basis. We are confident that any ultimate deferral of revenue will be fully recovered in future months.

Maryland is looking at environmental regulatory and legislative proposals for local requirements on power plant emissions that might go beyond what is mandated by the federal rules issued in March 2005. These proposals will be debated in the general assembly between now and mid-April.

Our capital budget reflects our expectation for additional controls that will be required to meet new Maryland clean air implementation plans. These added costs would begin in 2007 and will include added O&M expenditure for using existing equipment on a year-round basis.

Turning to Slide 17.

Our outlook for 2006 is for earnings per share of 3.65 to 3.95. We continue to believe 2007 will be 4.75 to $5 per share as a stand-alone company.

Rising commodity prices, a more highly hedged fleet, a growing backlog of full sale transactions and actual productivity gains make us even more comfortable with this assessment than we were when we first provided this guidance last January. We have increased our outlook for 2008 as a stand-alone company for growth of 10 to 15% over 2007, again reflecting a fleet more highly hedged at higher prices, coupled with modest expectations for our fundamental growth drivers.

When you consider the merger with FPL, our shareholders will not only continue to see the benefits derived from our stand-alone plan, but will have more diverse sources of growth and a stronger balance sheet from which to grow. I will speak a bit more on the merger in my concluding remarks at the end of presentation.

At this point I'll turn the presentation over to Felix to talk about the Commodities Group.

Thanks, Mayo, and good morning, everyone.

In the next 20 minutes I will give the outlook for Constellation Commodities Group, our wholesale sales and risk management arm.

Turning to our agenda on Page 19.

I'll begin by providing a brief overview of our business model focusing on how we consistently apply this model across each of our four business lines. As I think you'll agree, the Constellation Commodities Group that we discuss today has expanded significantly over the past year into the broader business we set out to become.

We've grown, we've diversified and we've proven once again that our unsurpassed portfolio management and trading capabilities allow us to navigate even the most highly volatile commodity markets such as those we've witnessed this past year.

Both hurricanes, above average summer temperatures and non-static regulatory environments have made the competitive energy marketplace a challenging and exciting place. We've once again proven that the Commodities Group is up to this challenge as our 2005 results and our 2006 gross margin outlook demonstrate.

Turning to Page 20.

2005 was another outstanding year for the Commodities Group as each of our customer focused business lines performed well. We retained our number one position in the power markets, substantially increased our delivery volumes in gas and delivered over 12 million tons of coal to customers in the U.S., Europe and the Far East as well as to our own fleet.

While we continue to focus on margins, not volumes, we believe they're indicative of levels of commercial growth. Our results from the year confirm the strength of these businesses.

Turning to Page 21.

Combined, Commodities created $378 million of new business recognized as current year gross margin, or CGM. Coupled with the realization of previous years backlog, Commodities earned $598 million in gross margin in 2005.

Looking back to 2001 when we embarked on our current course of success, we've achieved a compound annual growth rate of 44%. Also notable is the backlog of future earnings we've created across each of our business lines.

Future gross margin, or FGM, which represents new business originated in 2005 that will be realized in future years was 415 million, more than double the amount from 2004. Importantly, 80% of this will be realized over the next four years and will provide meaningfully to our 2006 gross margin target.

Total value creation, which includes the CGM and FGM originated in 2005, was $793 million, up 395 million from the prior year.

Turning to Page 22 let's review the business model that has central to our accomplishments.

Last year during our meeting we spoke to you about the simple business model we employ. We provide physical energy products to upstream and downstream customers earning margins by effectively managing our portfolio of owned and contractual assets.

We also mentioned our plans to extend our model into new business areas, upstream and downstream natural gas and coal. Today we're happy to be speaking with you about the success of these efforts.

The developing businesses we described a year ago have now become core elements of commodity strategy and are substantial contributors to both current and future gross margin. The rollout of these businesses was accomplished faster than we had planned and each business is exceeding our initial expectations.

Commodities now offers a truly diversified platform marked by consistent application of the business model that brought us so much success in the power markets. We continue to focus on physical customer-oriented products.

We manage the risk and optimize the value of CEG's owned assets and we use our portfolio management and trading capabilities to both manage risk and deploy risk capital to generate attractive returns. We believe that our coal and gas businesses reduce the relative exposure of our overall performance to a single business.

Looking forward, we're now able to explore investment opportunities across each of the lines of business ensuring our capital is directed towards the opportunities, markets and customer segments that will provide the greatest returns for our investors.

Turning to Page 23.

This is how we see Constellation Commodities Group today. Three commodity business lines each customer focused and all supported by our portfolio management and trading capabilities.

In power we serve the needs of merchant generators and distribution utilities through our load serving business, mid-marketing sales efforts and with other structured products.

In natural gas we serve customers across the value chain beginning upstream with small to medium sized producers, across the transportation and storage network and ending with various market types of market area customers including local distribution companies and gas fired power generators.

In our international coal business we're employing the same customer focus to link global producers seeking long-term sales to power generators in the U.S., Europe and Far East who can receive seaborne coal.

Finally, central to all of this is a portfolio management and trading platform that comprises the core of the Commodities Group competitive advantage. We've spent years building the team, valuation tools and infrastructure that comprises our PM&T operations and we believe they are unsurpassed in the industry.

Turning to Page 24, let me walk you through each area.

Starting with our power business, comprised of two parts, full requirements power and mid-market and structured products. Full requirements power includes our sales of load following energy and capacity to distribution utilities.

It's an area we know well with a defined base of customers whose needs and buying patterns we understand. This business grounds our wholesale power effort and it creates an important footprint across the U.S. from which to build.

We expect margins for full requirements new business contracted in 2006 to remain at 2 to $4 per megawatt hour and are forecasting peak megawatts served to be about the same as in 2005. In the fall of 2005 in the key Northeast and Mid-Atlantic markets we won about a third of the total load awarded by utilities, which is consistent with past results, so we believe our outlook is reasonable.

As you know, last week Maryland held auctions for price free service and while we are not able to discuss the outcome of the auction at this time results were in line with our business plan. Given these considerations we expect 2006 current year gross margin to be in line with prior years and for this business to continue to contribute meaningfully to our backlog.

Turning to Page 25.

Mid-market and structured products includes two groups of activities. First, mid-market sales includes short dated liquid hedges for producers and consumers of power.

In 2005 we generated $34 million in gross margin. We expect similar performance from this business in 2006 generating about 32 million.

Second, structured products includes the more complex structured hedge products we provide to customers. In contrast to mid-marketing these are non-standard products that often provide more tailored and long dated risk management solutions.

Within this area we continue to see opportunities to provide unit contingent products to generators and to participate in restructurings and divestitures as customers look to exit positions in the power business and as we identify opportunities in our own portfolio to remove long dated risks for attractive returns. Our market leading position in power enables us to provide a level of responsiveness and structure and competitiveness of price that make Constellation the preferred provider in many areas.

We expect these businesses combined to generate $123 million in 2006 current year gross margin.

Turning to Slide 26.

Summarizing the gross margin outlook for our power business we expect 2006 total gross margin to be $355 million, slightly above 2005 which was a particularly strong year for this business line. We based our new business targets on reasonable assumptions given past performance and an assessment of the opportunities we see for 2006 and we are forecasting 20% growth year-on-year.

Our forecasted realization of backlog is down slightly year-on-year primarily driven by the shape of margin realization on load contracts entered into in '04 and '05. While our full requirements power business continues to thrive and produce meaningful earnings we expect it to produce proportionately less of the overall gross margin as our other businesses grow.

Turning to 27.

Our integrated natural gas platform is now in place. In a little more than a year, we've built the business that has the people, the capabilities and the scale to support our position as a key player in the North American natural gas market.

Our objective was to build a business that in its basic construction, in the scope of its market presence and in its profitability would be a suitable complement to our market leading power business, and we think we've met that objective. We see tremendous opportunity to grow this business in the coming years and as is the case across each of our business lines, we will measure success substantially by our ability to generate attractive risk adjusted returns on the capital we deploy.

Turning to Page 28 let's take a closer look at upstream gas business.

We've discussed before the strategy that we employed when building our load serving business in power. When numerous companies were tempering their participation in the load business, we saw opportunity and within several years we were the leading wholesale supplier of power in the U.S. and earning healthy margins.

We saw a similar opportunity in an underserved segment of the upstream gas business. The Commodities Group provides risk management services to small independent upstream companies with physical and operational expertise.

To meet the needs of these customers, our price and volume risk management services often come bundled with capital.

The past year's accomplishments in the upstream gas business exceeded our expectations. The upstream portfolio is generating strong returns and is a key contributor to current and future period earnings.

We now have 219 bcf of proved reserves in our portfolio based on independent third party estimates with current production over 21 million cubic feet per day. We believe 2006 is going to be another strong year for our upstream gas business.

With the portfolio scale and market presence we've built in 2005, we now have a strong pipeline of opportunities to add to our existing customer business. And as in power, as our upstream activity grows we will look to rebalance our portfolio through new deals, restructuring and divestitures.

Our successes on the upstream side were mirrored by our downstream business.

Turning now to slide 29.

In our downstream gas business we've applied commodities core risk management capabilities and customer focus to provide a variety of services across the midstream and downstream value chain. Our customers include wholesale natural gas buyers, such as utilities, large industrials, power generators and retail aggregators.

In addition to serving these customers we invest in strategic transportation and storage capacity to support multi-region marketing and trading activities.

We've benefited from investing in a solid business opportunity that others have left. Only two of the top ten gas marketers from 2001 are still in the business and it's not due to lack of demand from the downstream sector.

Industry trends such as skyrocketing gas prices and the potential globalization of the gas market by LNG have greatly increased the need for the services and skills that our downstream business provides and we are seeing increased value from our more significant base of customers.

These factors have led to strong results from our downstream business. We achieved competitive scale and market presence well ahead of expectations.

We've built down our Houston office which now has over 80 employees and with physical through-put of over 5 bcf a day, we became the seventh largest marketer of natural gas in the third quarter.

Turning to Page 30.

We expect our combined natural gas businesses to generate $159 million in 2006 gross margin. Of that amount, 95 million will come from upstream activity and 64 million will come from our downstream business.

On the upstream side we expect to create 67 million in 2006 gross margin from current year origination while the remaining 27 million will come from backlog realization. Downstream we project 47 million of new business to complement 17 million of margin already in the backlog.

Our downstream new business target is consistent with our second half 2005 run rate. Of the total gross margin target for our natural gas business, 28% is in the backlog.

Turning to our coal business on Page 31.

Our coal business is a producer and consumer customer business built around a large scale global portfolio of coal, freight and terminal logistics. We use our logistics and risk management expertise to optimized margins arising from structural differences in coal prices around the world.

And by working with coal users to increase their coal flexibility we're able to provide the most cost effective coal supply that meets their requirements.

As we exceeded the modest growth expectations we set for this business in 2005 we're forecasting continued progress this year as the business gathers momentum.

2005 was marked by several key accomplishments. Our coal group delivered 12.6 million tons of coal to international and domestic third-party customers and to our own fleet.

We've currently arranged for future delivery of 20 million tons to third parties giving us a significant backlog of business for 2006 and beyond.

Our international coal business was active in 17 countries. We're contractually enabled with over 25 customers globally and have 15 others nearing completion giving us one of the most robust lists of customers in the industry.

The coal business has substantially increased our market presence in Europe and will allow us to opportunistically pursue growth initiatives in the power and gas markets abroad should attractive opportunities arise.

Turning to Page 32.

The gross margin outlook for our coal services business is supported by the strong backlog we created in 2005 and our current pipeline of customer business. Our $66 million gross margin target for the coal business includes 59 million already under contract and an additional 7 million to come from current year origination.

Turning to our portfolio management and trading business on Page 33.

We've built an impressive track record of managing the risks in our portfolio while effectively deploying risk capital to earn substantial financial returns. Our portfolio management group is responsible for the near-term value in our aggregate portfolio of physical and contractual assets.

They seek to earn additional returns above and beyond the value of the portfolio at the start of the year. Additionally, they assume and manage the risks associated with new customer business.

Our closely related trading business deploys risk capital in actively regional traded energy commodities where we have customer business and an edge in our physical knowledge. Trading also supports Commodities' three customer businesses by providing market intelligence and execution services.

Our competitive advantage in PM&T begins with the capabilities provided by our people, infrastructure and risk management culture. We have taken the risk management and risk taking infrastructure from our power business and have enhanced it over the past four years to provide a scalable multi-commodity platform.

In the people in PM&T are some of the best and most experienced in the business.

We take these unique capabilities and apply them to markets where we have informational advantages based on our in depth knowledge of physical logistics. And we continually look to capitalize on opportunities that arise as the result of the scale and scope of our portfolio.

While there are some differences in the types of risks inherent in portfolio management versus trading, we manage them as a combined business seeking attractive overall returns on risk capital.

Slide 34 shows three broad metrics we use to assess our PM&T operations: mark-to-market value at risk, hedge percentages and gross margin. We closely monitor our mark-to-market value at risk.

Increased levels of VAR in the third and fourth quarters are attributable to increased volatility in the marketplace and the extension of our trading capability into the expanding areas of our business. Average VAR for the year was $4.7 million with Q4 averaging 8 million.

We continue to manage a well-hedged power portfolio with over 95% of our power and fuel hedged for 2006. As we have done in the past as we see opportunities to increase our hedge percentages in 2007 and beyond we will do so.

In 2005 we delivered a strong performance in PM&T earning $204 million of gross margin, up 111 million over 2004. The increase was driven by our ability to earn returns on risk capital in PM&T as gains on trading positions more than offset higher than expected costs associated with serving fixed price load.

As we discussed on the third quarter earnings call, we did experience higher costs to serve load in the face of a confluence of extreme temperatures and high commodity prices and volatility due to the active Gulf hurricane season. However, the trading portfolio was positioned to benefit throughout the year from some of the same commodity market dislocations which caused the increase in cost to serve load.

The increase in trading performance and activity reflects our continued focus on expanding our deployment of risk capital, leveraging our knowledge of physical power, gas and coal markets.

With the disciplined approach to deployment of risk capital and managing portfolio risks, we expect 173 million from PM&T in 2006, a slight decrease from 2005 as we are not anticipating market conditions and associated opportunities to repeat themselves in 2006, but do expect to benefit from the increased scale and scope of the overall portfolio due to the continued growth of our power, gas and coal business.

Turning to Page 35.

Having walked through each business area, let me now summarize our 2006 gross margin outlook. We expect our gross margin to grow 26% to 752 million.

As was the case last year, this is well below the 44% compound annual growth rate we have achieved since 2001 and we're comfortable with the assumptions in our plan are reasonable. We expect the $154 million of gross margin growth to be comprised of two basic elements.

First, 52% of the $154 million increase is attributable to the increase in 2006 backlog realization which is up $80 million year-over-year. The remainder of the growth is primarily comprised of increased new business from our power group in the first full year of contribution from our upstream and downstream gas operations.

Our track record of solid and steady performance gives us confidence that we can meet this forecast. The successful establishment of our three commodity platform reduces our exposure to a single commodity market and presents additional opportunities for future growth.

We expect another banner year for the Commodities Group and we're very optimistic about our growth prospects in the years to come.

With that I'd like to turn it over to Tom Brady.

Thank you, Felix, and good morning, everyone.

It's been well over three years since Constellation made a strategic decision to build a commercial and industrial retail competitive supply business. As we said before, this move was a natural extension within our Merchant Energy capabilities.

Turning to Slide 37.

Beginning with the acquisition of AES NewEnergy, combined with a series of companion acquisitions and fueled by organic growth, Constellation NewEnergy has become the leading supplier in the commercial and industrial sector. When we acquired NewEnergy in September 2002 was a 4,000-megawatt business.

We made a series of tuck-in power acquisitions, broadened our product base through gas acquisitions and allowed both businesses to organically grow.

Turning to Slide 38.

From the very start, our strategy was different from then existing marketers. Our hypothesis, scale matters.

Today, most market participants agree. Scale benefits virtually every aspect of the business, supply and risk management, lower back-office costs, branding, multiple commodities, [ESCO] capability and most importantly, geographic diversity.

Turning to Slide 39.

In the past we have shown this map and said geographic diversity provides us the North American presence to cross sell, provide value to our national customers, and most importantly, limit our exposure to unfavorable market conditions or regulatory rules in any one region. With sales of 300 billion cubic feet of gas and contracted power of 15,500-megawatts we are the largest retailer in the commercial and industrial sector.

This year our loads served exceeded 2,000-megawatts in four regions.

Turning to Slide 40.

2005 was a successful year for NewEnergy. Electric market share grew by 3 points to 24%. Megawatt hour sales increased 45%. SG&A improved by almost 20%, and in the face of high prices, the gas division increased sales volumes by 8%.

During the summer weather drove strong demand, high prices and price volatility throughout the country's power markets, especially Texas. In Texas, we and other suppliers experienced unprecedented low shaping and ancillary costs, extreme market conditions, coupled with our own regional growing pains undermined NewEnergy's gross margin.

Despite the difficult environment, retail gross margin was still comparable to the prior year. In fact, excluding Texas we were able to exceed the business plan target for electric gross margin per megawatt hour. This underscores the importance of our national platform.

Turning to Page 41.

During our last earnings call, I mentioned that the fourth quarter was an important sales cycle for NewEnergy. I'm excited to report it was a tremendous sales quarter.

Gross margin from new sales was $86 million, a 53% increase over a contracted margin from the same quarter last year. This favorable outcome was driven by improvement in all factors of business signed.

Gross margin per megawatt hour increased 19%, contracted volumes increased 28% and contract term was 17% longer. The strong sales cycle bodes well for the business in 2006.

Turning to Slide 42.

Constellation NewEnergy as a customer focused business model we now count nearly three-quarters of the Fortune 100 as valued customers. The current price environment underscores the value of our product and services.

We focus on a consultive approach that allows organizations to achieve cost objectives, reduce price volatility and manage risk. We use the same approach in both the power and the gas divisions.

Turning to Page 43.

Last year we once again measured customer satisfaction. For a second year in a row more than 93% of our customers are satisfied.

That means they would renew with us and they would recommend us to others. I might add we were able to maintain this high level of satisfaction during a time of rapid business growth and rising prices.

Turning to Slide 44.

Looking at 2006, we continue to see the electric switch market as a growth market. During the past three years the growth rate has been 19% compounded and during that time NewEnergy has grown at a compound annual rate of 53%.

We expect the market growth to continue 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 7% annually from now to 2008 and 10% from now to 2010. This projection is in line with KEMA's market projections.

As the switch market grows our business should grow at least at the same pace in mature markets and faster in newer markets. We anticipate market share will prove from today's 24% to nearly 30% over a planned period.

Our growth assumptions reflect the regulatory framework currently in place and do not depend on new markets opening to competition.

Turning to Slide 45.

NewEnergy's megawatt hour sales have more than tripled since we acquired the business. We expect volumes to grow at a compound annual rate of 18% over the next three years.

Last year we delivered 64 million megawatt hours slightly more than our plan. We plan to deliver 74 million megawatt hours in 200, a 15% increase over 2005.

We presently have over 60% of this under contract on track with our business plan and comparable to our status at this time in prior years.

Gas sales volumes are expected to be 340 billion cubic feet, a 13% increase over last year. Approximately three-quarters of the volume's already under contract and gas continues to be a strong contributor to our retail strategy.

Turning to Slide 46.

At Constellation we believe our past success in building scale will breed future success. Our NewEnergy companies are a number one competitive supplier and well positioned to continue as the industry leader.

Thank you. And now let me turn it over to Follin.

Thanks, Tom. Good morning, everyone. Thank you for joining us.

Let's start on Page 48.

I'll begin this morning with a more detailed look at our fourth quarter and full year results as well as our 2006 outlook. I'll also spend some time reviewing our capital expenditures, cash flow, balance sheet and return on invested capital. Finally, I'll provide some insight into our earnings outlook beyond 2006.

Turning to Slide 49 and our fourth quarter results.

Fourth quarter GAAP earnings were $1.09 per share. We recognized several special items in the quarter that in total reduced GAAP earnings by $0.04 per share, including $0.09 of merger related costs and the $0.04 per share negative cumulative effect of FIN 47 adoption for conditional asset retirement obligations, partially offset by $0.09 gain on the sale of our Panama business in October.

Also in the quarter we had $0.06 of mark-to-market gain related to certain economic non-qualifying hedges. As we discussed in our third quarter call, we're calling out the mark-to-market on economic hedges, a fuel adjustment clauses and gas transportation contracts that do not qualify for hedge accounting treatment.

After adding back the effect of special items and subtracting the gain on the economic non-qualifying hedges, adjusted earnings per share were $1.07 exceeding our guidance of $0.81 to $1.06 and $0.36, or 51% above our fourth quarter 2004 results.

Moving to Slide 50.

In looking in the segments, you can see that it was a strong quarter across the board. On an adjusted basis the Merchant earned $0.82 per share, near the high-end of our guidance range of 60 to $$0.85 per share compared to last year's fourth quarter adjusted EPS of $0.56 per share, Merchant earnings were up $0.26.

The 46% growth was largely driven by continued strong performance in wholesale competitive supply. New business grew by $0.25 while backlog realization was up $0.09. We also increased synfuel production which added $0.04.

These positives were partially offset by stock option expense of $0.04 and inflationary and other costs.

BGE had adjusted earnings of $0.25 per share, exceeding the top end of our guidance range of 17 to $0.22 and up $0.08 over the fourth quarter of 2004. BGE was up compared to last year due primarily to customer and usage growth and favorable weather conditions.

Turning to Slide 51.

For the full year our adjusted earnings were up, were $3.62 per share, up $0.50, or 16% from last year and above the top end of our guidance range of 3.35 to 3.60. The Merchant achieved $0.30 growth in adjusted EPS.

Earnings benefited from $0.33 growth in wholesale competitive supply both in new business originated during the year and backlog realized. Successful execution of our productivity initiatives yielded an additional $0.30.

Lower interest costs resulting from lower debt and higher cash balances drove $0.15 of gain.

You may remember that in 2004 we experienced coal rail delivery problems. We benefited $0.10 as a result of not experiencing a repeat of the 2004 problem.

We increased synfuels production which created an additional $0.06 of earnings. Offsetting these items was a loss of $0.11 due to a decrease in CTC revenues.

NewEnergy was down $0.11 in Texas due to pricing volatility and operational challenges. Year-over-year inflation for generation and [GANEY] cost us $0.09.

[GANEY] was down $0.08 versus the prior year due to dilution associated with the shares to finance the acquisition. We also lost $0.06 due to the absence of favorable bankruptcy settlement payments received by NewEnergy in 2004.

Finally, we have an aggregation of smaller unfavorable items including dilution, option expense, depreciation and other costs.

Utilities earnings were up $0.13 compared to 2004 primarily due to favorable weather. The other non-regulated segment is up $0.07 compared to last year primarily as a result of the acquisition of our energy services business Cogenix.

Turning to Slide 52.

Before I turn to the 2006 outlook let me pause to reiterate a few of our financial accomplishments in 2005.

Wholesale competitive supply had a banner year. We set out the year with a lofty target for new origination to be up 27% from 2004.

In fact, new origination was up 99% with healthy additions from our prospering coal and gas businesses. 415 million addition to the backlog provides a solid base of future earnings.

Higher current year gross margin than planned allowed us to add staff and build the business for the future. The bottom line we achieved our 2005 EBIT plan, built a strong backlog of earnings for the future and built a more powerful business platform.

Turning to Slide 53.

NewEnergy had strong revenue and market share growth in most regions. As Tom discussed, we had growing pains in Texas as did many of our competitors during the volatile period of the third quarter.

For some time now, we've indicated our expectation that average realized margin would decline to a level closer to $3 per megawatt hour as high margin contracts roll off. [Including] the effect of Texas we exceeded our gross margin plan of $3.35 per megawatt hour by $0.11 and delivered over 80 million of EBIT.

We also reduced SG&A per megawatt hour by 19% to $2.05 as we leveraged our larger platform. This further bolsters our competitive position for the future.

We delivered $90 million of productivity due to better nuclear outage management, the benefits from our fleet management approach and smart IT management. This means we established a more powerful competitive cost position.

All of this earnings growth was delivered while improving the balance sheet with debt to total capital coming down from 46.5% to 42.8%.

Turning to Slide 54. Let me turn to our outlook for 2006 starting on Slide 55.

For 2006 our guidance range is 3.65 to 3.95 per share which represents 1 to 9% growth over a highly successful 2005. The Merchant will be up 8 to 15%, while BGE, which benefited from weather in 2005, will be down.

Moving to Slide 56.

This chart walks through the factors that will contribute to our 2006 earnings growth. We've used the middle of the guidance range throughout this analysis.

As an overview you see our fundamental growth drivers, competitive supply and productivity, as well as the beginning of the impact of higher commodity prices. These were partially offset by the headwind of the wind down of our competitive transition charge which we've been expecting.

I'll walk you through each of these drivers starting on Page 57.

Wholesale competitive supply will be up $0.43 year-over-year. This increase is driven both by a higher backlog of already originated business versus what we had going into 2005, and by an increase in new business net of increased costs to achieve that growth.

Turning to Slide 58.

As Felix discussed, wholesale competitive supply is planning to achieve 752 million in gross margin in 2006 representing a 26% growth over 2005. 300 million will come from already originated power and hydrocarbons business.

This backlog position is 79 million higher than year-end 2004.

The next section of the table outlines our expectation for new business to be originated and realized in 2006. We expect some growth in each power, gas and coal.

Consistent with our past practice, new business growth includes rebalancing of our portfolio through new deals, restructurings and divestitures. Given our focus of deploying capital to achieve above hurdle rate returns, we expect that upstream gas properties we invest in and develop will reach a level of maturity at which our shareholders are better served by selling properties with higher percentage of proven, developed reserves to other investors.

Part of the growth you see in upstream gas new business reflects this expectation.

As you'll recall, portfolio management and trading is where we show the benefits of trading and of enhancing the value of the fleet over the business plan forecast which is based on actual hedges and market forwards for unhedged elements. Our plan reflects a decline of 31 million in portfolio management and trading, reflecting the prudent planning assumption that the strong trading performance of 2005 will moderate in 2006.

In total we're counting on new business originated and realized in 2006 to be 452 million, up 74 million, or 20% from 2005. With one month of the year behind us, we feel like this forecast is very achievable.

New business originated in January represented attainment of about one quarter of this year's new business target.

Turning to Slide 59.

Not only are we counting on 452 million of new origination to be realized in 2006, we're counting on the wholesale group to originate 372 million in margin to be realized in future years. Overall our 2006 total originations target stands at 824 million, which is up 31 million, or 4% over a very strong 2005.

Chart 60 provides an update of the backlog for our wholesale competitive supply portfolio.

Backlog includes scheduled realization for power transactions and reasonable expectations for gas production. It does not include as yet unknown restructurings of existing contracts.

As you know, the portfolio is highly hedged as to price risk. On an ongoing basis we actively manage risk such as the basis between regions or counter party performance risk.

The future year's backlog that we have been originating have positioned us well providing a highly visible stream of future earnings already originated as a solid base from which to build.

Turning to Slide 61.

Earnings at NewEnergy will be $0.08 higher in 2006 compared to 2005 as detailed on the next Slide, 62. We expect NewEnergy's EBIT to increase about 23 million from 2005 levels.

Electric and gas volume growth will be strong but moderate somewhat versus historic growth rates reflecting the market dynamics caused by the high price environment. Based on already booked business, combined with recent origination levels in the $3 area, we expect average realized gross margin to be approximately $2.90 per megawatt hour reflecting some hangover from the 2005 Texas issues.

SG&A costs per unit will continue to decline as we streamline processes and systems and leverage our growing volumes. In total, higher market shares and continued volume growth, stabilizing realized margins and cost leverage should drive good EBIT growth.

Moving to Slide 63.

We've been telling you for some time that when we bought NewEnergy a portion of its load serving contracts were unhedged. Power prices had declined since these contracts were signed.

We hedged the contracts at lower prices post acquisition. This phenomenon has resulted in higher realized gross margins per unit in 2003 through 2005 represented in the left box by a red line.

New sales margins in 2004 and 2005, represented by the blue line, have supported our expectation that this is a $3 per megawatt hour gross margin business. When you combine stable new sales gross margins per megawatt hour with declining SG&A costs per megawatt hour, our outlook is for growing EBIT margins per megawatt hour over the remainder of the business plan time horizon.

Turning to Slide 64.

The end of residential price reservice this summer on our Merchant fleet will drive an added $0.10 per share compared to 2005. This will be offset by a decrease in competitive transition charge revenues.

For several years we've been projecting for you how the roll off of Maryland competitive transition charge will effect our 2006 year-over-year comparison. The collection period for residential CTC ends on June 30, 2006.

We expect a $0.22 unfavorable effect versus 2005 reflecting one half year of CTC payments. The final impact will be in 2007, the first full year in which CTC is fully phased out.

Turning to Slide 65.

For 2006 we expect productivity to drive an additional $0.13 of year-over-year earnings growth in line with what we outlined for you last year. This will more than offset $0.10 of inflationary cost increases at headquarters in generation.

Turning to Slide 66.

Before we go into the specifics of this year's productivity [goals] I'd like to take a minute to highlight our generation group's 2006 initiative.

As you all know, the Generation Group is the primary driver of our goal to improve earnings by 150 to 180 million per year through a multi-year productivity initiative. Better nuclear outage management and benefits of our fleet management approach drove productivity improvements above our plan for 2005 and there is more to come in 2006.

This year Nine Mile Point will continue the march toward top quartile performance. We will also complete an 83-megawatt upgrade at [GANAY] that will position us for further productivity gains in 2007.

We will replace a reactor vessel head at Calvert Cliffs in 2006. Although this will increase our outage days and costs versus 2005 it will support our long-term efforts to maintain that facility as a top [decile] performer.

In the third quarter we announced a joint venture with AREVA to develop and deploy the first fleet of advanced nuclear power plants in America. As envisioned, we'll form joint ventures for each nuclear power plant in which of CEG may participate as an operator and/or as an investor.

Until we identify specific project we're committed to ordering advanced materials for a new nuclear power plant. Constellation's financial commitment will be limited to the cost of forming the business platform, funding business development activities and early licensing activity.

Moving to Slide 67.

Let me pause to remind you how we track productivity. We apply productivity definition akin to what many industrial companies use.

This definition demands quantification, the all-in change in cost relative to output. We break out inflation costs to help us better monitor productivity a generation in headquarters, expense timing items that swing from year-to-year and one-time items that could potentially distort productivity tracking such as extraordinary fossil maintenance are excluding from the cal.

Moving to Slide 68.

This chart shows the productivity gains that we're expecting for 2008.

As you'll recall in 2004 we promised that 2008 pre-tax earnings would be 150 to 180 million higher than 2003 due to productivity initiatives. We exceeded our 80 million productivity target for 2005 by 10 million and are poised to reach our 2008 goal, which will drive approximately 2 percentage points of EPS growth each year on average through 2008.

Turning to Slide 69.

In targeting our incremental productivity gains for 2006, we'll continue the initiatives that we began in earnest in 2004. Our fleet management strategies will leverage the best practices of Calvert Cliffs to Nine Mile Point, shortening outages and reducing costs associated with labor and materials.

Calvert itself will continue to march to better performance.

In total we expect 2006 EBIT to be $40 million higher than 2005 due to these initiatives. The cumulative impact of these programs will have raised the Company's EBIT by $90 million comparing 2006 to 2003.

Turning to Slide 70, we expect to see a negative 16 variance which reflects an accumulation of smaller items.

On Page 71, other non-regulated businesses should be up $0.05 year-over-year primarily driven by the discontinuation of our building services business. On the unfavorable side, at the bottom you see an aggregation of small items including the scheduled increase in the accretion of our nuclear decommissioning liability and spending on new nuclear initiatives.

I want to touch on two items, $0.07 of planned outages and $0.03 of synfuels discreetly.

Moving to Page 72.

For 2006 planned outages will drive a $0.07 year-over-year decline in EPS. Nuclear outages will drive a 14 million negative pre-tax variance driven primarily by the replacement of the Calvert Cliffs unit one reactor vessel head which will add 16 days to the outage and create higher removal costs which are treated as O&M expense.

We've been planning this RV head replacement for a number of years and have very detailed plans to execute the outage crisply. We have a favorable pre-tax variance of 10 million gross margin primarily due to the absence of a 2005 Brandon Shores outage to replace a cooling tower.

Finally, we have more outages in our fossil fleet to perform a number of planned extraordinary maintenance items which will cost us 16 million more in 2006 compared to 2005.

Turning to Slide 73.

Extraordinary maintenance is any significant fossil plant maintenance activity not performed every year like turbine and boiler inspection. Extraordinary maintenance is done at the optimum point in each plant's life and can cause lumpiness in our maintenance schedules and earnings.

In 2006 we'll perform significant work at High Desert, Wagner, Crane and Brandon Shores which will increase our 2006 pre-tax O&M expense by 16 million, or $0.05 per share. This will eventually reverse in 2007 when we expect to spend 11.7 million, or $0.04 less on extraordinary maintenance compared to 2006.

Turning to Page 74.

One topic we should discuss is synfuel. It is not driving much of a year-over-year variance in our plan but it could depending on oil prices.

We've stepped synfuels production in our plan at both of our facilities. This would drive a $0.10 year-over-year favorable impact in the absence of tax credit phase out risk.

We think increased production makes economic sense as long as the expected tax credits exceed the net variable cost to production. The breakeven is in the area of a 60 to 70% tax credit phase out.

A phase out less than this would still allow us to generate positive aftertax earnings and cash flow from producing and selling synfuel. In our 2006 forecast we've assumed a 17%, or $23 million tax credit phase out based on oil price forwards as of December 15th when we set the plan pricing. Obviously, the risk of phase out will move with oil prices.

We've told you we hedge the tax credit phase out risk along with our other fuel positions as a portfolio. Essentially we view the synfuel tax credits assist a short oil position and we have a portfolio of other long oil correlated positions which serve as a hedge.

What you see at the bottom provides a bit of a window into what has happened and what could happen.

Between December of 2004 when last year's business plan was completed and December 15, 2005 when this plan was completed, our estimated loss of tax credits due to phase out is 67 million cumulatively for 2006 and 2007. That is, as oil prices have gone up, we value the risk of tax credit phase out at 67 million pre-tax.

On the other hand, our portfolio of long oil correlated positions gained 216 million in value and by much more than the impact of the synfuel tax credit phase out. I point this out to you to emphasize that this year's EPS may decline from that presented today if oil prices stay at levels above the December 15th level.

Oil prices have increased since we set our plan at 1215. Market forwards and volatilities as of Friday, January the 27th would indicate an approximate 55% tax credit phase out.

When netted against the small favorable 2006 impact of the long oil like position this would reduce our 2006 EPS by approximately $0.24 compared to the numbers included in this presentation. On the other hand, the implied rise in energy prices would likely be very good news for the long-term value of Constellation Energy due to the implications for the value of our base load fleet as well as our long oil position.

Turning to Slide 75.

BGE's contribution will be $0.08 lower in 2006 versus 2005.

On Slide 76.

As you'll recall, BGE filed a gas distribution rate case on April 29th 2005 which is our first rate case filing in six years. The final order, which became effective on December 23rd, granted a rate increase of about 36 million based on a rate of return of 8.5% and ROE of 11%.

We're very pleased with the work that was done by the utility and we believe the PSC ran an efficient and fair process.

Moving to Slide 77.

BGE gross margin will be higher by 21 million in 2006 primarily due to increases in gas rates from the rate case and due to higher polar volumes. As the six year price freeze ends for residential customers on June 30th and as customers transition to market-based rates, BGE will serve as the provider of last resort for which it will earn a mark-up driving a $17 million increase in gross margin.

The polar margin is intended to encourage competition in Maryland and to compensate BGE for its role. Electric distribution gross margin is otherwise forecasted to be down 22 million, or $0.08 per share, as we assume normal weather patterns in 2006 versus the extreme conditions in 2005.

Finally, CTC roll off will reduce BGE's gross margin by $0.03 as we expected.

For 2006 we have increased expenses of 37 million, $0.05 for inflationary and pension assumption changes, $0.03 for spending on reliability, $0.02 attributable to increased uncollectibles as commodity prices and bills rise, and $0.02 for additional interest expense as BGE borrows more to fund an increased capital program. Taxes, dilution and other items account for remaining $0.03.

The resulting EPS will be $0.93 per share, down $0.08 from a strong 2005 and in line with a more normalized 2004.

Turning to Slide 78.

Now I'd like to take a look at the Merchant income statement. The information in this section is designed to help you with building your model and should be used in conjunction with the additional modeling information in the back of this presentation.

First the Merchant business on Slide 79.

In total we expect the Merchant gross margin to be roughly 2.7 billion up nearly 200 million, or about 8% from 2005. We've talked about wholesale competitive supply and NewEnergy.

Let me give you some background on what we've labeled Mid-Atlantic fleet here. We know you want to understand how much we make from selling the output of the Mid-Atlantic fleet.

In reality, the Commodities Group manages the output of these plants along with all other PJM competitive supply in one regional portfolio in order to optimize the value. That's part of the strength of our integrated business model.

Here we've taken our PJM regional portfolio gross margin, subtracted out notable competitive supply deals not off the fleet to approximate the Mid-Atlantic fleet's gross margin.

The gross margin associated with the Mid-Atlantic fleet is approximately 812 million for 2006, a decrease of 24 million over 2005. The decrease is due to lower CTC revenue which was partially offset by an overall fleet price increase in the second half of the year due to the end of BGE's six-year residential price freeze.

We expect plants with PPAs will be down 14 million primarily due to end of a PPA on University Park.

Turning to Slide 80.

In total at the mid-point of the guidance range we expect Merchant gross margin to be up 8% and Merchant EBIT to grow 65 million, or 9%. Lower debt balances will decrease interest expense.

After taxes we project Merchant net income growth of 10% at the mid-point of the guidance range.

Turning to Slide 81.

Year-over-year O&M expenses are projected to increase 63 million. Commodities and NewEnergy will add about 34 million to their cost basis to drive top line growth.

For generation and headquarters productivity will largely be offset by the relentless effects of inflation for 2006.

Extraordinary maintenance will drive costs up in 2006, which as I discussed before, is a timing item which should reverse in 2007.

D&A will be up 33 million. Most notable is the forecast of gas depletion which reflects amortization of our gas investments with production.

Now let's review our capital expenditures and cash flow starting on Page 83.

This chart represents the capital spending projections in our business plan.

As you'll recall, we give you a capital spending forecast that includes only known or reasonably likely investments. We don't include possible M&A, for instance, so accordingly what you have is essentially an organic business plan.

You see an increase from 2005 levels of spendings to 2006 to 2008 for generation. This primarily relates to environmental spending on which I'll elaborate in a moment.

You see an increase in Commodities Group investments which reflects a placeholder; for gas investments to support our successful gas efforts. The utility plans to increase its level of Cap Ex over the next two years to invest in reliability.

Turning to Slide 84.

Last January we projected environmental spending of 100 million through 2007 with an additional 400 to 500 million more through the end of decade. We think the capital cost of environmental compliance in this decade will be 180 million higher than the January 2005 projection and that we'll start to spend earlier.

The numbers shown here reflect scrubbing our biggest coal units, Brandon Shores and Keystone.

As Mayo mentioned, Maryland's rules have not reached full maturity yet. But based on what we know, we do not expect spending to change materially from the levels shown here.

Moving to Slide 85.

Bringing the earnings and capital picture together, in 2006 we expect to generate 148 million of free cash flow. As you can see, the Merchant continues to be a cash flow generator.

Because we're investing in reliability at the utility, BGE's contribution to cash flow will be less in 2006 than in the past. After dividends, cash flow will be about 120 million negative reflecting our investment in the business, combined with the payment of 266 million in dividends.

Now let's take a look at the balance sheet on Page 87.

Since 2001 we've reduced net debt to total capital by almost 12 percentage points while growing the business at the same time. Reported net debt to capital at the end of the year was 42.8% which is slightly higher than plan of 42%.

We executed on the key components of our plan such as paying down debt and generating and building strong cash balances. The short fall to the plan of 42% was primarily driven by accounting items which we do not think make sense to directly manage.

Equity balances were down 330 million for two such items. First, accumulated other comprehensive income was down 250 million primarily due to the effect of increases in commodity prices on PJM load serving positions.

These contracts have to be mark-to-market through AOCI while the offsetting increased generation value not will be realized anywhere many GAAP accounting until power is delivered resulting in the timing mismatch on the balance sheet.

We also had an increase pension minimum liability charge of 77 million due to the impact of lower interest rates on the liability and the new SEC mortality table requirements. We continue to target a net debt to captain of 40% for the stand-alone company and will be very close in 2006 as the equity balance grows.

Now let's review return on invested capital on Slide 89.

Our view as a management team is that we should be making investments which exceed the appropriate cost of capital to the risk specific to each investment. On an aggregate basis we think it's important to track our return on invested capital relative to our cost of capital.

As we discussed last January, the Company had an average ROIC of 6.5% in 2002. With the success of operations in 2003 and 2004, we increased ROIC to 8%.

As we look around the industry, we think we improved from a sub par ROIC to one that is superior relative to our cost of capital and to others in the industry. We got there through smart investments like [Ganay] and NewEnergy, the smart deployment of capital by our Commodities Group and by eliminating marginal investments like Guatemala and senior living facilities.

In 2005 we exceeded the projections for ROIC we shared with you in January by increasing income with smart investments in our [gap] business and by selling businesses which were worth more than others than to us, such as Oleander and Panama. As you can see in 2006 and beyond we're improving our projected ROIC by making smart tradeoffs with your capital.

As you'll see on the next chart, projections for 2007 buy backs are down from what we shared with you a year ago. As we explained with our goal we found smart investment opportunities where the returns are superior compared to the risk and improved the return you can expect on capital employed in Constellation Energy.

Now let me spend the last few minutes focusing on our earnings expectations beyond 2006 starting on Page 91.

Mayo reaffirmed our 2007 EPS guidance of 4.75 to 5. This represents a growth rate of approximately 28% off the mid-point of our 2006 guidance.

Let me focus on the growth drivers to show how solid this outlook is.

The two biggest drivers reflected here are Mid-Atlantic fleet and productivity. The fleet will experience the biggest impact associated with the end of Maryland residential price freeze service in 2007.

As you'll recall, we had set revenues in 2000 but did not hedge fuel costs until much later at higher levels resulting in artificially low margins in the Mid-Atlantic fleet. The fleet is now highly hedged in 2007.

Our productivity results in 2007 will be the result of labor cost reductions already being planned at Nine Mile Point and the gross margin impact of the 2006 83-megawatt [inaudible] upgrade. Interest costs reductions account for a relatively modest $0.07 in these projections.

We've included a modest $0.10 here for competitive supply, not because we expect growth to slow meaningfully in 2007, but rather to demonstrate how solid the building blocks for a 4.75 to $5 2007 EPS are for stand-alone Constellation Energy.

Finally at BGE, you see the impact of spending on reliability and inflationary costs pressures.

Turning to Slide 92.

The scale and scope of our wholesale and retail competitive supply businesses continue to have a superior customer proposition which should drive continued growth. Our productivity initiatives are powerful.

We executed the 2005 plan as promised to permanently reduce our cost positions and solidify our future competitiveness. We believe there is more to come from streamlining our processes.

We generate strong cash flow which will redeploy for the future benefit of our company and our shareholders or we will return to our shareholders.

Finally as we discussed in August, the current high price environment continues to have favorable implications for the value of the fleet in 2008 and 2009. Hedges we established for 2006 and 2007 in earlier years will roll off and be replaced with power contracts reflective of more recent power prices.

Our outlook for 2008 continues to strengthen with rising commodity prices and the growing hedged profile of our fleet. While we'll loose lose synfuels at the end of 2007 we will see gains on the oil correlated positions I described and we anticipate that the Mid-Atlantic fleet's gross margin should add 70 to $0.75 per share in 2008.

When combined with conservative assumptions for our growth drivers of competitive supply, productivity and cash redeployment, we are comfortable indicating now that 2008 EPS should be 10 to 15% above 2007 EPS on a stand-alone company basis.

Now let me wrap up on Slide 93 with our first quarter guidance.

We expect first quarter earnings to be $0.53 to $0.68 per share, which compares to adjusted earnings per share of $0.71 in the first quarter of last year. Wholesale competitive supply will be up year-over-year as we have higher backlog going into the first quarter than we had in last year's first quarter and we have strong new business results quarter to date.

This will be offset by the fact of Mid-Atlantic fleet is still selling power to BGE residential customers under the price reservice established in 1999 while associated variable costs of generation coal, oil and emissions are all up.

Finally, CPC revenues will be down in the quarter. We expect BGE in the other non-regulated segmenting to be about in line with the first quarter of last year.

That concludes my remarks. Now I'll turn it back over to Mayo for comments on the merger.

Great. Thank you, Follin.

On Page 95 you all know that Constellation's most exciting news of 2005, the announcement of the Constellation/FPL merger, the combined entity will also be well positioned to be an end game player in a consolidating industry.

Neither company needed to do a deal to be successful. Independently we each have very compelling growth prospects.

In the combination we are bringing together two of the strongest and most successful companies in the industry. The combined company will be a Fortune 100 company, the U.S. market leader in competitive energy markets and the number one U.S. power generator.

Each company brings excellence in different ways to this combination. Constellation Energy brings the highest customer facing competitive supply market share and best risk management platform in the business, but has limited generation capacity in NEPOOL and ERCOT.

FPL Group has meaningful deregulated generation in these markets but a smaller load serving business relative to the size of its generation.

This new platform will provide multiple channels of growth primarily in the deregulated markets. This growth is balanced by solid base of stable and growing earnings and cash flow from two outstanding state regulated utilities.

The combined company will also have the strongest balance sheet in the industry which is valuable in supporting the growth of the competitive businesses.

This growth will be further enhanced by meaningful synergies. The vast majority of these will come from the competitive energy side but there will be long-term benefits for the utility, too, both for shareholders and for customers.

We are very confident that we'll be able to deliver at least 200 to $250 million per year of pre-tax synergies retained for shareholders before costs to achieve by the third year of the combination.

Finally, as I mentioned in my opening remarks, our plan is to maintain the FPL Group dividend in effect at the time of closing. After effecting the share exchange, this will result in a significant dividend boost for Constellation Energy's current shareholders.

So lastly, let me give you an update on where we are with transaction time line.

We completed our filings with the Maryland Public Service Commission and the NRC in January. We plan to make the remaining regulatory filings and to file the joint proxy statement with the SEC in the first quarter. Overall we expect to have obtained the necessary regulatory approvals and close the transaction in 2006.

With that, we thank you for staying with us for this extended call and we are ready to take your questions.

Steve Fleishman of Merrill Lynch, you may ask your question.

Hi, everyone. Can you hear me?

Yep.

Okay. A couple questions.

First, on the, first of all on the commentary on the synfuel and oil hedge kind of offsets, Follin, when you mentioned in '06 synfuel today at prices, I guess, a couple days ago is about a $0.24 hit. Is that include net of your '06 long oil hedge, long oil position effectively?

Yes, the two charts you should look at to really understand this, Steve, are Page 74, right, in the chart and that is a summary of what is in the plan for synfuels.

On Page 74 there's a detail chart that shows the EPS calculation on Page 107, and what you see in 2006 is synfuels contribution of $0.44 before any phase-out risk and then an assumed phase-out in our plan based on market prices and volatilities back at December 15th of $0.13 per share getting to a net contribution of $0.31.

Now, if you look at Friday oil positions, of course oil prices have increased a lot since December 15th, if you look at Friday's markets and look at forwards involved, it would bring us to an estimate of about a 55% phase-out. We have included the gains on the long oil positions in that, but, so the gains on the long oil positions were very minimal in the last month in terms of what would be realized in 2006.

Got you.

Such that net-net the decrease, if that environment continued, we think it would be $0.24 from the earnings for [inaudible].

Okay. Thank you. That clarifies that.

My second question is on the commentary on the Mid-Atlantic kind of essentially repricing upside.

Yep.

You gave a number for '07 and then also a number essentially for '08. When you get to '08 with that additional, I think you said 70 to $0.75.

Right.

In 2008 today how does that, whatever that price is, compare to let's say what the current market price is for 2008 PJM power?

Are we, how close are we to current market in PJM by '08? Are we pretty much there? Do you know what I'm asking?

Yes. In August we disclosed our hedge position for 2008 for the first time, and you would see that we had hedges on for 2008 even back then, Steve.

Right.

And we're more highly hedged now. You'll see back, it's Page 102 back in the supporting material that you've got on the Web site.

You will see how hedged we were as of December 31st. This doesn't include the results of the Maryland auctions and the impact that would have on our 2007, 2008 hedge profile, and we can't really talk explicitly about that until BGE is in a position to release the results of the auction in mid-March, but you can imply that it's A Merchant [more than] the BGE load. It's more highly hedged.

Okay. But the point is, is that '08 is still somewhat or well below current market prices?

Correct. You will still see benefit in 2009.

Right. One last question.

You mentioned, Follin, in the gas business some of the benefit is occurring from effectively probably some sale of properties.

Yep.

And I don't think I fully -- if you could kind of clarify that statement.

Yes. I'll let perhaps Felix or George want to comment on it, too, but we're trying to distinguish what we treat as backlog which, you can view as already realized transactions scheduled to be delivered, and as you saw, for example, in 2005 with power, sometimes for risk management reasons, for example, in power we choose to monetize contracts, right, and that results in favorable current year new business and then it reduces the backlog, right?

With respect to gas you can expect from time to time to see pattern like that. We think it is inherent in the nature of the gas business that we will wish to harvest gas reserves in one form or another and I was trying to distinguish that.

We will report that as current gross margin and that's sort of a, there are no assumptions for that built into our backlog.

Felix or George, do you want to comment on the nature of harvesting the gas business?

I think Follin, this is Felix, I think Follin's explanation does it justice. It's just like we've spoken about in the power business on occasion in the past.

In managing our upstream portfolio we fully expect that there will be opportunities as components of the portfolio develop through their production cycle or through, for geographic reasons that either for our own modification and intent or for customer reasons, that we will probably execute transactions similar to those we've discussed in power and that's part of the source of current gross margin or new business origination that we've forecasted.

So that would be, sales of gas properties would be in the new business origination for '406 and realized in '06? In the kind of 114 million?

Yes, it's part of the 114.

Okay. Thank you.

Thanks, Steve.

Greg Gordon of Citigroup, you may ask your question.

Thanks. Just a follow-up to Steve's question on synfuel put another way. You guys have a, can you hear me?

Yes.

You guys have a $0.44 pre-phase-out contribution on Page 107, had a 15% phase-out, you add $0.31 contribution and you said in your comments that at the current oil price to 55% phase-out essentially there'd be an incremental $0.24 reduction so you'd have a $0.07 contribution from synfuel. Is that correct?

That's correct.

Okay. And where oil prices are right now should we assume if that were to straight-line out for the year that there's be a zero contribution?

No. Based on Friday's oil prices forwards and volatilities you would assume that we would lose $0.24 compared to what is included in these projections. And I think, Greg, we're trying very distinctly to say we develop a plan based on market conditions as of year end, and we haven't updated 2006, 2007, 2008, or 2009 projections for the changes in market prices from 12/15.

I understand. I wanted to make sure that I understood [overlapping speakers]--

But I think we need to be real clear. The implication if synfuels stay at where they were Friday is, we would lose $0.24 in this year's EPS. On the other hand 2007 and 2008 and 2009 should look even better.

Because you have a positive mark in your realization [inaudible] gross margin or other [overlapping speakers].

Increases in oil prices carry favorable implications for these long oil correlated positions, they carry favorable implications for the value of the fleet due to the assumption that commodity prices rise.

Okay. So basically every place where you have an open position you mark yourself to market as of December 15th long and short? Right. I understand.

And we're singling out this one to update because it is so material.

Well, you know, it is a mismatch in timing between when [overlapping speakers] I'm just matching timing between.

Short-term negative long-term favorable.

Second thing was that just to make it clear that that $67 million of gross margin that you expect to realize or that you're budgeting to realize in the gas business in the current period which is on Page 30, some significant portion of that is the assumed sale of an asset?

That's the 114.

Well, I'm zeroing in on just the gas on Page 30.

Correct. It's some portion of the 67.

Great. And then I have a question for Mayo that goes back to sort of the strategic rational for the merger because I know there's still a lot of debate with investors over whether or not you guys sold out for reasonable price just --

Right.

And as I look at the massive escalation in market penetration that you're exhibiting here in the gross margin targets for all of your competitive supply businesses, is it fair to say that you'd be running up against sort of the [inaudible] that your balance sheet would have been able to support stand-alone much faster than you otherwise would have expected so too much of this is actually some ways validation of your business model requires you to scale up this balance sheet to continue to grow at these levels? I mean, that's my observation from looking at this. I wanted to hear your --

Greg, I mean, to some extent that's certainly a component of our overall rational. I would say that the first point of emphasis is that this is a strategic merger, I mean, this was not a sale for cash.

This is combining two solid companies with really the two strongest balance sheets in the business together, but it did allow for us a obviously a much larger balance sheet and a more diversified set of businesses such there would be no constraint on the growth of our businesses and I would concur with your assessment that at some point there may well have been a constraint as to how fast we could grow and seize the opportunities that we saw, you know, without that diversification and overall strength with the combined operations.

So all of that stuff, you know, our year-to-year earnings targets and so forth, we felt very confident in our independent plan, but I think we also felt that these diversifications issues were important as well as trying to project what the end game really looks like, and we spent an awful lot of time trying to look ten years out and then march backwards as to how we were going to get there.

Our view is that the bigger company to scale, the diversity was really going to be very important, so rather go out and pick our own partner, then be picked five years from now and we think we found the best out there.

Thank you.

Leslie Rich of Columbia Management, you may ask your question.

I wondered if you can go through the Maryland regulatory situation? You're forecasting in 2007 and 2008about $1.60 to $1.65 per share and uptick from repricing of the Mid-Atlantic fleet, which is obviously not regulated, but if you could just walk through the staff recommendation for sort of capping and deferring some of the phase-in of the rate increases and when that decision will be made and what you view is the likely outcome?

Okay. Leslie, I have asked Tom Brady to be the main integrator of all of the Maryland filings and activities related to both the issue that you just raised and the merger, so I'll have Tom comment on that.

Okay. Good morning.

Let me just kind of run through maybe the three phases that we have going on right now. We have, starting with the merger, we have filed our merger application at the State of Maryland and they were beginning to come up with a process where they will review the impact of the merger on Baltimore Gas & Electric, the utility. We expect that to move along expeditiously.

We then also have, the commission has, in response to a request to look at the increase in power costs due to the July 1, 2006 coming off the price freeze and they have put forth a proposal, as we described in our presentation, that in fact would put a short-term cap on an opt-in approach on behalf of the customers and then the dollar amounts would all be recovered in a relatively short period, and there will be a review of that proposal in the next couple of months.

And then the final thing that we continue to always look at in Maryland is the overall impact on the possible legislation with regard to clean air. So we're actually, all three of these, we continue to look at at the same time, but I would say the first item that will be resolved is the overall rate cap approach and how the Maryland Public Service Commission will look at that.

Okay. So the idea would be that at the BG&E you would defer and earn a return on that regulatory asset or --

Oh, yes. The deferral would only go for a relatively short period and we would get the weighted average cost to capital as a return on that.

Now I said I would point out that it is right now as proposed is an opt-in approach, so it will be a situation where customers who would prefer not to have it deferred and have the, let's call it carrying costs associated with it, would just move directly to the market rates.

And then in terms of your increased environmental Cap Ex projections, I think there's two clean air issues being discussed in Maryland, the clean air proposal and the healthy air proposal or something like that. What are your thoughts in terms of the success of the legislature in passing such stringent requirements?

Right now you're correct. There are two proposals going on.

One of them is the Clean Power Plant proposal that initially was announced by the Governor's office in November of last year, and then as we started our general assembly for its 90-day period a few week ago, there have been bills introduced that in fact would take pretty much the, try to come up with the same effect of addressing what really needs to be done under the [inaudible] rules.

Right now we look at what's being proposed on both pieces of, let's say, one's the rule making and one's legislation. We think they're somewhat beyond where the EPA standards are and we would like to see some changes done.

We are hopeful that through the either working on the rule making with all the stakeholders, including the administration, or through the legislative process that we would be able to effectuate some of the thinking around this to keep it in line with why our business plan is right now.

But your Cap Ex, your environmental Cap Ex incorporates the governors? Restrictions or more of the just existing EPA?

Our Cap Ex right now brings in the scrubbing of the Brandon Shores plants and operational changes at some of the other plants using different types of coal and operating different pieces of equipment to basically attain the type of reductions that we would expect to get under either of the proposals that are currently underway. So what we have in our plan is what we expect the outcome to be.

Thank you.

Scott McGraw, private investor, you may ask your question.

My question was just to the EPS walk date provided for 2006 and 2007.

In 2006 the competitive supply number looks like it's projected to be $0.43. In 2007, I see that that's only listed at $0.10. I was wondering if you could speak to that a bit?

That's a point that we're trying to use to emphasize the strength of the 2007 projections, Scott.

We've sort of backed into what would competitive supply need to be for us to achieve 4.75 to 5, the mid-point of that range. It would need to be $0.10 with the other highly likely items of Mid-Atlantic fleet pricing and productivity being where you see on that walk.

So while all signs are that that business is growing much more rapidly than would be implied by that $0.10 bar, we're trying to show you that if they only grew by $0.10, we would achieve the 4.75 to $5 EPS in 2007.

Okay. So we could use our own projections there and grow that from '06 or take a judgment on '06 versus '07?

That's correct.

Thank you.

If you would like it ask a question, please press star one.

Operator, if there are no further questions, we want to thank everybody for attending today and we will see you after the next quarterly call. Thank you all very much.