艾索倫電力 (EXC) 2006 Q1 法說會逐字稿

Good morning, and welcome to the Constellation Energy's first quarter 2006 earnings call. [OPERATOR INSTRUCTIONS] Now, I would like to 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 first quarter earnings call and thank you for joining us today. We'll start on slide two. Before we begin the 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 Website, which you can access at constellation.com under Investor Relations.

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

Turning to slide four. 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 prospectus and other relevant documents to be mailed to security holders in connection with the proposed merger of Constellation Energy and FPL Group. With that, I would like to turn the time over to Mayo Shattuck, Chairman, President and CEO of Constellation Energy.

Good morning, and thank you for being with us today. I'll start off on page five. We are pleased to announce another quarter of strong performance. For the first quarter we delivered adjusted earnings for $0.70 per share in line with the same period last year. Adjusted first quarters, excluding synfuel earnings, were $0.68 per share. $0.07 above the top end of our guidance excluding synfuel s of $0.46 to $0.61. Demonstrating that our business leaders and employees have been squarely focused on execution and have delivered at or above our guidance for the 18th consecutive quarter.

Let's review the drivers of the first quarter performance on page six. The commodities group delivered solid results in the first quarter. Earnings were up due to a higher backlog of transactions goings into this year compared to last year's first quarter, which demonstrates the growing scale of that business. We also had strong portfolio management and trading results in the quarter.

The commodities group made substantial progress toward meeting their new business goals set out for the year. Achieving almost 50% of their total new business gross margin objective in the first quarter. We completed our planned nuclear refueling outages at Nine Mile Point of Calvert Cliffs. The Nine Mile Point refueling outage duration of 25-days, was Nine Mile Point's shortest outage and five days better than expected. With some aspects of the outage achieving top decile performance. During its refueling outage, Calvert Cliffs replaced the reactor vessel head, which will improve reliability and reduce the length and cost of future refueling outages. This was a complicated outage that went 13 days longer than anticipated. The impact of which will be seen in the second quarter.

We also delivered $10 million of incremental productivity gains at generation and headquarters, putting us on track to achieve our 2006 productivity target of $40 million. NewEnergy had a solid quarter and performed in line with the expectations we outlined in our January presentation.

Moving to slide seven. Now, let me get right into the Maryland political debate. In July of 2006, BGE's residential customers are scheduled to transition to market pricing after 13 years of low-priced power. While this has already happened with little pushback at many other Northeast and Maryland utilities, we realized that the big percentage increase for BGE's residential customers may create a significant political challenge for Maryland.

In the fall, we organized an outreach effort to legislative leaders to educate them about the impacts of growing global energy demand and tight energy fuel supplies. In January, we worked with the PSC to develop a rate stabilization plan, which they adopted in March. Because 2006 is an election year, we expected that the Maryland Legislature would see this as an opportunity to extend its ongoing partisan political battles. The intensity of the debate was more than anyone could have predicted. Perhaps because of the political dynamic and partisan positioning surrounding the Public Service Commission. As you know, in the end, despite a very noisy debate, no bills effecting Constellation, other than the Healthy Air Act, which had been anticipated prior to the session, ultimately became law.

Now, moving over to slide eight. After the conclusion of the session, we worked with the Governor and certain legislative leaders to garner support for a rate stabilization plan that we filed with the Maryland PSC last week. We requested a decision by May 1. Yesterday, the commission conduct a hearing on the plan. Accordingly, we're hopeful we will hear on the rate plan in a matter of days. This plan provides customers with the option to phase in the price increase over an 18-month period. With a recovery of the deferred balances and related interest costs over two years for most customers beginning June 1, 2007.

With respect to our merger with FPL, similar to our proposals to the Legislature, we have offered $60 million per year in economic benefits beginning January 1, 2007. To further reduce customer bills, contingent upon successful closing of the merger. On balance, while you heard some very harsh rhetoric during the legislative session, we were pleased that the cooler heads prevailed when it came to action. And we believe we reached a compromise position that assists our customers in transitioning to current market prices for electricity, while protecting the health of BGE.

On slide nine. At several points during the legislative session, a number of Legislators expressed the sentiment; that our need for PSC approval of the FPL merger provided an opportunity for the State to demand economic concessions from Constellation. As with any utility merger, some level of synergy sharing with customers is expected. As I mentioned, we reiterated last week in our PSC filing that we are prepared to provide a level of synergy sharing and other economic benefits totaling 60 million per year to our customers, contingent upon the merger closing.

The merger will now proceed through the PSC review process. The procedural schedule published yesterday, implies that the second half of September is the earliest possible date an order could be entered with by the PSC. However, the possibility of a delay, or the potential for additional required concessions continues to pose a risk to the timing and ultimate closure of the deal. Of course, if we reach a point where the risks to closing the merger or economics become unacceptable, we and FPL could agree to terminate the transaction. We won't sacrifice shareholder value just to get the deal done.

Now, moving to slide 10. Constellation's independent course and financial outlook remain robust. And our confidence in our longer-term earnings outlook continues to grow. Our expectation for 2006 and 2007 performance, excluding synfuel earnings is unchanged. In addition, we have provided 2008 EPS guidance of $5.25 to $5.75, which is equal to growth of 10% to 15% off of our original 2007 estimated earnings including synfuels. I think you'll agree, the good news is that Constellation energy shareholders will fare well, whether the merger proceeds or not. And at this point, I'll turn the presentation over to Follin to cover the financials.

Thanks, Mayo and good morning, everyone. I'll start on page 12. For the quarter, GAAP earnings per share were $0.63. Special items of $0.01 per share are merger related costs and a work force reduction program at the Ginna nuclear plant. Economic non-qualifying hedges were $0.06 per share. As a reminder, the economic non-qualifying hedges we call out meet the flowing criteria. First, the position cannot receive hedge accounting. Second, it hedges a specific accrual position. Third, it's of meaningful size. And fourth, it will not likely resolve in the current year and the increases and inner-year timing of earnings recognition issue.

This quarter, the only economic non-qualifying hedges that meet this definition are hedges on gas transport contracts. Gas transport contracts are essentially options to flow gas over a pipeline. We may economically hedge with basis swaps, which must be mark to market because they are not eligible for hedge accounting. The gas transport, on the other hand, must be accounted for on accrual basis, with earnings recognition during the transport period. For the quarter, the hedges had a mark to market loss of $0.06. The offsetting gains on the accrual gas transport positions will be recognized in 2007.

We spent some time in January explaining that oil prices would affect our synfuel tax credits. I know many of you have already separated synfuel earnings from the ongoing forward earnings streams in your model. Going forward, we'll report adjusted earnings excluding synfuels, clearing the path for you to evaluate relative operating performance. Excluding the likely volatile effects on fuel prices on synfuel tax credit recognition. Adjusted earnings per share, which excludes the effects of special items, non-qualifies hedges and $0.02 of synfuel earnings; were $0.68 per share, compared to $0.64 last year.

Now moving to slide 13. This chart gives you the specifics on how to call synfuel earnings out of our guidance. When we provided first quarter guidance, we also assumed $0.10 per share of synfuel earnings before tax credit phase-outs in the first quarter. Partially offset by $0.03 per share of synfuel tax credit phase-outs. For a newt EPS contribution from synfuels of $0.07. In fact, the tax credit phaseout was higher, due to higher oil prices. Adjusting our guidance for the $0.07 of synfuel EPS included in our actuals for the $0.02 of synfuel EPS recognized, our guidance was $0.46 to $0.61 and our adjusted EPS was $0.68.

Turning to slide 14. Adjusted EPS, excluding synfuels, were up $0.04 year-over-year. Utility was down $0.02. The merchant was up $0.04. In January, we told you that our guidance for first quarter EPS would be down year-over-year, primarily due to the fact that the mid-Atlantic fleet is still selling power to BGE residential customers under price free service through June 30 of this year. While the associated cost of generation coal, oil and emissions are up. We also expected reduced CTC revenues. We beat our expectation at the merchant due to strong new business performance at the commodities group.

Let's look at the segment results starting on slide 15. BGE earned $0.38 per share in the first quarter, at the low end of our guidance range of $0.38 to $0.43 and down $0.02 from the first quarter of 2005. This comparison to last year, reflects the effects of milder January weather and February storm costs, partially offset by the benefits of last year's gas rate case.

Now moving to slide 16. The merchant segment's adjusted earnings were $0.29 per share, which was above the top end of our adjusted guidance range of $0.05 to $0.20. And $0.04 above the adjusted EPS of $0.25 delivered in the first quarter of last year. Looking at the year-over-year variance, we had a strong quarter of wholesale competitive supply. With $0.23 in increase coming from higher realization of backlog transactions originated in prior years. And a $0.09 increase coming from new business originated in the quarter, driven by strong portfolio management and trading performance.

We also recorded an incremental $0.03 in productivity, putting us on the path to achieve the $0.13 of productivity that we have targeted for 2006. As expected, the mid-Atlantic fleet offset much of this growth. Driving a $0.20 reduction from the first quarter of 2005, primarily due to increased costs from purchased fuel, energy and emissions against fixed revenues from BGE residential service. We also saw the anticipated $0.04 roll-off of the competitive transition as more commercial customers completed their CTC obligation. As we told you in January, planned outages were expected to drive a net negative variance for the full year. During the first quarter, we saw two large pieces of that variance due to the longer Calvert Cliff outage for the reactor vessel head replacement and increased costs for extraordinary maintenance. This was partially offset by the absence of a first quarter Ginna outage.

Now moving to slide 17. The merchant segment gross margin of 589 million in the first quarter excludes the impact of special items, non-qualifying hedges and synfuel results. Gross margin is up 12%, from the 524 million of gross margin achieved in the first quarter of 2005. As expected, mid-Atlantic fleet gross margin was down, due to higher purchased fuel, energy and emissions costs and the roll off of the CTC.

Wholesale competitive supply was the primary growth driver for the quarter, as we recognized higher gross margin from already originated business and strong portfolio management and trading results. We also saw solid contribution from our growing gas business. NewEnergy experienced gross margin growth, primarily due to increased volume.

Turning to slide 18. Merchant EBIT is up 6 million from the first quarter of 2005, as higher gross margins were partially offset by higher O&M in commodities and NewEnergy to drive growth. Net interest expense was lower year-over-year, primarily due to lower debt balances. Net income was up 7 million.

Turning to slide 19. Wholesale competitive supply's realized contribution margin of 202 million, includes 88 million of backlog, and 114 million of new business. The 120 million increase from last year includes 67 million more backlog going into the first quarter of 2006 than we had going into 2005. Total new business originated and realized during the period was up 53 million driven by strong portfolio management and trading results.

Current period accounting results, of course, don't tell the full story of origination and its impact on the future. So, if you look at slide 20, this chart updates current and future new business versus the targets that we provided at the beginning of the year. You see that the commodities group originated new business with a gross margin value of 398 million in the first quarter, compared to 78 million in the first quarter of last year. In the box at the center of the page, you can see that we have originated 50% of the current year new business gross margin target, as compared to 22% in the prior year first quarter.

On the bottom line of the chart, you can see that; including origination of backlog to be realized in future years, we booked 48% of this year's target in the first quarter, compared to 15% last year. This level of new business origination is a demonstration of the fact that we have created a fundamentally more powerful platform to meet our growth objectives. For example, since the end of the first quarter last year, we have increased the number of full-time employees at the commodities group from 452 to 638. This has allowed us to continue to deliver solid quarterly results and make substantial progress towards building our backlog of earnings to support meeting future earnings commitments.

Now moving to slide 21. Of the first quarter's 171 million future gross margin origination, 83 million will be realized in 2007, and 33 million will be realized in 2008.

Turning to slide 22. NewEnergy continued to increase in scale serving over 15,000 peak megawatts of load, representing growth in load surge of 6% versus the end of the first quarter last year. And driving market share to 24%. NewEnergy's volume delivery was up 17% compared to the first quarter of last year. For the quarter, excluding the effects of economic non-qualifying hedges, total gross margin was 75 million, up 19% year-over-year. NewEnergy's first quarter performance was in line with the plan that we presented to you in January.

Turning to slide 23. Looking at NewEnergy's volume backlog as of the end of the first quarter, we had 59 million megawatt hours either delivered or contracted for 2006, which accounts for 80% of our target set out at the beginning of the year. And that's in line with the pace of last year. We also added to our future backlog. For 2007, we have 24 million megawatt hours contracted, which represents 26% of our 2007 plan, providing a solid foundation for 2007 earnings. For a comparison at this point in 2005, we similarly had 26% of the 2006 plan contracted.

Now moving to slide 24. As you can, see we're substantially hedged through 2008 with balance in our open power and fuel positions. Since the portfolio is highly hedged as to price risk, the accrual earnings represented by the competitive supply backlog that I shared with you provide significant visibility into our future periods' earnings.

We have also maintained a relative highly hedged posture with respect to our generation fleet. As to the unhedged position, we are fairly balanced. If the spread between power and fuel prices stays relatively constant, price changes will not materially change our outlook through 2008.

Turning to slide 25. While we have called out the impact of synfuels from adjusting earnings throughout the presentation, I want to provide you with the specifics around synfuel earnings. As you'll recall, we increased synfuel production at the South Carolina facility late last year. And that would drive a year-over-year increase in synfuel's net income if there were no tax credit phase-out. As you can see in the top box, net income from synfuels will be up 21 million from 62 million in '05 to 83 million in '06. As you see in the center box of the chart, market forwards and volatilities as of March 31, indicate that the expected value of the 2006 tax credit phase-out would be approximately 65 million.

Taking into account the benefit of reduced production expenses, the net impact of the phase-out would be 57 million or $0.32 reduction in the expected earnings from synfuels in 2006. Overall as of the end of the first quarter, our best projection was the 2006 synfuel earnings would be $0.14 or $0.20 lower than were realized in 2005.

Now, turning to slide 26. First quarter free cash flow, was a use of 756 million driven by the merchant. Capital spending net of D&A was a use of 137 million. We made a $100 million investment in an upstream gas property in Wyoming. As you'll recall, we told you in January that we were earmarking 250 million for upstream gas investments in 2006. And we made an attractive investment in the first quarter.

You see that working capital and other, were use of over 700 million. This was driven by a 500 million increase in net cash collateral posted, as well as some short-term investments by the commodities group in gas and emissions that will be realized by the end of the year. Unrealized mark to market gains and annual bonus payments, partially offset by favorable moves in deferred taxes and tax accruals.

As to the 500 million increase in net cash collateral posted, because we're highly hedged, the impacts of swings in commodity prices should be moderated from a near-term earnings perspective. On the other hand, changes in commodity prices can result in changes in working capital as we receive or post collateral against the in or out of the moneyness of an underlying position or hedge. In the first quarter, there was no fundamental change in the amount of collateral posted. We posted 500 million more cash collateral with exchanges and counterparties, which require cash collateral, but we reduced by 500 million the level of bank letters of credit posted to other counterparties. So net/net, Constellation Energy's liquidity position defined, as cash plus bank facilities, was unchanged.

Turning to slide 27. When you look at the balance sheet you will see that net debt is up in line with the first quarter use of cash. Also notable, is the decrease in our equity balance from 5.1 billion to 4.5 billion. This is a function of a negative 674 million change in accumulated other comprehensive income, or AOCI the majority of which was associated with our retail business.

Our power sales to customers are recognized in earnings. As we deliver power, the hedges we used to procure the power have to be mark to market through AOCI. As power prices declined in the first quarter, the marking to market of the hedges through AOCI was negative. This is an accounting consequence of maintaining economic neutrality with our highly hedged business model. Adjusting this out the way we think the rating agencies do, you see that our debt-to-capital increased by 3 percentage points in the quarter, driven primarily by the shift in our collateral posting from letters of credit to cash.

Turning to slide 28. Including a rage of outcomes for 2006 debt -to-capital, which depend upon working capital and collateral posted. If longer dated commodity prices stay at current levels, the same volume of business will require somewhat more cash working capital. If that's the case, our credit metrics will hover around year end 2005 levels rather than improve in 2006. Overall, our balance sheet and credit metrics continue to look very strong and will continue to strengthen in a stable price environment and with growing operating earnings and cash flows.

Here you see the mile post of year end 2001, which would have been the last balance sheet published when Moody's established our current Baa senior unsecured rating. We've also included year-end 2003, after which S&P established our BBB senior unsecured rating. Not only are our metrics stronger now, the deregulated business now has 18 quarters of solid, dependable performance under it's belt. No longer the nascent, unproven business model but a solid Fortune 125 Company with sizable liquidity reserves and a strong record.

Turning to slide 29. Let me wrap up by providing second quarter guidance. We expect adjusted second quarter earnings of $0.30 to $0.45 per share, compared to $0.59 per share in the second quarter of 2005. All excluding the impact of synfuel earnings. We project the merchant's adjusting earnings to range between $0.20 and $0.35 per share, compared to last year's second quarter earnings of $0.45 per share. Similar to the first quarter, mid-Atlantic fleet will be the primary driver of the decrease as we're still selling power to BGE residential customers under price free service until July 1, while the costs of generation; coal, oil, and emissions are up.

BTC revenues will also be down in the quarter. We expect BGE to deliver $0.08 to $0.13 per share. BGE will see some of the higher operating costs year-over-year that we discussed in January, partially offset by the benefits from the 2005 gas rate case. This concludes our prepared remarks. We'll now take your questions. Operator?

Thank you. Now we will begin the question and answer session. [OPERATOR INSTRUCTIONS] Our first question comes Mr. Greg Gordon with Citigroup.

Thank, good morning. I have got two questions actually. Going back to working capital balance sheet and cash flow issues, just to maybe sure I heard it correctly. The working capital that's up 726 million. You said 500 million of that will reverse by the end of the year.

I think about 400 -- or 400 of that will reverse by the end of the year, Greg.

Okay.

About 100 of it is associated with positions that aren't realized until future years.

400 will reverse. And you said that you reduced bank LOC's such that your liquidity position is unchanged but why are your counterparties demanding cash now as opposed to being comfortable with just relying on your bank lines.

It depends on the nature of the counterparty. Like take this example, Greg. Say we sold power to a load serving utility, where it's customary in bilateral contracts for collateral arrangements to allow us to post letters of credit. Alternatively, we might have hedged some of the load contract with say a purchase of power with a NYMAX cleared contract. NYMAX generally requires cash. So if prices fell, as they did out the curve in the first quarter, we would have offsetting economic gains right on the position I just described. And yet, with the utility we would take back letters of credit but we would be posting cash with a NYMAX. So, it really just depends on the nature of the counterparty, as to whether or not our arrangements allow them to accept cash -- accept LC's or just cash.

So, you are saying that your counterparties are not demanding cash instead of lines of credit. That this is just a function of the --

No. This is just the nature of the counterparty.

All right. The other question was on the equity balance being down, you said that that was associated with retail. Does that also reverse over time as those business -- as those contracts are -- works through and over what period does that reverse?

We have not assumed any of it reverses by year end.

Okay. And is that because those contracts are longer dated?

Well, we take it out of the calculation, Greg, so it's neutral to the debt-to-capital calculations presented.

Okay. And then can you repeat about what -- repeat what you said about why your credit targets have -- are now to be flat with prior year versus the improvement that you laid out at the end of January?

Yes. Here's the reason that they are going to be flat at the year versus we have said they would be -- debt-to-capital, for example, we have said would improve from, as you are looking at chart 28. At the end of January, we would have told you that debt-to-capital would have improved from the 43.7% at year end '05 to about 42% at year end '06. It's combination of the collateral they I just described that doesn't unwind in the current calendar year. It's a combination of the $100 million that will be on our balance sheet associated with the rate plan. We have assumed that the current proposed rate plan to the PSC does get implemented and that adds temporary debt to the balance sheet. And it's due to somewhat higher unrealized mark to market earnings.

Okay so a big component of that is the deferral associated with collateral?

Exactly, collateral deferrals. It's timing issues. Right?

Okay. And then the second question, the procedural schedules for the approval of the deferral plan, you said you could expect a decision any day, but we don't have a specific schedule. Is that correct?

We don' t -- we have a request that it be May 1. So it possibly just days away. And that is our anticipation that we would fining out either today or sometime next week.

And then on the merger approval schedule, one of my associates just dropped on my desk an updated schedule. It looks like the brief -- reply briefs are now due out on August 21, not September 20, so they've have expedited the merger schedule. Is that correct?

Yes, with a couple of moving parts. Yes, overall the schedule has been somewhat expedited but we would still not expect a decision until the latter part of September.

Okay. Thanks, guys.

Thank you.

Our next question comes from Mr. Dan Eggers with Credit Suisse, your line is open.

I'll avoid most of the M&A questions. There should be other people here to ask those today. Are you -- question number one, have you guys seen any slow down along the lines of deal flow where people are willing to sign up contracts given a little bit of the uncertainty around the deal and market speculation?

Felix?

Yes, Dan, this is Felix. The basic answer is, no. Certainly there's a lot of interest in the transaction so there's open dialogue with our customers about it. But we have not seen it adversely impact our commercial, As our Q1 result indicate.

And Dan, we're going to have Tom Brady comment on NewEnergy.

Dan, good morning. But we have seen a very strong sales quarter for Q1 at NewEnergy. Probably, we sold 26 million megawatt hours, contracted 26 million megawatt hours this year in the first quarter versus less than half of that last year, so we have seen no slow down whatsoever.

Okay. Great. Mayo, maybe you can comment on a little bit on how you guys are thinking about pursuing the strategic acquisition activities, that sort of thing? Given where the merger stands right now, as far as looking at generation sales upcoming, say Palisades or the PSE&E plants and how you guys plan to participate? Whether it be FPL on a joint venture, independently, or do you plan to sit out at this point?

Yes, Dan, the merger agreement has certain constraints on CapEx and investments and that sort. And we anticipated in the merger agreement the types of things that we expected to do in 2006 particularly off of the commodities group platform. And as Follin mentioned earlier, the gas investments that are expected this year. We did not in that context expect that we would be active in big plant acquisitions. With the expectation that we would discuss those with FPl. But in all likelihood, that FPL would be still in that game while we were waiting for the merger to close. So, we are going about our business in the normal coarse and are not active right now on the generation acquisition side.

Okay. Can you give a little more color around -- in the commodities group how much contribution you guys had from the natural gas business in the quarter? And then how much you had from portfolio management operations?

Dan, this is George. Portfolio management and trading for Q1 was 97 million and I think last year Q1 it was about 55. So, Q1 last year versus Q1 this year, you saw an uptick in that business. But that comes commensurate with the growing size of the backlog. As the backlog grows and as we do more customer business, the portfolio grows in size and scope and across different commodities. So I think the uptick that business is a sort of logical extension of the customer business model that we have been building over the last 18 months.

And this is Felix. As it relates to gas, not the traded portion of it but our upstream and downstream new businesses; the backlog, we didn't give quarter by quarter guidance. But I'll say this that it's -- the business volume has continued to grow in both of those. And our outlook for the balance of the year remains strong. So, we feel pretty confident that the numbers we gave you at the January timeframe are highly achievable.

And just one last question. What is the trailing 12-month ROE at BGE?

I have got to pull that up. Give me a couple of minutes, Greg, and I'll come back to you.

Thank you.

Thank your our next question comes from Mr. Steve Fleishman with Merrill Lynch.

A couple of questions, first on the competitive supply results. In terms of the improvement versus guidance, was that all at the portfolio management line essentially? Did the backlog stuff flow through as expected, or did that end up being different?

Steve, it's George. The definition of portfolio management and trading is variance to the beginning of the year plan for the portfolio as well as associated trading results. So it's a combination of both variances to achieving the backlog as well as our trading result. But I think in terms of performance, everything in that business portfolio management and trading performed certainly better than expected in Q1.

Okay. Just maybe to add more color, is there any particular part of the business power or gas, coal that's kind of sticking out as doing better or worse than -- or better that grows this.

I would say on balance the 97 million -- the power component is the largest component. As you might expect, Our power business is sort of our longest standing, longest running business. But the gas and coal businesses are growing. So, we would expect PM&T results from those segments to continue to uptick as those businesses grow.

Okay.

And Steve just to answer the first quarter of your question. Backlog was exactly as anticipated.

Okay. And then on some of the credit metrics and such, have your cash flow to debt matrix changed much over this quarter versus what you thought? And just kind of on the same lines, you mentioned that the metrics are still better than what you sold the rating agencies. But in updating these numbers to the rating agencies, have they communicated to you any issues?

We haven't walked them through the collateral swings in the first quarter. As you know, Steve, they take into account both cash and available bank facilities when they think about liquidity? Right? And we're exactly where we should be in terms of available liquidity to accommodate our business. So, I don't expect that that's going to be an issue with them.

Okay. You mentioned somewhere mark to market earnings are now bigger for the year than expected. Could you just explain that? I thought I heard.

With the success of portfolio management and trading in the first quarter, a component of -- that's when I was commenting on working capital for the year. A component of that will not be realized in the quarter -- may not be realized in the year, excuse me.

And then one just last question on Maryland. There's still come people pushing for the Legislature to come back for a special session to address some of these issues. Just what is your latest thoughts on whether that is going to happen?

I would say it's a bit of a toss up. We have -- our first order of business is the PSC review and then approval of the rate stabilization plan. And I suspect that will continue to get a lot of political attention for a while. As time elapses after that decision, if the acceptance of that plan begins to digest with Legislatures, I think we'll probably not have a special session. There's clear indication when we announced the plan with the Governor that we had a reasonable amount of support, particularly from the House. And so, our view is wait and see. I doubt whether there would be a special session without some kind of prearranged agreement. I think the worst case for everyone, particularly for the Legislatures is going into a session without any framework for an agreement.

As you know we got very close last time with almost universal acceptance in the House. And what I would describe as a snag on the Senate side. But it died at the tail end and really the worst penalty of all of that was the failure to put the securitization ability in place. That's really the down side. And in fact, really the only fundamental difference in our capabilities with respect to the new rate plan designed relative to the one that was put through the House and almost put through the Senate. So yes, it has to be an opt-in plan because of the balance sheet requirements but besides that, it's actually quite similar.

Okay. Thank you very much.

Thank you. Our next question comes from Mr. Michael Goldenberg with Luminous Management. Your line is open.

Good morning, guys. I had a follow-up on legislation. Is there a particular drop dead date beyond which it's unseasonable for legislation -- for Legislature to call it's own back into session?

No. Only -- we do have an election this year, so the limitations on -- the biggest limitation on calling a special session is that it puts them out of the business of raising money. And in an election year, that's tough. They have gone back to the business of running for office. And to the extent they come back into session, it puts a hiatus on that process. So -- and that certainly wouldn't keep them from doing it but certainly it's a deterrent. After the election -- the awkwardness in an election year is that it's estimated that about 30% of the members actually turn over. So you would have a third of the delegation not having the history o the issue at all. And -- but conceivably, nonetheless I think they can call a special session during that period of time. They did in fact call a special session last December related to medical malpractice type issues.

Did they call themselves in or the Governor called them in?

They called themselves in.

Okay.

I-- this is Tom Brady. And I would -- just on the special session, I would add that you actually need over 50% of the delegates and the senators, so 50% of each chamber to petition for a special session. And keep in mind that there are a lot of delegates and senators from the eastern shore of Maryland, and the western Maryland areas that are probably a little bet less interested in this issue. As time goes on, the probability of getting that urgent need of having 50% agree it to probably decreases a little bit, especially as you move into the summer.

Got it . And my other question had to with your relationship with FPL. Throughout all of this, FPL has been pretty quiet on -- and hasn't made any comments as to the effects of all of this on your planned merger. Can you give us any color, sense, or idea as to the types of discussions you have with FPL. If there's anything we can or should expect, as they need dates that we should be looking out for that would help us pay attention to the progress of the merger?

Well, I think what I would say if this is the essence of your question. They have been terrific partners through this whole process. Obviously, they understand that this is a Maryland issue. And it's to some degree our problem. But they have been very helpful, very cooperative and have offered a number of ideas us to as we have gone through the process. And I think they have appropriately probably not wanted to say a lot more than that. But I think all of us have been very pleased with the type of help and their attitude about dealing with what was a complicated situation during the legislation and continues to hopefully resolve itself here in the next month or so.

But as an investor sitting on the outside, are there any dates or things in the pipeline or processes that you could point us to that we should be on the lookout for to keep track of the progress?

Well, I think the two dates that we alluded to earlier. One is simply within the next week, we get the PSC order presumably on the rate stabilization plan. And the other date or series of dates really relate to staying on schedule with the PSC review process. That's -- we are in the middle of that. We know hearing schedules and so forth. And so following that process along, which we'll certainly try to convey to people an understanding of is obviously important. But it looks now like we could conceivably get an order late September based on what we know now.

Have the shareholder votes been scheduled yet?

No, that's not on the critical path because we wanted to get the rate stabilization plan and a better understanding of the Maryland outcome before we filed. But we could conceivably, once we do have that in the near-term file the S-4. And that would not be on the critical path for overall closing.

Thank you very much, good luck.

Thank you our next question comes from Mr. Paul Patterson with Glenrock Associates. Your line is open.

Just a few clarifying questions. What was the mark to market impact for the quarter?

It was 98 million pre-tax.

And that's unrealized?

Yes.

Okay. And would the AOCI question, usually --?

Paul, let me me clarify that answer to say that, we had in the quarter -- hang on let me flip to my statistics. We had unrealized gains, which were non-cash. Right? And unrealized losses against which we posted collateral, is how this filters through the income statement. And if you want, I can sit down with you with the balance sheet and show you how to track it through.

Okay. But 98 million pre-tax was what the impact was on the quarter?

The income statement, yes.

And that excludes the non-qualifying hedges?

Correct. No. No. No. That includes the non-qualifying hedges.

Okay. And then the AOCI that often comes back into the income statement over time?

Yes. What happens is the -- you will have the accrual load serving positions come into earnings. They are nowhere on the balance sheet now. Right? And then you will have the offsetting power purchase positions, which are what being marked through AOCI, coming through in future periods too.

Okay. So, they'll all set each other --?

With the net impact should being that our earnings should be as we projected and as we expected when we entered into these contracts because we were hedged.

And then with respect to -- what again -- I'm to sorry to a -- if you could just elaborate a little bit, what exactly drove the AOCI to go up so much in the quarter?

We have short power positions by virtue of our load serving positions on retail. This was mostly a retail story. Right?

Right.

On the other hand we have offsetting -- and those are not anywhere mark -- they are accrual accounting positions and nowhere on your books are they mark to market. On the other hand, the purchases of power that are the -- we are setting up as the hedges, are required to be mark to market through AOCI. And then they are unwound out of AOCI as the power is delivered. So you see why this creates a mismatch in your accounting. Right? The thing's being hedged is nowhere on your books but the power purchased is being mark to market. So, you've got a differential accounting treatment on your balance sheet.

It just seemed like a big swing. And I was just wondering if there was any particularly, market activity or something that had caused that?

Power prices came down from 12.31 to 3.31.

Okay.

Especially at the short end ,which the new energy contracts are generally 18 months duration and less.

And then the cash collateral versus the LOC. Basically, this is basically because of transactions that you guys engaged in and your counterparties' traditional desire for -- those counterparties' traditional desire for cash versus any concern on their part --?

There's no change in what is happening with any individual counterparty. It's just, that it just so happened that the positions that we have with counterparties who require cash collateral postings, such as NYMAX. For example, the big -- lots of big trading counterparties have, as a requirement, they only accept cash collateral. They don't accept LC's. On the other hand, lots of our bilateral contracts with other power generators, allow us to post LC's. Or with utilities, allow us to post LC's. And the shift was such -- the shift in the mark to market from those various positions was such that we had to post more cash and we brought back in LC's. So, that net/net when you look at our liquidity, you're looking at what are unused back facilities and what are our cash balances, it was unchanged.

I follow you. The 90 million, just back to the mark to market, over what period of time was that realized? You can get back to me if you don't have it immediately.

I would have to get back to the patterns, it's mostly through OA.

Thanks a lot, guys.

Thank you, our next question comes from Mr. David Frank with Peacock Capital. Your line is open.

Hi, good morning. Follin, I was wondering, were there -- in the last year in the first quarter you had one contract monetization that you specifically highlighted. Was there anything large or material as far as your portfolio management that stuck out this year?

No, there was no one big transaction.

Okay. And do you include the load that you serve under the BGS auctions as part of your origination at competitive supply?

Yes.

And would the year -- I would assume there was a year-over-year step up in the auction prices. Is that what helped to generate some of the growth year-over-year?

This is Felix. The basic answer is No. The prices in the BGS auction, of which we were awarded a portion of, were definitely higher, but due to the way we manage our overall generation of load position, it didn't translate in -- directly into wider margins.

Okay. I'm sorry, is it possible just to elaborate a little on -- I'm a little confused on that.

The margins in -- overall in the Q1 load business were pretty much in line with plan and in line with historical margins. So, there was no significant increase in the level of margins we saw in our load business in Q1 this year versus Q1 last year.

So, it was really more just a function of higher volumes?

Higher volume across all of the -- all of our power -- or all of our origination businesses, not necessarily just with respect to BGS load but just higher level of commercial activity.

Okay. And last question was do you measure your hedge position strictly against your physical generation, or does that also count against contracts that you may have entered into?

Yes. That's the total portfolio, so it's physical and contractual assets, not just our power plants.

Okay. Great. Thanks a lot.

Our next question comes from Mr. Paul Fremont with Jefferies. Your line is open.

Thank you very much. It sort of looks to me for '06 that you have lowered guidance by about $0.15 and for '07 by about $0.20. And initially, in your January conference call you had talked about offsetting long oil correlated positions that were expected to offset the synfuel phase-out as you documented on slide 74 of your year end presentation. What has changed since the January presentation? Is the level of synfuel phase-out greater than what you had been anticipating in January? And therefore, the long oil correlated positions are sort of not offsetting to the level that you had originally anticipated?

Yes, this is Follin. So, first let me address the issue of; Are we taking down guidance? If you look at page 10, you can see that our guidance excluding synfuel earnings has not changed at all. What has changed is synfuel earnings, as you rightly point out. What we told you in January -- and we spent a lot of time with January telling you we were calling this out because it could be really volatile depending on what happens to the phase-out.

Now, we said if the thing that causes the phase-out happens, and that is rising oil prices, that is likely a good thing for Constellation Energy. And we pointed you to a number of oil correlated positions that are on our books. Quite specifically, things like fuel adjustment clauses. Things like long oil liquid -- long gas liquids positions that are a part of our gas business. But we also said that if oil prices go up, that means energy prices are going up. And it likely means that it's a good thing for the value of this base-load fleet over the long haul.

Now, all of these good things that I just described are thing that will be recognized in accrual earnings over time. They are not things that are market to market in the current period. So, we explained that there was likely to be a disconnect if oil prices went up. Such that we would suffer from the phase-out in '06 and '07. But over the very long haul, the other things would be gains in our outlook.

So, when we look at -- what we were talking about as of year end versus now, we were projecting, based on 12.15 prices, we built our business plan assuming there would be an 18% phase-out of synfuel tax credit. If you look at forwards and volatilities and we use a 10,000 trial statistic model to convert that into an expected WTI and then assume a spread to get to EIA. March 31 prices could have assumed a 46% phase-out. And that is what is included and driving the current projection of synfuel EPS on the 2006 EPS projection. Does that help? And this thing -- the synfuel --.

What I I'm trying to figure out is if I look at slide 74 from the year end presentation, it looked like you were anticipating a synfuel phase-out pre-tax equivalent of 38 million. If I compare that to the 65 million on slide 25 of your first quarter presentation, the difference worked out to be roughly the $0.15 that you seem to be sort of losing out of your earnings this year. Is that sort of a reasonable way to look at it?

Precisely if you look at page 10, you can see that we included in our guidance on January 31, $0.31 of net synfuel earnings after phase-out. And our current projection for synfuel EPS is $0.14, such that there's a $0.17 change in synfuel earnings in our projections.

Thank you very much.

Mr. Ashar Khan with SAC Capital, your line is open.

Good morning. Congrats on your results. Can you just tell us when you expect FERC approval on the merger? What is the timing on that proceeding?

This is Irving Yoskowitz. We believe that will be -- we're shooting for August.

August. Okay. In August, FERC doesn't have a meeting, so should we assume that it would go to the September meeting?

Just one minute. John?

This is John Collins, There is no absolute set time schedule for FERC approval. Other than that they have a certain -- depending on how the data requests come back and forth. But you are right there is no August meeting for FERC, so if it's not dealt with in the July meeting, then we would expect it to happen in September.

Thank you. Shalini Mahajan with UBS your line is open.

Thank you. I had a question on 2008 guidance, about items of $5.25 to $5.75. It's a pretty wide range given that you guys are substantially hedged on your portfolio for 2008 and there's a lot of visibility on your productivity. Could you give some color behind that?

Well, it's two years away, so to us a $0.50 range seems appropriate to include. We developed the projections on a very conservative basis. You'll see there's about $1 increase if you look at the midpoint of '07 to the midpoint of '08. And the vast majority of that is a continuation of the move of our fleet's gross margin to current market prices.

Okay. And then one question on the Healthy Air Act Mayo mentioned in his comments earlier. I just wanted to confirm the environmental CapEx that you guys had outlined in your January, does remain the same or does that go up?

I'm sorry I did not understand the question.

The environmental CapEx have changed.

No let me talk to you about the -- do you want to quickly give a summary on the Healthy Air Act and what the impact is on our capital projections? In January we told you that we had about 740 million of capital through 2010. And that comprehended scrubbing our largest and most profitable coal plant in Maryland.

The new news out of the Healthy Air Act was what they called phase 2 emission reduction requirements, which become effective in 2012 of NOX, 2013 for SO2. And that would have implications for our smaller, less profitable coal plants in Maryland, that's Wagner and Crane. There are a number of ways we would deal with this. We would add additional control equipment. We could switch to low sulfur coals, or in extreme cases we could consider closing Wagner or Crane. So the cost of what we will do here is bounded on the down side with the option to shut down one of more of the units.

If we did decide to shut them down for economy reasons, of course, we would need to work with the PJM to determine if any of those units are deemed to be reliability must run, which the would allow us to operate the system at cost with an allowed rate of return for those plants. We don't need to make a determination on how we will ultimately respond to that phase 2 in the next decade until probably around 2008.

Okay. And then one last question on the wholesale competitive supply business, looking on slide 19, the new business originated in current -- in the first quarter of 17 million is trailing below what you guys had achieved last year. Could you speak to that and also kind of remind me what your origination goals are for this year?

All right. As far as the comparison and the 25 million difference between Q1 last year and Q1 of this year goes. As we have discussed on a couple of occasions, we are doing more transactions and originations that are focus on building the backlog. And as a result, you'll see less origination hitting the result within the current quarter and a continual build of the backlog. The -- I need to quickly check back on the results of Q1 of last year to see if there was any specific event that -- okay. Yes, there was. There was a specific transaction which we discussed at the end of Q1 of last year that would have driven that number higher.

Okay. And what is your origination target for 2006?

Page -- those are detailed on page 20.

Okay.

So, you see that our total origination target, including what is to be originated and realized this year and what is to be added to the backlog is 824 million for the year. And the group has done a little less than half of that so far in the first quarter.

Okay. And just one last question if I may. The retention rate for NewEnergy at 68%, how does that compare -- has that come down a bit?

This is Tom Brady. It might be just down 1% or so. But we're continuing to hit in around the 70% number on just about any type of measure you look at, quarter by quarter or 12-month trailing. So, we really haven't seen any change at all in the retention rates.

Before we close off I just want to make sure we come back and answer the question about BGE's ROE. And Ken DeFontes, I think has an answer.

Yes, good morning. For the 12 months ended March 31, '06 BGE's book ROE was 10.6% and our return on invested capital was 7.3%.

Thank you, Ken. Thank you all for joining us this morning and we will look forward to seeing you next quarter.