艾索倫電力 (EXC) 2007 Q3 法說會逐字稿

Good morning, and welcome to Constellation Energy's third quarter 2007 earnings call. At this time all participants are in a listen-only mode. During the question and answer session (OPERATOR INSTRUCTIONS). Today's conference is being recorded and if you have any objections you may disconnect at this time.

I will now turn the meeting over to the Vice President of Investor Relations for Constellation Energy, Mr. Kevin Hadlock. Sir, you may begin.

Thank you, and good morning, everyone. Welcome to our third quarter 2007 earnings call. Thanks for joining us today. Before we begin our presentation, let me remind you that our comments today will include forward-looking statements which are subject to certain risks and uncertainties.

For a complete discussion of these risks, we encourage you to read our documents on file with the 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. We'll 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. With that, I would like to turn the time over to Mayo Shattuck, Chairman, President and CEO of Constellation Energy.

Thank you, Kevin. Good morning, everyone. I will apologize if you hear two raspy voices this morning, but I will try to get through this. We're pleased to announce another solid performance in the third quarter of 2007. We recorded adjusted earnings of $1.45 per share in the middle of our guidance range of $1.35 to $1.55 per share and we remain on track to achieve our 2007 earnings projections.

Now turning to slide five, in the third quarter, we continue to move forward on several key strategic objectives. This morning we announced our board of directors has authorized a $1 billion share repurchase program which is expected to be executed over the next 24 months. Further we are executing on $250 million of the program through an accelerated share repurchase agreement. This announcement illustrates continued confidence in our bright future. Given our strong financial profile, we believe this is the right time to execute a share repurchase program. We also believe this program represents the most efficient return on excess capital to our shareholders while maintaining flexibility to opportunistically pursue higher, value added strategic investments.

As you'll recall, in August, we shared with you the details of the new alignment within the merchant organization. We continue to make progress on the integration and have announced key leadership roles and responsibilities. We have also begun to implement specific high impact initiatives within the organization. Also, we're making steady progress on our new nuclear initiatives. We closed the UniStar Nuclear Energy joint venture with EDF in August. Recently a revised federal loan guarantee program was announced, a watershed event that provides more clarity on the financing necessary for new nuclear development.

Looking forward, AREVA is preparing to file the design certification for the USEPR by year end, and through UniStar, we expect to complete the combined license application, or COLA, for the proposed Calvert Cliffs Unit 3 in early 2008. We're also making progress on a similar COLA filing for a potential new nuclear plant at our Nine Mile Point facility in upstate New York. Last week, BGE filed aggressive demand response in conservation programs with the Maryland Public Service Commission. These programs are an important step forward to encourage customers to manage their electricity usage and to help Maryland meet its reliability and conservation objectives.

Turning to slide six, let me spend a minute to update you on current events in Maryland. On June 1st of this year, BGE's residential customers effectively transitioned to market rates which are equal or slightly lower than the rates of neighboring Maryland utilities. Discussions in Maryland have moved beyond BGE rates and are now focused on energy policy and the optimal long-term market structure. The PSC is fashioning a preliminary report to the Maryland legislature as required by Maryland senate bill 400 which was passed earlier this year. The preliminary report due in December will address the status of electric restructuring in Maryland and review issues such as the BGE stranded cost settlement, energy efficiency recommendations, municipal opt-out aggregation and other retail choice issues.

In addition, the PSC is exploring alternatives to the current wholesale power procurement process. This inquiry is focused on the possible switch to a portfolio management approach which would use a combination of spot market purchases, long-term power purchase agreements and utility construction or acquisition of generation. We see that the broader energy policy discussion is increasingly focused on the convergence of energy issues with environmental goals including support for renewable technologies, energy efficiency and conservation. This convergence must, of course, be balanced with the need to maintain adequate generation supply in transmission infrastructure. This is a good trend.

As we've mentioned previously, we're focused on opportunities for us to revive or expand generation capacity and to pursue the BGE Smart Energy Savers programs more aggressively. As you are probably aware, the Maryland legislature convened a special session this week to address the projected state budget deficit. We expect the state will entertain proposals to increase property taxes paid by generators and raise state income taxes for corporations in the state. We're actively engaged with the legislative leadership to ensure everyone understands the need for fair tax treatment for businesses, especially for generators operating in competitive markets.

Turning to slide seven, industry fundamentals continue to be supportive of our long-term growth story. The chart on the left shows forward power and natural gas prices at the end of last December and at the end of September. While gas spot prices have fallen in recent months in response to high storage volumes, long-term prices remain robust, providing support for future power prices. A chart on the right shows the auction clearing prices for Southwest MAAC capacity for the next three planning years. These results are encouraging investment in capacity, transmission and demand response initiatives which will help meet the reliability needs of customers in the Baltimore/Washington area. However, due to long lead times for these investments to make a meaningful contribution, capacity margins are likely to continue to tighten before we begin to see sufficient development of new generation.

Turning to slide eight, while some may be waiting for new plants to be built to indicate the capacity markets are working, companies are responding in meaningful ways to the new price signals and are investing in reliability programs. Constellation is making reliability investments that we would not be making without the capacity market frameworks operating in the New York power pool and PJM. Based on the recent capacity clearing prices in the PJM, we're focusing on projects where we have significant cost advantages over new generation. We're planning to rejuvenate 178 megawatts of retired generation assets in Maryland. In addition, we're making further investments to extend the lives and improve the reliability and operational flexibility of about 700 megawatts of older Maryland plants that might otherwise have been retired. Effectively, we're increasing capacity in Southwest MAAC by almost 900 megawatts that would have been retired without the RPM framework.

In the New York power pool, we're investing in 150 megawatt uprate at our Nine Mile Point nuclear plant that's expected to come on line in 2010. We're beginning to see energy and capacity prices approach levels that encourage new build. Over the past several years, rising construction and materials costs have increased the energy and capacity prices required for generators to achieve a sufficient return. We continue to make steady progress in our feasibility study for building up to 520 megawatts of new gas-fired generation capacity at existing or permanent sites. Longer term, we see a significant opportunity in the option to build new nuclear plants in PJM and New York.

We're also moving forward with investments in reliability of BGE, where we filed plans for demand response and energy efficiency programs with the Maryland Public Service Commission last week. These two programs could require up to $320 million of capital investments over the next five years and create as much as 600 megawatts of available demand response. We're currently in the pilot phase for an advanced metering program, which would provide our customers with the tools and incentives to better understand and manage their energy usage. We expect to file for full project implementation for advanced metering to the commission in late 2008 following completion of the pilot program.

Turning to slide nine, I will wrap up with our 2007 to 2009 outlook, a slide that you've seen before. We're raising the bottom end of our 2007 guidance for a new range of $4.45 to $4.65 per share. While we're in the midst of our five-year planning process, we remain confident that our 2008 earnings level will be in the mid-to-high end of our $5.25 to $5.75 per share guidance range. Looking out further to 2009, we expect earnings growth of more than 10% over 2008. Beyond 2009, we believe the underlying fundamentals in the energy markets have positive implications for longer-term growth. We plan to share more detailed plans and update our guidance when we see you in New York in January. Now, I would like to turn the presentation over to John to cover the financials in more detail.

Thank you, Mayo. Good morning, everyone. Let's begin on slide 11. For the third quarter, our adjusted earnings were $1.45 per share in the middle of our guidance range of $1.35 to $1.55 per share. GAAP earnings were $1.38 per share

Let me walk you through the adjustments to GAAP in the third quarter of 2007. We had a $0.01 gain related to special items driven primarily by tax-related adjustments associated with the sale of High Desert which was accounted for as discontinued operations. We had a $0.01 gain on economic, nonqualifying hedges, associated with gas storage which we subtract from GAAP earnings. Lastly, synfuel earnings was a $0.09 loss in the quarter due to an increase in tax credits expected to be phased out. Forward prices at the end of the third quarter indicate that approximately 54% of tax credits would be phased out versus an expectation of 29% at the end of the second quarter. As you'll recall, we break out synfuel earnings separately since the synfuel tax credit program expires at the end of this year and the fact that synfuel earnings vary with oil prices.

Turning to slide 12. Looking at our segment performance in the third quarter compared to last year, the merchant was up $0.07, the utility down $0.06, and other nonregulated down $0.02. Overall, adjusted earnings were down $0.01 per share. Moving to slide 13. BGE earned $0.14 per share in the quarter, down $0.06 from the third quarter of 2006. These results were driven by credits to residential customers required by senate bill one and higher operations and maintenance costs, partially offset by higher electric transmission and demand response revenues. BGE's trailing 12-month regulated return on equity for gas and electric distribution, adjusted for weather, is 7.5%. This is well below the rates of return observed around the country in recent rate case decisions. BGE has been investing heavily in infrastructure and programs in support of reliability and customer growth and plans to continue this pattern of investment in the future. Combining the current rate of return with increased capital being invested in both our electric and gas distribution businesses, as we previously discussed, we expect to file a distribution rate case with the Maryland Public Service Commission during 2008.

Turning to slide 14 and a review of the merchant segment's performance. The merchant segment's adjusted earnings were $1.31 per share. Compared to the third quarter of last year, the merchant segment was up $0.07 per share. Wholesale competitive supply increased $0.13 per share due to the higher backlog realization and new business partially offset by higher operating expenses. Our retail competitive supply businesses, NewEnergy Electric and NewEnergy Gas were down $0.05 per share. NewEnergy Electric had a strong third quarter, up $0.05 per share driven by higher realized margins. NewEnergy Gas was down $0.10 per share, primarily due to mark to market losses related to economic hedges of accrual transactions. Year-to-date, retail competitive supply earnings, excluding mark to market are ahead of last year's pace. There are a number of small items which result in a net decrease of $0.01 per share. These include unplanned plant outages in the third quarter that impacted fossil reliability and the loss of earnings from the national gas plants which were sold in December 2006, partially offset by lower interest expense.

Turning to slide 15. As you can see in the column on the left, during the quarter, wholesale competitive supply recognized contribution margin of $346 million including realization of $80 million of backlog and $266 million of new business. Backlog, realization in the third quarter was up $28 million versus the same period last year, an increase of 54%. New business in the third quarter was $41 million higher versus last year's third quarter driven primarily by an increase in portfolio management and trading of $53 million. Turning to slide 16. This chart gives you the full picture of wholesale competitive supply performance because it shows the earnings added to the backlog during the quarter. On the total originated line in the center of the chart, you see that the commodities group originated new business contribution margin of $427 million in the third quarter compared to $322 million for the same period last year.

Looking at the components, we originated $207 million of business to be realized this year versus $180 million in last year's third quarter. We also originated $220 million to be realized in future years versus $142 million in last year's third quarter. For the first three quarters of 2007, we have originated new business contribution margin of over $1.2 billion compared to $1 billion for the first three quarters of last year. While we have made significant progress toward our full-year origination objectives for contribution margin, we're also experiencing higher growth-related costs. In addition, we're planning to take an outage at Nine Mile Point to perform maintenance during the fourth quarter. We will also take this opportunity to repair a jet pump which was previously scheduled to occur in the spring refueling outage. We estimate the outage will last 16 days.

Moving to slide 17. This chart provides an update of the backlog we've created this year in our wholesale competitive supply portfolio. Of the $787 million of future contribution margin originated in the first three quarters of 2007, we have added $160 million to the 2008 backlog and $151 million to the 2009 backlog. Wholesale competitive supply continues to perform well and the future year's backlog provides a highly visible stream of future earnings, already originated as a solid base from which to build.

Turning to slide 18. At NewEnergy Electric, we have 72 million megawatt hours either delivered or contracts for 2007. This accounts for about 86% of the full year target and is in line with last year's pace. Retention rates were 86% in the third quarter, an increase from 81% in the third quarter of 2006. Volumes for 2007 are tracking below plan for the year, but the gross margin impact of lower volumes has been more than offset by higher realized margins. We're also working to add future backlog. We currently have 44 million megawatt hours contracted for 2008, providing a solid foundation for next year.

Turning to slide 19. Free cash flow for the quarter was negative $341 million. Capital spending was a use of $436 million and was consistent with our expectations for the quarter. Working capital was a use of $165 million, primarily driven by collateral posting requirements with exchanges. During the third quarter, we completed the acquisition of Cornerstone which is a complimentary acquisition to our NewEnergy Gas business and further expands our geographic footprint in the Midwest. The cash paid of approximately $100 million is reflected in the acquisitions, dispositions, contract restructuring line along with the amortization of acquired contracts, including the progress ventures contract assumed this year. You'll also note that the transition of BGE's residential customers to full market prices effective June 1, we have begun collecting for the recovery of the rate deferrals agreed to last year in Maryland senate bill one.

Turning to slide 20. The balance sheet and associated credit metrics continue to be very strong. Total debt outstanding has remained constant at $4.9 billion, with the issuance of the $623 million of rate stabilization bonds, offset by the maturity of $600 million of debt in the second quarter. While shown on the balance sheet, the rating agencies generally exclude this securitized debt from utilities credit metrics. Our net debt to total capital at the end of the third quarter was 32%. For the full year, our funds flow from operations to debt is expected to be at 34%.

Turning to slide 21. Given our strong balance sheet and liquidity position, we have announced a $1 billion share repurchase program that we expect to execute over the next 24 months. We are executing on the initial $250 million of this program through an accelerated share repurchase agreement. The decision to approve a share repurchase program is a strong indication of our continued confidence in the outlook for the company. We believe it represents a significant return on capital opportunity. It is, of course, immediately accretive and we believe it is an efficient use of our cash balances. In terms of managing the program, we plan to move incrementally over the next 24 months to preserve our flexibility if needed to fund strategic investments. We view the repurchase of stock as an alternative that will be evaluated alongside other investment opportunities.

Turning to slide 22. This chart shows our updated capacity hedge percentages for the combined New York and PJM regions. As with energy, we've sold capacity to load serving customers and bought capacity from numerous generators over the last several years. Together with our owned generation, which accounts for about three million megawatt days of capacity, we have a large portfolio of capacity positions throughout New York and PJM. Given competitive dynamics, we do not provide the details of our positions in each location. In mid October, PJM released the 2009/2010 planning year auction results. Compared to the price levels we saw in July for the 2008/2009 planning year, clearing prices increased in Southwest and Eastern MAAC and decreased for rest of pool. The October auction was also the first time MAAC plus APS was included as a separate region. As of the end of September, our hedge ratios on our total capacity position in New York and PJM were 86% in 2008 and 43% in 2009, consistent with the ratios we provided last quarter.

As Mayo discussed in his section, these results are encouraging investment in reliability, but it may be some time before any additions can create meaningful downward pressure on capacity prices. In order for Constellation Energy to fully realize the higher capacity revenues and to avoid costs associated with not meeting established availability requirements for generation assets bid and accepted into the RPM auctions, we plan to make significant investments to ensure continued reliability of our generation assets. We'll provide more details in our January presentation.

Let's turn to slide 23 and wrap up with fourth quarter guidance. We expect fourth quarter earnings to be $1.35 per share to $1.55 per share, compared to adjusted earnings of $1.08 per share in the fourth quarter of last year. In merchant, we're projecting earnings of $1.15 to $1.35 per share versus $0.88 per share of adjusted earnings in the fourth quarter last year. We expect these results to be driven primarily by favorable wholesale competitive supply backlog and new business. Higher retail competitive supply gross margin, favorable fleet costs and lower interest expense. These positives will be partially offset by the Nine Mile Point outage mentioned earlier. We expect BGE to earn $0.18 to $0.22 per share in the fourth quarter compared to the $0.18 per share of adjusted earnings earned in the fourth quarter last year. The primary drivers are: return to normal weather compared to a mild fourth quarter of 2006, higher demand response, transmission and gas revenues, partially offset by credits to residential customers required by Maryland's senate bill one. That concludes our prepared remarks. We'll now take your questions.

Thank you. (OPERATOR INSTRUCTIONS) The first question this morning is from Dan Eggers of Credit Suisse.

Hey. Good morning.

Hi, Dan.

Touching back on what's going on in Maryland, with a draft proposal expected in December, can you just walk us through how you see the process evolving from a preliminary proposal to an implementation of policy both from a timing and when we'll have absolute clarity on how this all works out?

Sure, Dan. Why don't I have Tom Brady start on that question.

Yes, Dan, good morning. The -- if you recall, the actual study process started in senate bill one which was passed in the special session of 2006 and then in 2007, senate bill 400 directed the PSC to basically do the same studies and extended the time frame to do the studies. So, the first report is due on December 1st, 2007. And this is an interim report.

Overall, the studies very broadly look at the Maryland energy market structure. The PSC -- and over the summer, they hired a consultant to help out with the reports. And we know that they're working on this process right now. The scope of the report would include a lot of elements. But I'd say broadly they'll look at restructuring in the state of Maryland as well as how it compares elsewhere in the country. They're going to take a look at options that -- they use the word reregulation, but I think it is really focused more on whether utilities should be required to construct or acquire generation assets. Obviously, they're going to take a look at the implementation of the 1999 Restructuring Act including looking at the stranded cost issue, other issues that have emerged.

In case 9099 which was decided in the spring where the second part of the rates were put into effect on July 1 of this year, certain issues with regard to how the wholesale energy markets were working and then some issues about BGE Constellation affiliate relationships and RPM all came out of that. I would expect there is a chance the report, might address some or all of the issues. But it is not a requirement that it would do that. I think there is going to be a focus, because they had summits back in July of this year with regard to safe and reliable energy and I think that will come in which includes adequate transmission and generation supplies. And then, of course, high on everybody's list as the state has moved more from pricing issues to policy, has been energy efficiency goals and mandates. Other issues that could be looked at also are development of retail choice and municipal aggregation.

As I see this coming by the first of December or close to the first of December, the commission will issue a report that will go to the governor and the general assembly. It is an interim report and by that, I would expect them to express a view on everything that they have covered up to this point, rather than necessarily express a review on all topics, and then by December 1, 2008, I would expect them to have a final report to the commission. So, that's how I see the whole thing playing out right now. And part of this is they really do owe this to the presiding officers and the general assembly which will go into regular session in January of 2008.

Got it. Thank you very much. And I guess just talking about the merchant performance in the quarter, O&M expense looked particularly high, but given the strengths of the fourth quarter, should we assume there was some timing allocation between the quarters that affected how the bottom line looked?

Yes, I think, Dan, that's a very good assumption. If you took a look at the increase in the O&M third quarter to third quarter, roughly 2/3 of that is basically employee-related type costs that are timing just because of the strength that we have and the visibility that we have into the fourth quarter of this year, and you saw that we've had a very strong year-to-date with $1.2 billion of total contribution margin originated. So, a lot of that evolves around timing.

Okay, great. And then just one last question real quick. On the demand response business at NewEnergy, can you give an update on the size of that and how that initiative is progressing?

I would say in terms of citing the size of it at this point, probably nothing dramatically different to report from what we discussed in the past. I think we are making good progress in terms of kind of longer-term strategy development, building alliances with providers of man response technology, and I would expect we'll continue on that initiative. But in terms of sort of overall stats on the initiative, it is probably a little too soon to give you much more than what we have.

Okay. Great. Thank you, guys.

Your next question is from Mr. Greg Gordon from Citigroup. Your line is open.

Thanks. Question for Tom. Tom, playing great football this year. Do you expect the governor or the Maryland Energy Commission to come out with a specific agenda for the 2008 legislative session once the Maryland Public Service Commission has issued its draft report?

Thank you for the football comment by the way. I would say that all of this -- the Public Service Commission is working collaboratively with the governor's office on legislative agenda. I think the December 1st report is really intended to decide what would be needed in this session. I believe most of it will be focused on energy efficiency and conservation and demand response. The -- if you recall, back in the summer, the governor put out a plan that he called Empower Maryland, which is intended to reduce consumption in the state by 15% by year 2015. So, I would expect most of the legislative agenda would focus on the conservation and demand response initiatives.

Thanks. And a question for John Collins. The -- looking at slide 20. And these are really compelling numbers in terms of balance sheet strength, and obviously we can see why you would choose to repatriate cash to shareholders through a buyback. Even net of that buyback, it doesn't look like it really puts a meaningful dent in the balance sheet strength of the company. Can you help us understand over a longer period of time what type of balance sheet metrics you're targeting in terms of FFO to debt or other metrics, so that as we look out over the forecast horizon and you return this billion dollars of cash to us, we might be able to understand what you might be doing with your balance sheet subsequent to that initiative?

Yes, sure, Greg. Obviously, what we're showing here on the slide isn't exactly how the rating agencies look at the credit metrics. The FFO to debt that we're showing here is a gross and does not [include] imputed debt from things like long-term tolling arrangements and those types of transactions. But to answer your question, we're still -- we really haven't changed our targets. Our targets have been roughly in the 40% range for debt to total cap. And then in the 25% to 30% range for FFO to debt. So, those are the targets that we're looking to maintain. We still have to work with the rating agencies on how they look at the credit both from a qualitative and a quantitative perspective. And we do believe that we have some flexibility with our balance sheet, but we want to maintain flexibility as well to pursue new investment alternatives that are strategic to growing the business.

So, we think we're sending a very strong signal with a billion dollar share repurchase program. We'll continue to look at ways to maximize shareholder value either through future share repurchases or through investments in strategic opportunities. So -- but we haven't really changed the type of metrics that we're looking at to manage the business at this point.

Just to be clear. The -- those targets are based on not these GAAP measures but adjusted measures similar to what the rating agencies use.

Yes. I mean, the -- really, the debt to total cap, the rating agencies don't really focus on that measure at all. They're really focused more on FFO to debt. And they still are focused on FFO interest coverage.

So those are really the two. But the one we share publicly is the FFO to total debt which is roughly 25% to 30%, that's the range that S&P said that they like to see us in. That's what we're shooting for as a target. I want to remind everybody that our credit rating is still very important to us. So, what we're trying to do is balance the needs of the business to maintain a strong credit rating while providing a good return to our shareholders through the share repurchase program.

Thank you.

Your next question is from Mr. John Kiani of Deutsche Bank. Your line is open.

Good morning.

Good morning, John.

Can you give us an update on how the effort is going to move more into the small C&I segment in ERCOT, and then what your latest thoughts are on the residential market and ERCOT as well, please?

Let's start -- this is Tom Brooks, John. Starting with the second question first. I guess I would say on residential, certainly that's a piece of the market we're going to keep our eye on. A piece of the market we could imagine being interested in at some point in the future, but it's not sort of part of our near-term plans. In terms of the smaller C&I segment, we have had, for a couple of years now, an ongoing effort, particularly in our confident in other markets to enhance our focus on small C&I customers. So, our basic point of focus, as you know, has been larger C&I customers and we have a significantly higher share of the larger C&I market than the smaller C&I market. We really haven't made much of a point of focus yet.

So, over the last couple of years, we've really developed an approach principally in Texas, but in other regions as well, for targeting the smaller C&I customers, this based on different sales -- different sales approach, different set of products, different customer care approach, and that's worked pretty well on a small scale. And we expect to ramp that effort up on a similar model to what we've succeeded at on a small scale. We expect to ramp that effort up through the balance of 2007 and into next year. At this stage, I think we're probably not quite yet ready to give you clear quantitative indications of what we think that can produce. But we're -- we've seen some good results thus far and we're optimistic about the outlook.

That's helpful, Tom. Thanks. And one other question. How should we think about potential cost savings and operating synergies from the business realignment that you're focusing on internally? And can you remind us if that is in any of your forward projections?

It is really not yet, John. And, obviously, we'll be giving you a much deeper dive into the outlook in January across a range of issues both top line and operating cost related. One of the key pieces of this initiative has been to integrate across the whole platform all of risk supply and risk management into the global commodities platform. And we think that's important for a few different reasons. Significantly important in terms of sort of enhancing the flow of information across the whole business. But we think it's likely to yield some cost efficiency as well. But not at this point ready to sort of characterize the magnitude of -- the potential magnitude of that.

Okay, thank you.

Your next question is from Mr. Gregg Orrill of Lehman Brothers. Your line is open.

Thanks very much. Was wondering if you could touch on the ROE at BGE at 7.5%. Kind of what the plan is to get it up to more industry standard, and how you think about that business.

Great. Let's have Ken DeFontes speak to that.

Hi, Gregg. Good morning. Obviously we are seeing a decline as we've had to make investments for reliability and growth and continuing to make sure we're serving our customers well. So, we are preparing for a filing for a rate case for distribution rates. I would also remind you that we are currently enjoying the formula rates in our transmission business and that's been working very well. We've already gotten some favorable treatment from FERC with respect to incentive rates. So that part of the business which is going to be growing as well will be returning fair returns. The real focus right now is really on the distribution side of the business.

Okay. Thanks.

Your next question is from David Frank. Your line is open -- with Catapult Partners.

Yes. Hi, good morning.

Hi, David.

Question, you mentioned that the results at the gas marketing were impacted largely by some mark to market write-downs. How much were they?

If you took a look at it for the quarter, the NewEnergy gas had roughly I believe $0.05 or -- total, quarter over quarter it was $0.09 relatively speaking. And that's Q3 '07 versus Q3 '06 was $0.09. Part of it was there is mark to market losses related to hedges of accrual positions, economic hedges of accrual positions in this quarter versus we had some mark to market gains in the third quarter of 2006. And, Dave, these are not write-downs. These are just mark to market because they don't qualify for FAS 133 hedge accounted treatment, in some cases, related to effectiveness of the hedges.

Right. Okay. So, the losses were about $0.05 in aggregate, $0.09 year over year?

Yes.

Okay. Great, thank you.

Your next question is from Mr. Paul Fremont of Jefferies. Your line is open.

Thanks. Two questions. One would be the gain on sale of subsidiary equity CEP that's in the income statement. Should we -- where in the wholesale income statement would that fall? Would that fall under wholesale?

It does fall under wholesale and it falls under the origination line item at wholesale. Those gains are triggered by CEP when they do need transactions and they purchase new gas properties. We account for the gains relative to the shares issued related to those acquisitions.

And then the second question would be, when I look at the gas operations and I look at sort of -- the comparisons that you do on page 32 would strip out the mark to market gains. Should we assume that the gas results for last year were distorted based on the mark to market adjustments, and that 2007 is sort of a more normalized view of the ongoing earnings power in that business? Or how should we sort of think about those mark to market adjustments.

Well, I think if you took a look back at '06, we had some mark to market gains that drove some increased earnings in 2006, primarily related to some storage and transportation transactions that we had that basically caused '06 to outperform that we had originally expected. If you took a look at '07, we don't really have that similar type of business in '07. And what we've had was some of the hedges that we have used to manage the supply portfolio in NewEnergy Gas are not being treated for -- as cash flow hedges. They have to be mark to market. And that's driven some reduction in earnings for the year.

And are there any adjustments that we need to look for in the fourth quarter, either for last year in terms of gains or expected negative adjustments?

I don't have it in front of me. But we would expect some of the losses from the mark to market hedges will be coming back in earnings in future periods.

Just stepping back a step back from the accounting, I just characterize our performance of our overall retail businesses for the year is looking pretty strong, above last year and above plan. The power -- the retail power side is meaningfully outperforming plan, the retail gas side is somewhat underperforming plan. But the basic message in aggregate is that the retail business is doing pretty well. And, obviously, it is a business where you like to have diversity of sort of markets, customers and business drivers because in any given year, it is a bit hard to predict which pieces will outperform and which pieces will underperform, but in aggregate, we're pretty happy if the overall retail business is exceeding our expectations.

Yes. And I would add one last piece is that Q3 is not necessarily indicative of the strength of the business because, again, largely these are timing issues related to economic hedges of accrual positions that we probably will see gains in future periods related to this as these transactions actually go to delivery.

Great. I think we have two more questions?

Your next question is from Ashar Khan of SAC Capital. Your line is open.

Hi. Good morning.

Good morning.

Mayo, could you just define the strategic value-added investments if you can give us some examples versus which the buyback will be evaluated against. Going forward. What could those be?

I think those investments would be similar to the ones that we've made in the past. Acquisitions like [Ganay], acquisitions like Cornerstone that, one, we've always been in the market for hard assets as you know. The variability in pricing fueled by the availability of a lot of private equity capital has probably kept us out of the market the last couple years. But we don't expect that to continue forever.

So, I think that as we march forward, we'll continue to evaluate opportunities pretty much consistent with what we've done in the past, and keeping in mind that we have finally reached our targets from a balance sheet standpoint and it has been a -- I guess a long six years going from 55% of debt to total cap down to 32%, but it has been a huge amount of progress over these years. And we have represented that at the appropriate time that we would mix our investment strategies with share buybacks as a way to demonstrate our discipline with respect to how we deploy capital, and we're pleased to get to the point of having talked about it all these years that we have a share buyback and we have executed the first 250. And -- but it really does not signal anything other than sort of the normal course here. I think it's what we've represented. And we continue to see interesting investment opportunities looking forward.

And if I can just end up, how should we evaluate the timing, I guess, the next time you give us a view would be what in January whether you proceed with a further buyback or some investment has come into line? How should we monitor these events from a perspective -- shareholder perspective?

Well, you'll certainly see it in our cash flow statements. I don't know whether we'd make interim announcements, but going forward we obviously have the option of buying back, either through ASRs or just in the open market. And you would basically see it each quarter.

Okay. Thank you, sir.

Your next question is from Mr. Paul Patterson of Glenrock Associates. Your line is open.

Good morning, guys.

Good morning.

I just wanted to go over a couple of things. First of all, there was an article yesterday in the local paper indicating that there was the expectation that the governor was going to seek an elimination of a tax credit associated with power plant equipment, and that would I guess provide around $30 million to $43 million in revenue for the state. And I was wondering what would the implication be for Constellation specifically, and is there anything, are you guys expecting anything in addition to that? You mentioned something about property taxes on that. That's the first question I have.

The second one I have is, in terms of the acquisitions, dispositions and contract restructurings, which was negative $213 million this year, if you could just elaborate a little bit more on that. You did touch on it. I didn't hear exactly everything that you mentioned about it. Versus the $290 million benefit that you guys got last quarter. If you could just sort of elaborate on those two things.

Okay. I guess I'll start with the governor or the article you read in the paper yesterday. The special session is there to deal with the Maryland budget deficit which is estimated to be about $1.7 billion. One of the governor's proposals is to eliminate some county grants that the state gives in the budget every year that were part of the 1999 deregulatory settlement that would eliminate funds coming into the counties. That just has absolute no impact on us from a tax perspective.

However, it potentially can get linked with the elimination of the 50% exemption that we currently receive on personal property, related to our power generating assets. That -- if that exemption was to go away, and we're obviously in Annapolis, trying to talk to people, telling them this is not a good thing, but if that was to go away, that could increase our property tax bill annually about $26 million. That would not take effect until the middle of '08, because that's where the property tax years run, so it would basically have about a $0.04 impact on '08 earnings and about a $0.09 impact -- negative impact on '09 earnings. We're obviously lobbying against this. We don't believe it is in the best interest of Maryland, who is trying to incent the development of new generation, increase reliability in the state, and we think that it just puts us at a further competitive disadvantage relative to surrounding states that actually get 100% exemptions related to these types of taxes.

I think your other question had to deal with I think on the cash flow slide. Which was -- let me find the page here -- 19. And you basically have a couple of things in that line item. First of all, you have the Cornerstone acquisition in there. Which is slightly less than -- the cash-related to that which is slightly less than $100 million. And then you have the amortization of previous contracts that we have acquired where we received cash. So, when we receive cash, we're then required to amortize that cash over the lives of the contracts relative to how the cash flows of those contracts work. That's roughly about $100 million as well. So those are the two big components that are driving there.

Great. Well, thank you all for attending this quarter again, we'll look forward to seeing you all in January for the full-blown presentation. Thank you very much.