艾索倫電力 (EXC) 2009 Q2 法說會逐字稿

Good morning and welcome to the Constellation Energy Group's second quarter 2009 earnings conference call. At this time, all participants are in a listen only mode. (Operator Instructions). Today's conference is being recorded. If you have any objections you may disconnect at this time. I will now turn the meeting over to the Executive Director of Investor Relations for Constellation, Mr. Carim Khouzami. Sir, you may begin.

Thank you. Welcome to our second quarter earnings call. We appreciate you being with us this morning. On slide two, before we begin our presentation, let me remind you 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 is being Webcast and the slides are available on our website, which you can access at www.constellation.com under Investor Relations.

On slide three, you will notice we will use non-GAAP financial measures in this presentation to help you understand our operating performance. We've attached an appendix to these charts on the website reconciling non-GAAP measures to GAAP measures. With that, I'd like to turn the time over to Mayo Shattuck, Chairman, President and CEO of Constellation Energy.

Great. Thank you, Carim. Good morning everyone and thank you for joining us today. On behalf of all of our employees I'm proud to say Constellation is delivering on our stated objectives.

Let me take a moment to detail some of the highlights for the quarter. This morning we announced second quarter adjusted earnings of $1.08 per share, underpinned by strong results from each of our core businesses, Merchant Energy and BGE. Given the operating performance of these businesses during the first half of the year, combined with the outlook for the balance of the year, we are raising guidance for 2009 to a range of $3.10 to $3.30 per share.

Our nuclear generation fleet continued its record of exceptional operating performance during the second quarter with a planned one year capability factor of 95%, exceeding industry average of approximately 91%. During the quarter, our Nine Mile Point Unit 1 completed its scheduled refueling outage in just under 20 days, the shortest duration ever for the unit, beating the previous best by 10 days.

Meanwhile, in 2009, our non-nuclear generation fleet is performing well with better than expected reliability and cost control. Our major non-nuclear projects, the construction of our Hillaby plant and the Brandon Shores Unit 1 scrubber remain on schedule to come on line by the end of 2009.

We are seeing strong margins in our wholesale and retail load businesses and are earning attractive risk adjusted returns. Across the country, demand destruction from weaker industrial and economic conditions, coupled in part with milder weather is negatively impacting many suppliers. Demand destruction has been higher than we forecasted at the beginning of the year, but this has had only a modest impact on our financial results.

Back in February, we outlined strategic initiatives for derisking our Company. As of the end of the second quarter these initiatives are substantially done with the balance expected to be completed by year-end. We have successfully divested the vast majority of our non-core businesses and have more than doubled our net available liquidity from $2.4 billion at year-end to $5 billion at the end of the second quarter.

At BGE, after a successful pilot of our Smart Grid program, we are ready and have filed an application with the Maryland PSC for full deployment. This program is estimated to save our BGE Electric and Gas customers in excess of $2.6 billion over the life of the project. We have requested PSC approval of our filing in a time frame that would allow us to qualify for a competitive Department of Energy grant of up to $200 million to partially fund this initiative. This funding would reduce our deployment cost and increase the net savings realized by our customers.

If you turn to slide five, we'll get a review of the market conditions we saw during the second quarter. On a year-over-year basis, we have seen energy demand decrease in nearly every region. Idle industrial capacity, reduced commercial activity and overall domestic economic weakness have contributed to this decline. In the East, weather during the second quarter exacerbated demand destruction with this summer expected to be one of the mildest in the Mid Atlantic in over 30 years.

Industrial production is one good indicator for power consumption and prices. Industrial output fell at an annualized rate of approximately 12% during the second quarter after falling at an annualized rate of 19% in the first quarter. We expect industrial output production to remain weak until the broader economy recovers and consumer spending increases.

Our businesses have weathered these effects. Our decoupling mechanism at BGE and our active risk management and customer supply have largely negated the negative impacts of demand destruction. Similarly, falling commodity prices have had little impact on our generation portfolio, due to maintenance of high hedge ratios in the near term which will insulate our earnings and cash flow over the next two years.

We continue to analyze macroeconomic conditions and commodity fundamentals and refine our hedging strategy. As we look forward, we expect power prices to remain weak in the near term and rebound in 2011 and 2012 as the economy recovers from the current recession.

Turning to slide six to review how competitive markets are performing under these economic conditions. After a period of steady natural gas driven increases in electricity prices, recent declines in natural gas prices have caused rates in competitive markets to decrease. This is best demonstrated by recent auctions in competitive markets that resulted in significant decreases in electric rates year-over-year.

The first energy auction produced a 16% drop in electric rates for Ohio Edison customers. Bids in the 2009 BGE auctions were 23 to 25% lower than prices in the 2008 auctions. As BGE replaces more of the higher priced legacy supply contracts with newer contracts reflecting today's lower wholesale prices, customers will see lower electric rates.

By contrast, several regulated states are proposing rate increases. In March, for example, AEP's West Virginia utility, Appalachian Power, proposed a rate increase of 43% to help cover fuel, purchased power and pollution control equipment cost and CapEx.

Historically, some vertically integrated utilities have mitigated the need for rate increases through off system sales. Demand destruction has reduced market appetite and prices for this excess generation. Without these added revenues, regulated utilities are now forced to raise rates to fund their ongoing operations. Some of these utilities have also been carrying large deferrals for fuel cost adjustments, which are now coming due.

Furthermore, evolving national environmental policy will require significant capital investments which will level the playing field for all. Generators in the Southeast and Midwest for example, who currently have lower emissions limitations, will see more limited opportunities to sell what had been cheaper priced surplus energy into competitive markets adding to the need for further price increases by these utilities. Meanwhile, as the rate rise in many of these states without competition, new challenges continue to emerge.

Cap and trade legislation will put a price on carbon, while renewable portfolio standards, smart grid systems and transmission & distribution infrastructure expansion will introduce complexities that will require our industry to adapt and evolve. Customers in competitive energy markets will have superior opportunities to leverage technology innovation, Smart Grid implementation, demand response and other conservation and efficiency programs to take control of their energy consumption.

If you turn to slide seven for an overview of the sustainable products and services Constellation offers. Constellation is leveraging its physical and intellectual platform to offer energy efficiency products and services aimed at reducing emissions and overall peak energy demand. Within our Merchant Energy business, our customer supply operation provides customers with clean energy and carbon offset solutions. We currently own and have entered purchase agreements with wind, biomass, solar, and other renewable facilities to provide clean power solutions to wholesale and retail customers. We are also selling renewable energy credits to customers who are increasingly interested improving their environmental position and reducing their carbon footprint.

Currently, we are one of the largest providers of renewable energy credits to the Federal Government and sell over one million renewable energy credits to commercial and industrial customers each year. As a founding member of the Green Exchange at NYMEX, we are active in the design and deployment of a new array of environmental risk management products that will help customers more cost effectively manage some of the most pressing issues they face.

Our projects and services group offers renewable technology products for on site, for governmental, institutional, commercial and industrial customers throughout the country. We have installed a variety of technologies for customers, including solar panels, roof mounted wind turbines, biomass steam boilers, water efficiency systems and geothermal heat pumps. Increasingly, stimulus funding is helping advance many State and federal projects. Going forward we will further align the sales capabilities and customer relationships of our customer supply group with the product offerings of our projects and services group to expand our business and improve our share of near term and long term customer energy spend.

Finally, Constellation's demand response programs offer incentives for customers to reduce energy usage during times of peak demand, helping to reduce costs and improve system reliability. Constellation's demand response program currently includes approximately 500 customers with 850 megawatts under contract, making Constellation one of the leading demand response providers in the country. By combining energy sales, demand response, efficiency products, green and distributed generation and carbon offsets, we have the ability to be one of the leading integrated solutions providers. As we move forward, we will continue to explore opportunities to expand our renewable product offerings to meet our customers' growing demand for green energy solutions.

To turn to the next slide, following our completion of our divestiture activities and the resizing of our trading activities our integrated merchant energy business now consists primarily of our generation and customer supply operations. Our generation fleet consists of approximately 9100 megawatts of primarily base load nuclear and coal fired capacity. The bulk of our fleet is located in PJM and upstate New York, both well established functional markets with strong interconnections with other regional markets. In addition we have retail and wholesale load obligations from our customer supply operation in the same regions.

This alignment of key components of our physical power business provides opportunities to manage our collateral and contingent capital needs as efficiently as possible. Furthermore, it offers us more flexibility and options in our hedging decisions and we earn a margin on hedging rather than paying a financial institution to manage that exposure for us. Importantly, as the cost of collateral has increased and access to capital has decreased, these margins have expanded as others have exited the retail and wholesale businesses.

Our customer supply operation is focused on markets with strong merchant generation footprints where we can augment our generation assets by contracting for off take agreements. In 2009, we expect our open owned and contracted generation to align with approximately 65% of our total fixed price wholesale and retail load obligation. As we move forward, we expect to further align our load obligations by buying attractively priced generation assets and entering into longer dated off take agreements with merchant generators. This will reduce our dependence on exchange traded products, lowering collateral requirements and further enhancing the returns of our generation and customer supply operations.

If you turn to slide nine for a review of our regulated activities. At our regulated utility, we expect to invest approximately $2 billion over the next five years in aging infrastructure to improve our core systems and reliability. BGE is also implementing its Smart Energy Savers program that includes energy efficiency, demand response, and advanced metering projects.

These projects will provide BGE customers with the tools to better understand and manage their energy usage and costs. These projects are also integral to meeting the Empower Maryland goal of a statewide 15% reduction of per capita usage and demand by 2015. BGE already successfully launched all 10 of its improved efficiency programs and has enrolled more than 115,000 customers in its peak rewards program.

In July, BGE filed with the Maryland PSC an application for full deployment of its Smart Grid program. The total cost of this program is approximately $480 million, of which is much as $200 million could come from the Department of Energy stimulus funding, significantly reducing consumer cost. A stable, regulatory environment, where projects such as these can receive an appropriate return on investment is essential to enable funding of these investments.

We are pleased that the Maryland PSC has approved timely recovery of our investments in demand response and energy conservation and are seeking a similar rate tracker mechanism for our investment in Smart Grid. Prospectively similar to other utilities throughout the country BGE will seek recovery on our increased investment in infrastructure through a regular recurring rate case process.

Turning to slide 10. In Maryland. Constellation and BGE is poised to make incremental capital investments. As we just discussed, BGE has launched and filed for a number of energy efficiency and conservation programs. On the merchant side of our business, our proposed new unit at our Calvert Cliffs nuclear facility would be one of the largest economic development projects in Maryland history. If constructed, this will lead to the creation of high paying union jobs while adding 1600 megawatts of new clean energy in the State.

Upon completion, Calvert Cliffs 3 will strengthen energy security and reduce energy costs for customers. Recently the PSC granted a certificate of public convenience and necessity for this facility, adding evidence of the broad support for this project. Constellation is also actively evaluating new renewable projects throughout the State of Maryland.

Finally, we're committed to closing our nuclear joint venture with EDF. It is the right thing for Constellation stakeholders, our customers and the state. Except for NRC approval, which we anticipate receiving in the third quarter, we have received all of the necessary regulatory approvals. At the State level, we are pursuing efforts to close the transaction through multiple paths.

First we are fully engaged in the PSC process. Yesterday the PSC decided to extend the decision date by approximately three weeks, which is disappointing; however we will press on. Second, we remain open to the possibility of reasonable settlement discussions with the State. Lastly we are preserving our legal rights to further pursue our appeal of the PSC's ruling depending on the outcome of the current proceeding. Our emphatic hope is that a positive outcome can be reached without having to take a less desirable litigated course of action.

Turning to slide 11. Before I turn the presentation over to Jack, let me take a brief moment to summarize the investment pieces for Constellation. Our generation fleet consists of low cost environmentally advantaged assets primarily located in PJM and New York. In the near term, we have significantly hedged the cash flows associated with these plants, insulating our earnings and cash flow from declining power prices. Beginning in 2011, our assets are less hedged, and they are positioned to benefit from an economic recovery. By the end of 2009, we will complete the bulk of our environmental CapEx spend to address the Maryland Healthy Air Act, decreasing generation CapEx spend going forward and increasing free cash flow for investment to grow the business.

Customer supply margins continue to expand in 2009, providing attractive risk adjusted returns for this operation. In those regions where we currently do not own or contract for generation, we are exploring opportunities that will better and more efficiently address our liquidity and capital needs, sustaining and driving higher returns on equity. BGE will continue to benefit from the PSC's progressive policy to address the disincentives of energy efficiency.

Importantly BGE's decoupling mechanism allows it to retain the value of future growth and customers. This is increasingly valuable as added federal spending is expected to bring more jobs and people to the Maryland and DC metropolitan area over the next decade. We plan to increase investments in our infrastructure and new conservation and efficiency programs provided that adequate cost recovery and reasonable returns on investment capital are allowed.

Let me close with some final thoughts. Over the course of the last nine months, Constellation has substantially completed its derisking activities and refocused its business model. The Company is now a fiscal gas and electric business with a primary focus on the generation and sale of electricity to customers.

Looking forward, I'm very encouraged by the prospects for Constellation. We have maintained our core franchise, retaining the platform and infrastructure needed to manage the risks embedded in competitive markets, the policy and economic benefits of which will be more evident in today's declining price environment. We've made each of our core businesses more capital efficient and are structuring liquidity products to match the unique characteristics of each business.

We have strengthened our balance sheet and significantly improved our liquidity position allowing us the flexibility to consider acquisition opportunities at what could be the bottom of a commodity cycle. Internally, we're focused on rationalizing and optimizing our operations and reducing costs, thereby further improving our profitability and returns. Externally, we are focused on closing the EDF transaction and taking advantage of opportunities that will drive increased shareholder value now and into the future.

With that, I'd like to turn the presentation over to Jack Thayer for the financial review.

Thank you, Mayo, and good morning everyone. Turning to slide 13 I'll review our financials for the second quarter of 2009. As Mayo mentioned, second quarter adjusted earnings were $1.08 per share. Adjusting for $1.04 per share of special items realized during the quarter, our second quarter GAAP results were $0.04 per share. I will speak in more detail on these special items on the next slide.

BGE recorded adjusted earnings of $0.06 per share for the second quarter as compared to $0.09 for the same quarter in 2008. While demand decreased in our territory, due to mild weather and a weak economy, decoupling helped to insulate earnings from this impact. During the quarter, PSC Order 9175 limited our ability to terminate service to residential customers that were in arrears and required the BGE offer extended payment plans under certain conditions to these customers. This led to increased credit reserves to account for a higher prospective customer default rate on these extended payment plans.

Our merchant segment recorded adjusted earnings of $1.03 per share, down $0.71 as compared to the second quarter of 2008. This decline was primarily driven by the loss of earnings associated with our decision to reduce our trading activities and divest business lines as part of our derisking activities. This resulted in approximately $0.79 of lower earnings in the second quarter of 2009 as compared to 2008.

Offsetting this negative impact were positive contributions from our generation operation. Our generation business was $0.43 higher, driven by $0.18 of improvement from higher margins and $0.25 of improvement from the year-over-year impact of outages. Additionally, customer supply was essentially flat as compared to the second quarter of 2008 with lower operating cost and earnings from the sale of wholesale contracts offsetting reduced wholesale volumes. As part of our efforts to increase our liquidity, we exited several wholesale contracts that returned approximately $200 million of liquidity.

A consequence of exiting these positions was the recognition of $0.29 of earnings, the majority of which was an acceleration of earnings from the balance of 2009. By comparison, we sold an upstream gas property in the second quarter of 2008, similarly realizing $0.26 of earnings. As we redeploy the collateral liquidity return from these divestitures to support our higher margin retail business we expect these sales to be neutral or positive contributors to 2010 earnings.

Other notable negative year-over-year impacts consist of approximately $0.12 of higher interest expense, $0.11 of higher taxes, and $0.11 of dilution due to the increased number of shares in 2009 as compared to 2008.

Turning to slide 14, for a review of the special items recorded during the second quarter. During the second quarter, we had special items of approximately $1.04 per share, the majority of which were due to our derisking activities. Specifically we recognized a loss of $0.62 per share due to divestitures. These included our international coal and freight, Houston based gas trading, international uranium marketing and west power trading operations. In addition we recognized the loss of $0.35 per share due to the impairment of assets, the majority of which relate to the pending sale of our international dry bulk shipping joint venture.

Turning to slide 15. During the second quarter we continued our derisking activities, materially improving our net available liquidity from $2.6 billion at the end of the first quarter to $5 billion at the end of the second quarter. We believe we have sufficient liquidity to sustain our business activities throughout the current economic recession. The significant increase in available liquidity during the quarter was due primarily to strong performances by our core businesses as well collateral returns in the form of both cash and letters of credit from our divestitures.

These strong cash flows allowed us to fully repay the $1.1 billion of cash drawn on our facilities, reducing our interest expense going forward. Additionally, BGE was able to issue $340 million of commercial paper during the quarter, demonstrating our ability to return to the capital markets in a more normal manner.

Turning to slide 16. Let me conclude by taking a moment to discuss our earnings guidance. For the first half of 2009, we have benefited from strong results from all of our core businesses. Although we expect headwinds from a weak economy and reduced power demand for the balance of the year, we're confident that our businesses will continue to perform well during the second half of the year.

As Mayo discussed, in the near term, our earnings and cash flows are insulated from declining power prices through our decoupling mechanisms and our highly hedged profile. As I mentioned earlier, during the quarter we decided to sell several wholesale contracts to further improve liquidity. This decision accelerated earnings that would have been realized later in 2009. It will also add $0.10 of incremental earnings to 2009 that was not part of our original 2009 forecast, a gain of $0.05 and the acceleration of $0.05 of earnings from 2010.

Redeployed liquidity that supports higher margin retail activities will more than cover this impact on 2010 earnings. Accordingly, with the incremental earnings from the sale of these wholesale contracts and other smaller positive impacts expected for the balance of the year, we now expect 2009 earnings to be higher than originally forecast and are comfortable increasing our earnings guidance for 2009 to a range of $3.10 to $3.30 per share. We are maintaining our existing 2010 earnings guidance at a range of $3.05 to $3.45 per share.

As we discussed with you in the first quarter we have been in discussions with EDF regarding the form that the $700 million hedge conveyance will take. We are comfortable now guiding investors to assume that this will most likely take the form of the below market PPA. Our 2009 guidance range assumes no adjusted earnings benefit from the below market power purchase agreement with the joint venture. The cash adjusted earnings benefits from this power purchase agreement will largely be realized in 2010 and 2011.

Beyond 2010, we continue to be exposed to dark spreads and heat rates as indicated by the sensitivities shown on the right side of the slide. We believe that as the economy recovers and reserve margins tighten, we'll be well positioned to benefit from higher power prices and see substantial earnings improvement prospectively. With that I'd like to open the call to questions. Operator?

(Operator Instructions). Our first question comes from Paul Fremont with Jefferies & Company.

Yeah, I just want to get a better understanding on the generation side. When you talk about $0.18 of higher margin, is that inclusive of the $0.10 that you realized through the sale of the wholesale contract?

Paul, the $0.10 would actually show up, that's in our competitive supply business. The generation is driven by the roll off of lower priced hedges and rolling into higher priced hedges.

Yes, because I was going to say on the generation side, you're 100% hedged for the year so the only difference is the timing of what prices look like on a quarter-over-quarter basis. So should we expect that the hedge price comparison on the generation side will look less favorable in the third and fourth quarter to get to sort of your annual number which is more flattish on the generation side?

No. The comparison is really a Q2 2008 versus Q2 2009 comparison. That's what's driving the improvement, so we would expect -- our guidance contemplates that the roll off of hedges in quarters three and four would also incorporate the benefit of the roll off of hedges.

And one other question, just relating to the proceeding at the Commission. Is there, are there ongoing conversations between the Company right now and other parties in the state looking to settle the proceeding and in terms of timing, would that be easier to arrive at a settlement before the parties file their initial positions?

Paul, this is Mayo. I think what we have explained is that we're pursuing multiple paths and the three week delay in the PSC process that was announced yesterday was disappointing, but doesn't really alter the substance of the expectation that we expect to get a ruling some time in mid October that would give an order, presumably with covering as many things as the PSC would be addressing during these hearings.

Parallel to that, we've expressed our continued interest in settlement discussions. There has been some sort of public back and forth of letters as you've seen. We're not going to get deeply into how that's going at this point other than our continued interest in seeing whether that process could actually result in something that would preemptively get this deal done before the October time frame.

And then lastly there's obviously a need to protect our own legal recourse here so there is a process with respect to the course that makes sure that we have some recourse to challenging the whole concept of having the PSC review this transaction. And as you, as I think you will recall that when the Company had to make a decision last year about whether the EDF transaction was in fact superior to the MidAmerican transaction, obviously one of the key aspects to that was whether we could potentially realize more value for shareholders and we obviously came to that conclusion, but another aspect of that whole decision process was which transaction might get closed easier.

We made the judgment at the time because it was our strong view that the EDF transaction was protected under the Settlement Agreement and the Safe Harbor from last year that it was going to be easier to get the EDF transaction completed than would have been a complete merger with MidAmerican, so we made that judgment call. We still believe that that was the right legal analysis of our position and so we are holding out that third course which is to preserve our legal option as well.

Thank you.

And Paul this is Jack. Just to clarify I misspoke earlier. I was thinking of our prospective format as opposed to our current format. The sale of wholesale contracts actually shows up on slide 19 as within our commodities business, not our customer supply business. That business is flat year-over-year roughly.

Thank you.

Thank you. Our next question comes from Greg Gordon with Morgan Stanley.

Thank you, good morning.

Hi, Greg.

Can you explain to me how the hedge conveyance works again and in the context of the fact that commodity prices have fallen quite dramatically? If I look at the last disclosure on the value of the hedges versus the current disclosure on the value of the hedges they basically look like they've gone from being pretty valuable to being close to in the money, so that $700 million conveyance to the JV, was that an absolute dollar amount that was sort of contractually agreed to at the time or is that an amount that will fluctuate with commodity prices?

Yes, Greg that's a good question and I do want to make sure everyone understands that. The $700 million is a value transfer and an absolute value transfer that doesn't change because of price swings since the signing of the deal, and so I'll have Jack expand on this is describe that although it was early on described in the notion of negative hedges and trying to convey those hedges, the other methodology that is developed in our discussions with EDF and is the more likely outcome is simply the construction of a below market PPA in order to achieve the $700 million in NPV, so either way the value is there, Jack, do you want to expand on that?

Sure. So Greg, I think you're referring to on slide 24, we show the generation outlook and on the quarter-over-quarter basis to your point, prices have declined and we've seen a roughly $200 million-plus swing in value in those hedges moving that were out of the money moving to either at or in the money, and that benefit has accrued to our shareholders. The nature of as Mayo discussed the PPA, that is a value transfer.

We had been previously showing this as potentially occurring in the balance of 2009, happening in 2010, and then the balance of that occurring in 2011 and beyond. The nature of the PPA discussions that we're finalizing with EDF would transfer or realize that value in 2010 and 2011 primarily, and that would take the form of a PPA that would be locked in right before the close of the transaction.

Thank you very much.

Thank you. Our next question comes from Angie Storozynski with Macquarie Capital.

Thank you. I have another question about hedges. Could you explain to me what's happening with 2011 and 2012 hedges for nuclear plants since the first quarter of 2009? It seems like the percentages dropped quite a bit especially for 2011 with some change in prices, I mean you're 100% hedged for instance for Calvert Cliff in 2011, now it seems like 62%, how can you explain that?

With respect to the hedging profile we have in 2011 and beyond, we were more highly hedged and during the balance of the second quarter, we have taken, we took steps to become in effect less hedged to buyback some of the positions we've taken to in effect lock in the prospective value we saw as power prices declined dramatically during the quarter. Prospectively we would look forward to using our retail and wholesale customer supply businesses to hedge those generation positions with -- as auctions or retail business occurred on an 18 to 36 month basis.

Okay. Now you're saying that the global commodities business is, not global commodities, I'm sorry, the competitive supply business is largely flat while we're hearing from other companies in similar businesses that we're seeing a margin expansion. From my perspective, that should be anticipated given the fact that it's a counter cyclical business, and we should see some margin expansion, so why not, why aren't we seeing it with you guys?

I think it's fair to say and we tried to bring the countervailing forces into focus in Mayo's section, we're seeing significant demand destruction throughout the economy in the majority of regions. I think Texas is the only region where we're not seeing it. So absolutely we're seeing higher margins but unfortunately our customers are consuming less volume, so on a year-over-year basis, while margins have expanded, those expanded margins have really offset to a large degree the demand destruction we've seen.

Kathi, do you want to?

I would like to add something. Angie, I think the other point is that we have very consciously looked at the mix of our business and the customer supply and where we are making sure that we are offering products and serving customers where we can make an appropriate return, so in this whole process as well we have consciously shrunk some of our volume from some products and/or customers where we just don't feel that we can make the appropriate return in this marketplace.

Okay, that's great, and now the last question is for global commodities the $174 million of gross margin, I understand that that's the wholesale contract that you guys sold. Going forward, should we assume that this business is basically at zero gross margin and it's like a one off transaction?

With respect to global commodities, this business is our structured products business. It's our wholesale and mid-marketing activities and these are activities that we've been in for the last roughly 10 years. These are activities that we will remain in. They are the more aligned with our shift to generating and selling power to customers, be they utilities or be they retail and industrial or commercial industrial customers.

In the prospective shift that we'll see as we adjust our segments in 2010 and beyond, this business will really be encompassed into the customer supply business, so I guess to answer your question, no, the business won't go to zero, and what I'd point you to is the $338 million reduction in the overall size of that business and that's really the shift in business model. That's where you're seeing the fact that in 2008, we had $279 million of gross margin contribution from trading in the second quarter of 2009. That was actually a modest loss of $6 million related to those activities as we were optimizing the portfolio and divesting some of the legacy positions, so that's really where you'll see the significant shift in business model impact the earnings prospectively.

Perfect. Just a last question. I'm struggling to understand why you guys would be even willing to sit down and negotiate with Maryland, having given the Company and the State already, well the State close to $200 million, when the Maryland was going to the market.

I understand that there's a put option for coal plants. There's carbon legislation in the works. Maybe you're actually better off keeping those nuclear plants and not letting the state hold them hostage while shareholders are getting anxious, there's clearly more value in the long run to keep these nuclear plants at Constellation granted that credit agencies would probably get nervous initially. But in the long run aren't you better off just letting, exercising the put option and letting the nuclear deal expire?

Well, I've heard that thesis before and I think that we have very strongly taken a position that we would like to get this transaction completed. We think that it is very important to our long term business model in nuclear. It's clearly to the great advantage of Maryland and Maryland customers and it allows us to work with a strategic partner that has a lot of capital in a world that is going to require a lot of capital to do lots and lots of things to meet some of the challenges you've alluded to in climate and so forth, so we've expressed our strong support. I believe EDF is equally as strong in their determination to get the transaction done.

It is, however, as you suggested not a transaction that can be done at all costs. It doesn't need to be and it shouldn't be and I think that there are some aspects that are bandied around with respect to settlement ideas and so forth that are really contrary to the maintenance of the right policies and the right relationship between what the PSC is responsible for and what a merchant Company can do. And as an example, the notion of putting a lot of capital out to work without having any recovery through rates is such a fundamental violation of a tenet in a regulated world that it's just simply unacceptable and there are things like that that really can't be part of any final ruling from the PSC and we wouldn't expect them to be.

On the other hand, we did feel that when we made the choice to move from MidAmerican to EDF that the right thing to do in this sort of politically charged environment was to match the offer that MidAmerican had put forth and we thought that was a fair thing to do. There were other added benefits to the EDF transaction that we feel were very important to even enhance the deal over the MidAmerican transaction, so we feel like we've put forth a very fair deal but I think most importantly it has to be a deal that doesn't violate or set some standard for decades to come that fundamentally alters the regulatory compact that we have in the State, and we have, as you know, made our best efforts to talk about ring fencing ideas.

We understand some of these things can be put in place that are comparable to other states and in Constellation's best interest as well as the state's best interest, so that in conjunction with some of the economic concessions along the lines of the MidAmerican transaction we think are very fair. But I do have to say that we have to keep in mind that it has to be the right thing from the standpoint of long term policy, particularly regulatory policy and I think we have to hold our ground and we completely expect the PSC will hold its ground on those issues because that's their responsibility.

Okay, thank you.

Thank you. One moment please for the next question. Our next question comes from David Frank with Catapult.

Hi, good morning.

Good morning, David.

Mayo, I had a couple more questions on the People's Republic of Maryland and I guess yesterday the EDF CEO said he would expect approval of the JV by the end of the year, so was he just speaking off the cuff? Was he hinting there could be further delays if this process is just never as simple as we think or was he, do you have any indication there would be further delays?

David, I actually think my understanding is that he was misquoted, that he actually said by the end of the third quarter. Now at the time that he actually said that, he also didn't know the PSC was just extending the ruling by three weeks so I'm pretty sure that what he said was the end of the third quarter and that he was not at that point aware and we'll go back and check on that but I'm pretty sure that's the case and of course as of yesterday got extended by three weeks.

Okay, great. And then I know we've also been hearing some noise in some of the trade rags that the legislature is looking at reregulation again. I thought we had already gone through this, but is this just noise to try to get more concessions from approval of the JV? Do you really expect the legislature to attempt to pass some kind of new laws in the next session? Do you have some insight into this?

Well, I do actually. It's sort of independent of the EDF transaction, I do expect the State to continue its assessment of deregulation and reregulation and that could go on for quite a few years honestly. Now I think that we feel very strongly, it's a source of some of my remarks earlier that boy, it would be grabbing the feet from the jaws of victory to be pushing this forward at this point in time.

The evidence is now in that the competitive markets are working, these auction results are lowering costs to consumers in different states and we have in earlier sessions cited many, many studies about the potential benefits of competitive markets. And of course those get drowned out by this massive increase in commodity prices over the last three or four years across the globe, and it's very tough to make people feel good about competitive markets when the fuel inputs are going up by 300%, so I think the good news for us is that the debate around reregulation has to be a more reasoned one in this kind of environment because there is a lot of evidence that shows that the markets are working.

We're seeing rates come down, and obviously there's new news with respect to not only just demand destruction and where the reserve margins are but also how people are using energy and how they are changing their behavior in response to efficiency and conservation, say realtime pricing type of endeavor so that the demand side is really being addressed also by technology innovation, new programs that are being seen on both the regulated and deregulated side and all of that is pretty exciting. So if you were a legislature and said do I want to disrupt this incredible momentum that actually is having the effect of reducing peak demands, through multiple measures, that's encouraging renewables and energy efficiency that could lead to the development of a new nuclear plant in Maryland, all of these things are fabulously good news for rate payers over long period of time.

So if you are looking at sort of the simplistic argument that we heard last year about should BGE build a peaker, I think that they, BGE has found many more efficient ways to get at the issue of reducing the peak than having a peaker in its portfolio. I hope that as more evidence comes in, and there are actually very good forums right now in the State of Maryland, the Department of Energy at Maryland is a very productive forum under way with respect to dealing with these issues, so I think that there's going to be a more reasoned debate about this in the next 12 months. But you have to expect that that debate will take place.

Very well. It sounds like you guys are prepared for it.

I think so.

I'll let someone else ask a question. Thank you.

Thank you. Our next question comes from Paul Patterson with Glenrock Associates.

Good morning guys.

Good morning, Paul.

Slide 20, the cash flow slide, just there are two items here, the derivative contracts classified as financing activities under FAS 149 and the contract and portfolio acquisition of about $1.3 billion, and of course it seems to be a proceeds as well in the financing activities. Could you just explain what is driving the activity there? What those two things represent?

Sure. So with respect to the derivative contracts classified as financing under the FAS 149 as you'll recall last year we had very positive second quarter of mark-to-market contribution from trading activities. That's really, but that was non-cash earnings. That's really the realization of those cash gains this year. As you'll recall earlier, we've been speaking to how the realization of those cash earnings will help both liquidity as well as our balance sheet posture for the balance of 2009.

Right. But it also comes out under the financing activity.

So with respect to investing and financing activities, as you might recall from the Q for first quarter, it's part of the gross up associated with the divestitures of our London and Houston businesses where we entered effectively total return swaps, so what that has the impact of doing -- of showing in the money contracts, for example cash paid shows up as an investing outflow and out of the money contracts or cash received shows up as a financing in flow. On a net basis, really it's kind of a wash but because of the accounting treatment that requires the gross up of those respective activities, it adds to some large numbers in our cash flow statement that effectively cancel each other out.

So you guys did not acquire $1.3 billion worth of contracts this quarter; is that correct?

Consistent with the derisking activities that we cited as being substantially complete that would be a fair statement.

Okay. And then in terms of the -- just to review this, you guys got $0.10 by selling wholesale contracts that were in the money and that was acceleration. How much again from 2010? You went through it; unfortunately I didn't get it down quick enough.

No, that's quite all right there's obviously a lot of numbers in the presentation. In effect what we did is we brought forward earnings, accrual earnings that would have occurred in the balance of Q3 and Q4, this was related to a utility contract that we had and the primary motivation was they brought in approximately $200 million of liquidity that we could in turn redeploy or reallocate to higher margin activities on the retail side.

The impact of this really was of the sale was $0.10. $0.05 was an actual gain from the sale. $0.05 was the pulling forward of earnings from 2010 and given the margins that we're seeing in the resale business as we redeploy the $200 million or so that we brought in and we redeploy that. we would expect the redeployment to be neutral to positive contributor to 2010 earnings.

Okay, great. Thanks a lot.

I think we have time for one more.

One more question.

Thank you. Our final question comes from Chip Moore with Canaccord Adams.

Hi, good morning. Thanks for taking the question. With regards to the proposed Smart Grid planning at BG&E, was wondering if you could talk about the expected timeline on the regulatory side and also if you could discuss the timeline for you to get comfortable with technology. Thanks.

Chip, this is Ken DeFontes. The timeline that we've proposed to the Commission was to get a decision from them in time for the DOE grant to be made, which is in early October. The Commission has heard our proposal this week at their admin meeting and they indicated they would issue a schedule to us, but we have not gotten that yet. But we've clearly made a tight linkage to the ability to get access to the DOE funding which we think is incredibly beneficial, so I think we have a compelling case that the Commission should move promptly to review.

I think from a technology standpoint, we're actually very comfortable based on the pilot we ran last year and the evaluation of how the market is developing we actually think the technology is moving along quite nicely, and we're ready to go. We think the solution we'll deploy will be long lasting and it will have the ability to give us lots of future potential, not only in terms of the immediate opportunities but also for the interface into the home.

Great. Thanks.

Well thank you all very much. We're pleased to present the quarter to you today and we'll look forward to talking to you again in three months. Thank you all.

This concludes today's conference. You may disconnect at this time. Thank you.