艾索倫電力 (EXC) 2009 Q4 法說會逐字稿

Good morning and welcome to the Constellation Energy fourth quarter and full year 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 2009 year-end earnings call. We appreciate you being with us this morning. On slide two 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 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'll notice 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. With that I'd like to turn the time over to Mayo Shattuck, Chairman, President and CEO to Constellation Energy.

Thank you, Carim. Good morning everyone and thank you for joining us today. This morning we reported full year 2009 GAAP earnings of $22.19 per share reflecting the gain realized with the close of the EDF joint venture. On an adjusted basis, were we to back out such one-time items, Constellation earned $3.36 per share consistent with our guidance of $3.25 to $3.45. Despite a challenging market environment, 2009 was a strong year for Constellation Energy, for our act of risk management and hedging program we adjusted our portfolio to adjust demand destruction and compressed commodity prices insulating the Company's results. Over the course of the year we completed the strategic initiatives announced in 2009 to derisk and strengthen the Company. We successfully closed our nuclear joint venture with EDF and divested our non-core trading and marketing businesses. We more than doubled our net available liquidity with a focus on managing collateral exposure and entering into new liquidity facilities specifically tailored to our ongoing businesses.

During the year we retired approximately $3.7 billion of outstanding debt and increased our cash position. Importantly, three rating agencies reaffirmed Constellation's investment grade rating. We completed these initiatives in less time and at a lower cost than originally anticipated. All of our core operating businesses performed well in 2009. Our generation business operated safely and efficiently throughout the year. We broke numerous records at our nuclear plants and completed major non-nuclear generation projects. Our customer supply business locked in strong margins reflecting a shift in the way products are priced and collateral needs managed. At BGE, we completed a number of efficiency programs such as our Smart Grid pilot aimed at providing customers the tools to better monitor and manage their energy usage. These projects are integral to meeting the empower Maryland goal of a statewide 15% reduction in per capita usage by 2015.

In summary we transformed and strengthened our Company in 2009. We are pleased with these accomplishments in the fashion with which we addressed the financial crisis. That said, we recognize we have further work to complete given the continuing headwinds facing our industry.

Let's turn to page five to discuss the challenges in greater detail. During 2009, energy demand decreased in nearly every region as idle industrial capacity and reduced commercial activity contributed to overall economic weakness. By the end of the year, energy demand and commodity prices appear to have stabilized. However the outlook for 2010 and beyond remains uncertain and will be influenced by the timing and magnitude of the economic recovery. We believe Constellation's merchant businesses are well positioned to weather these market uncertainties. Our ability to actively manage risk through our involvement in physical markets and execution capabilities enables us to proactively address changing scenarios for energy demand and commodity prices. Our generation fleet is highly hedged in 2010 and 2011, so lower commodity prices should not materially impact our earnings and cash flow during this period. The uncertainty surrounding climate change and financial regulation weighs on our capital intensive industry making capital investment decisions difficult. Evolving environmental legislation and regulation has the potential to significantly change the long term supply and demand dynamics of the market place and Constellation continues to actively advocate a clean energy agenda, one which supports balanced investment in renewables, gas, and new nuclear generation.

Looking forward, we see attractive opportunities to grow our generation footprint in the current depressed asset and commodity price environment. With our near term earnings and cash flows largely insulated, and approximately $1 billion of cash on hand earmarked for acquisitions and other investment projects, we are optimistic that we will be able to make attractive investments. Our strategic objective is to acquire generating assets in regions where we have significant load obligations and where ownership of generation would provide a more balanced physical footprint. This will be our foremost strategic objective in 2010 and 2011.

Let's now turn to slide six to review the detailed performance of each of our different businesses. In 2009, BGE, our regulated utility, enjoyed one of its best operational years ever. The BG team exceeded all of its key operational goals which included improvements in safety, reliability and customer satisfaction metrics. We're extremely proud of the performance last year and expect continued investment in people, processes, infrastructure and technology to build on 2009 strong foundation. Financial strength and flexibility are key components of BGE's bright outlook. During the year, BGE expanded its credit facility from $400 million to $575 million and entered a new secured in denture providing enhanced financing flexibility. BGE is pursuing opportunities which enable customers greater control of their energy costs and in 2009 the utility invested heavily in energy efficiency and conservation initiatives. BGE also increased its demand response capacity by 40% to more than 300 megawatts with further growth expected in 2010.

During 2009, BGE also commenced the full implementation of several energy efficiency programs including the use of home energy audits and appliance rebates to reduce customers energy consumption. In July 2009, BGE filed its Smart Grid proposal with the Maryland PSC seeking approval for full deployment of advanced metering technology. BGE was one of six utilities across the nation that was awarded the maximum $200 million grant under the DOE Smart Grid program. For BGE customers, the overall savings from Smart Grid deployment is projected to exceed $2.6 billion of five times return on the original investment of $480 million. Factoring in the DOE grant funds the customer turns are even stronger. At this time, we anticipate a March PSE ruling in our proposal and a semi-reasonable outcome, BGE expects to begin implementation in the second quarter 2010.

Several other green initiatives are under way throughout our service territory. Our recently completed Baltimore City solar facility is providing power to a BGE complex and our plug in hybrid electric vehicle pilot program will provide important data and experience concerning the potential impact of this technology. On the regulatory front, BGE has implemented all of its ring fencing measures and Constellation has made the requisite equity contribution to the utility that was a condition of EDF JV approval. As we have previously stated, and as the media has already widely reported, BGE expects to file a rate case in 2010 to help fund new initiatives and important upgrades to our systems to improve efficiency and reliability for our customers. Both the 2008 settlement agreement with the state and the Public Service Commission order approving the EDF transaction contemplated this filing. This will be BGE's first electric rate case since 1993 and will be capped at no more than a 5% increase in the electric distribution rates or about 1% on the total bill. Over the past few months, other Maryland based utilities have filed rate cases seeking increases. The Maryland PSC has recently ruled on Delmarva Powers filing with what appears to be a reasonable outcome.

Longer term, planned robust investments in reliability, load growth, energy efficiency and demand response will grow our rate base as we expect a reasonable return on regulated investments to drive improved BGE earnings. These programs are important for customers and will insure continued reliable service and provide our customers with the important energy management tools they need.

Let's now turn to slide seven for a review of our generation businesses. In 2009, our non-nuclear generation fleet operated at 9% reliability consistent with our plan and with better than expected cost control. Our Brandon Shores Unit 1 scrubber came online in December and has reduced the environmental impact of that plant. The project was on time and on budget with a plan we established in January 2007. The Brandon Shores Unit 2 scrubber will be online in the first quarter of 2010 as planned. These projects, coupled with several other environmental projects at our Wagner and Crane coal facilities, complete more than $1 billion of environmental investment and bring us in compliance with the Maryland Healthy Air Act, one of the most stringent air emission standards in the country. In the fourth quarter of 2009, we substantially completed construction of Hillabee, our 740-megawatt combined cycle plant in Alabama. We are currently running test burns and compliance testing with the expectation that the plant will come on line during the first quarter of 2010. We expect this plant to play an important role in matching generation to our existing Southeast municipal and cooperative electric load serving business.

Our nuclear generation fleet delivered outstanding safety, reliability, and efficiency results in 2009. The nuclear fleet generated over 32 million-megawatt hours exceeding our plan for the year. Our fleet achieved a capability factor of over 95%, the highest for any nuclear fleet in the industry. We also experienced record breaking operations in refueling outages in 2009. Our Calvert Cliffs Unit 2 set a world record by operating continuously for 692 days prior to entering its refueling out age. Our Nine Mile Unit 1 and Ginna plants each completed refueling outages in approximately 20 days, both plant records. In November, we successfully closed our nuclear joint venture with EDF. Constellation Energy Nuclear Group, or CENG. Constellation will purchase approximately 90% of the uncommitted output from CENG's five nuclear units under a five year PPA providing firm physical power to support our customer supply activities in the New York and Mid Atlantic regions. The PPA pricing is below market for the first two years with the balance of the power sold thereafter priced monthly at prevailing market prices.

Now if you'd turn to slide eight. Our customer supply operation performed well in 2009 undergoing significant change in managing through volatile economic and commodity conditions. At the start of 2009, we right sized our customer facing businesses to a scale consistent with our balance sheet. Factors considered during this process included our owned and contractual generation footprint, the size of our load obligation and the size of our over-the-counter and exchange hedge positions. A significant amount of capital is required to maintain and hedge our load positions given the structural imbalance between our own generation footprint and our supply obligations. As a result we reduced our contractual load volumes, but we continued to be a competitive market leader serving over 30,000 customers and approximately 140 terawatt hours. Similar in scale to the residential, commercial and industrial loads served by EEP and Southern. Additionally we improved unit returns as we and others begin pricing in the cost of the contingent and working capital under pinning the business. We also reduced our base load collateral needs there by lowering operating costs. We entered a gas supply arrangement with Macquarie Cook Energy to support our retail gas efforts. We also entered into a new $500 million commodity link facility which increases our available letter of credit capacity as natural gas prices decrease, addressing in a cost efficient manner the collateral asymmetry of the retail business.

The retail power group latter 2009 results with higher margins. As we have discussed with you in the past our customer supply margins typically expand during commodity cycle troughs as customers lock in lower power prices for longer periods of time and we earn higher margins on the new business we serve. Through 2009, our average margin on new retail business originated was greater than $7.50 per megawatt hour. Looking forward we believe sustainable margins in this business will be $5 to $7 per megawatt hour.

Our wholesale power group also performed well during the year with new business margins averaging about $3 per megawatt hour. We won key load auctions in PJM and MISO and added load in the Southeast. Although the wholesale power operation is largely auction dependent and therefore difficult to predict on a quarterly basis, looking forward, we expect sustainable margins in this business to be in the $2 to $4 per megawatt hour range. Profits from our customer supply business should continue to improve in 2010 and 2011 as existing lower margin contracts roll off and we move to one operating platform, streamlining processes and standardizing products.

Turning to slide nine. In 2009, we transformed the Company in fundamental ways, divesting business lines, reducing risk taking and becoming more focused and efficient in the deployment of capital and liquidity resources. We did this while maintaining a focus on our core activities, producing, selling and distributing power and gas efficiently and safely to our customers. Our sizeable cash and liquidity balances provide us with the opportunity to invest in generating assets. As I said earlier, over the next 12 to 24 months, we plan to deploy our excess cash to acquire assets in regions where we currently have a structural imbalance between the load we serve and the physical generation we own or contract. We believe that we should be able to earn attractive risk adjusted returns in these investments. This approach to our generation in load serving businesses and competitive markets should drive greater efficiency in terms of capital requirements and realized cash flows and will reduce our earnings and cash flow volatility through commodity price cycles.

Even after resizing the business to better match our balance sheet, we continue to be a leading supplier of power to retail and wholesale customers. We are committed to this business and in 2010, look to develop innovative products and services to help meet customers financial objectives, energy efficiency targets and carbon footprint reduction goals. We believe that these additional offerings will strengthen and deepen our customer relationships. We are increasing our annual capital spending at BGE, investing in reliability and energy efficiency. Our Smart Grid program is just one example of this increased spending committment. Prospectively, this increase in capital spending should grow the utilities rate base and its earnings. Through our unit star partnership with EDF, we are participating in the development of a new nuclear unit at Calvert Cliffs, the DOE loan guarantee remains one of the critical components in funding this investment and we are hopeful a positive decision will be forthcoming. Finally Constellation has stabilized and improved its operations. We are committed to further streamlining our businesses making Constellation a leaner more focused Company poised for growth. Aggressive pursuit of cost savings and capital efficiency as well as a balanced asset backed investment strategy is key to our continued competitiveness. With that I'll turn the presentation over to Jack to review the financial results. Jack?

Thank you, Mayo. Good morning, everyone. Turning to slide eleven, I'll review our financials for 2009. As Mayo mentioned, full year 2009 adjusted earnings were $3.36 per share. Adjusting for $18.83 of special items realized during the year, our 2009 GAAP results were $22.19 per share. These special items included the close of the EDF nuclear joint venture and this gain was partially offset by losses from the sale of our non-core businesses, impairment losses and the BGE customer credit. Details of all of the special items can be found in the additional modeling section on slide 18.

BGE contributed adjusted earnings of $0.80 per share in 2009 as compared to $0.85 in 2008, with a year-over-year decline driven primarily by share dilution. The merchant business reported adjusted earnings of $2.58 per share in 2009, down $0.11 as compared to adjusted earnings of $2.69 in 2008. It's important to note that year-over-year comparisons for the merchant business are difficult given the significant changes made during 2008 and 2009, including the reduction in risk capital to deploy to support our marketing and trading operations and the sale of our non-core businesses. The net impact of these changes contributed to year-over-year positive variance of $0.09 per share. Within the ongoing merchant business, our customer supply operation declined $0.19 as lower volumes were offset in part by higher margins on new business. Our generation operations favorable timing and duration of outages and higher hedge margins lead to a $0.29 year-over-year improvement. In addition, share dilution resulted in a year-over-year negative variance of $0.30 per share.

Turning to slide twelve, we'll discuss overall liquidity. This past year, Constellation's net available liquidity balance shifted from an area of concern to one of strength. Our net available liquidity more than doubled during 2009 from $2.3 billion at the beginning of the year to $5.6 billion at year-end. Strong performances by our core businesses, as well as the return of collateral in the form of cash and letters of credit from our non-core divestitures, increased our balances during the first three quarters of 2009. In the fourth quarter we closed the EDF transaction and our credit lines were reduced by approximately $3.3 billion for the terms of our bank incentive agreements. We partially offset this reduction by entering into just over $1.1 billion of new credit facilities in the fourth quarter ending 2009 with $4.1 billion of facilities. We believe we have adequate liquidity to support the current scale of the business we under write. Additionally the proceeds from the EDF transaction increased our cash balances, as of year-end 2009, to approximately $3.4 billion. Of that approximately $600 million will be used during the first quarter of 2010 to complete our committment to repurchase $1 billion of outstanding debt and $700 million will be used to repay the net tax liabilities related to the EDF transaction. We expect to use approximately $1 billion of the remaining cash on hand to fund strategic growth initiatives over the next 12 to 24 months. The net cash balance will be held on the balance sheet to support working capital needs. During 2009 we also experienced significant reductions in our down grade collateral requirements. As of year-end 2009 this amount was $1.1 billion, down approximately $700 million from the start of the year. Changes in credit exposure and position roll autographs contributed to the significant decrease.

Turning now to slide 13 to review the Company's debt profile. During the first nine months of 2009, we used internally generated cash and cash returned as part of our derisking activities to retire debt. We repaid approximately $900 million of short-term borrowings and retired a $500 million 6 1/8% note that matured in September. During the fourth quarter we retired the $1 billion EDF preferred note as part of the closing of the EDF transaction and commenced a $1 billion repurchase of outstanding merchant debt. To date we retired approximately $900 million, including the 2009 repurchase of approximately $400 million of tax exempt and zero coupon bonds and the 2010 successful tender for more than $480 million of our 2012 7% coupon bonds. We anticipate completing our committment by calling approximately $120 million of tax exempt bonds before the end of the first quarter. Looking ahead, as others in our industry carry a significant debt burden, Constellation has less than $800 million of merchant debt coming due over the next decade.

Turning to slide 14 for a review of our balance sheet. We ended 2009 with a strong key levered balance sheet. Our merchant segment markedly improved its credit metrics with an FFO to debt ratio of approximately 40%. This reflects strong operating results, the previously discussed debt repurchase program, and reduced imputed debt levels as a result of divestitures and lower counter party exposures. Looking to 2010, we project that we will have approximately $4.2 billion of total debt with approximately half at BGE and the other half at the merchant segment. Our merchant segment should maintain an FFO to debt ratio of approximately 38% in 2010 benefiting from strong operating cash flows and the cash benefit associated with our below market PPA with the nuclear joint venture. Many have identified 2012 as a pivotal year for companies in our industry, with the roll-off of in the money hedges and forecasts which consider the impact of low power prices. Using current commodity forwards, Constellation expects its merchant segment to have a 2012 FFO to debt level in the mid 20% range and expects to return to the 30% range in 2013 and beyond. We believe these are strong metrics, especially in a commodity cycle trough. At Constellation we are committed to improving our current investment grade rating. Over the next two years we hope to achieve a triple B stable or equivalent rating from all three major rating agencies.

Turning to slide 15 to discuss earnings guidance. Over the next 24 months, our earnings and cash flows are largely inflated from declining power prices. We are maintaining our 2010 guidance range of $3.05 to $3.45 per share. For 2011, we anticipate earnings per share to be between $3.45 to $3.85 per share. Our merchant earnings will benefit from the continued roll-off of existing lower margin contracts at our customer supply segment. Our BGE earnings reflect expected earnings growth related to capital investments for transmission & distribution infrastructure as well as efficiency programs. In 2012 and beyond, merchant earnings will be in part dependent on dark spreads and heat rates. Absent in any recovery in the commodity markets, Constellation's 2012 earnings will be negatively influenced by the loss of the below market PPA which is expected to contribute $0.55 to $0.60 of our adjusted earnings in 2011. This hedge roll-off will be modestly offset by increased earnings at BGE, and any potential incremental investments we make over the next 12 to 24 months . As we've said in the past, it's important to note we do not assume the reinvestment of this $1 billion of cash in our current guidance range. It is currently earning LIBOR based returns in our projections. That said, we plan to provide updated earnings forecasts as we make investments and capture returns. With that I'd like to turn the call over to Mayo for concluding remarks.

Before Q&A, let me conclude with a few thoughts. During 2009 we successfully completed our stated objectives and strengthened Constellation. After divesting our non-core businesses, Constellation now consists of a strong regulated utility and a merchant business that has an attractive set of physical assets coupled with a nationally competitive retail and wholesale load serving business. Our balance sheet is strong and stable with modest merchant debt and sizeable cash balances. As asset prices decline, we are poised to grow our generation fleet and balance our competitive footprint. The Company is well positioned for continued growth and management is focused on delivering strong shareholder returns in the years to come. And with that I'll turn it over for questions. Operator?

Thank you. (Operator Instructions) Your first question comes from Greg Gordon, Morgan Stanley. Your line is open.

Thanks. A couple questions. The first one is when we look at the success you've had in signing up margins at the levels articulated in your release, what's the average sort of duration of those contracts?

Greg, I think the question was the average duration of the contracts, roughly 18 months.

Great. The second question is not really directly related to the quarterly or annual earnings, but when you talk about the level of cash that you are committed to keeping on the balance sheet, what are we waiting for or what could change in terms of your collateral needs going forward that might cause you to reevaluate that? If we get better codification of the rules from the CFC, would that give you more clarity on whether you might be able to use other means to back up your business and use less cash?

Greg, this is Jack. With respect to the longer term working capital and cash requirements of the business, as you rightly point out, the CFTC proceedings that are looking at this very issue are important and significantly influence how we think about the levels of cash required for the business and this is a topic that we'll cover in some detail at our Investor Day on March 29th, Jim Connaughton will be speaking to this and other regulatory topics. In terms of the overall balances right now, we are keeping roughly a billion dollars on the balance sheet for the working capital needs of the business to the extent we're successful in acquiring Generation we would expect this number to come down. As far as ongoing operations further at the curve, a working capital balance at the merchant segment or cash to support that of somewhere between $250 million to $500 million is probably the longer term the right level.

And Greg, I might add that we continue to work operationally on ways to reduce the collateral requirements of the business. So every day we've got teams working on new ideas, whether it's new facilities on one side or through customer relationships or exchanges, et cetera. Working on reducing the collateral requirements of the business. So this is pretty much of a daily exercise here, but we are obviously working on the legislative issues, potential regulatory issues on that front and I think we will probably have a more fulsome view on March 29th when we all get together on that.

Thank you.

Your next question comes from Angie Storozynski, Macquarie Capital. Your line is open.

Thank you. Two questions. First about the competitive retail. You mentioned potential cost efficiencies in this business. Any chance you could quantify them and also are they included already in the guidance for 2010 or 2011?

Angie, this is Kathy Hyle. So the cost efficiencies, I'm not sure that we can definitively quantify them at this point. I do think as we have our Investor Day there will probably be a little bit more clarity in our segment reporting as we've talked about. So I think that's really all we can say at this point.

Okay, and the second question is about your hedge disclosure at slide twenty nine. It seems like you managed to hedge your coal at significantly lower prices than what we saw during the third quarter or the end of the third quarter earnings disclosure and how did you manage to do that? It seems like you have a higher percentage of hedges, but the prices are significantly lower?

Angie, this is Jack. With respect to the coal hedging, as we've spoken before, what is unique about our business is our ability to actively manage our portfolio. It's what we view as the key competitive advantage of our business and with respect to coal, we've been very actively working with our coal suppliers to acknowledge the fact that we've had lower than expected burn, that our coal piles are higher than anticipated and we've been pushing forward deliveries, and locking in lower prices on our hedges.

But did you unwind any of the hedges that you had in the past, because it seems like especially for 2010 and 2011, you had significant percentage of hedges at significantly higher prices than the ones that you are showing now.

With respect to that active management, the ability to move forward or extend at higher volumes and lower prices is certainly within the context of that active risk management.

Okay and last question. About the basis differential, the premium versus PJM West, you were mentioning a BGE zone had historically about 10% to 20% premium. Do you think that this is sustainable given the completion or upcoming completion of the Trail transmission line?

I would say that forward prices consider the impact of Trail coming into the zone. This is in Southwest Mac a very transmission constrained region in terms of getting power into this load pocket. So I think our forwards do consider the impact of trail and holding at that level we previously disclosed. Okay, thank you.

Your next question comes from Gregg Orrill, Barclays Capital. Your line is open.

Good morning, Greg.

Good morning, thanks a lot. Just coming back to the billion dollars of excess cash and your efforts to redeploy it, what are you seeing out there right now in terms of asset prices and what's your sense of the timing to deploy that?

Well, our expected timing, as we stated earlier, is the next 12 to 24 months. We aren't going to press on the market in any kind of unnatural way, but obviously we're looking at all of the possibilities that we think are available in the markets in which we have these load obligations. I would say there are some that are literally in auction format now, some that are in the zone of being likely troubled assets and then there's a group of assets that I think are -- would simply be opportunistic, that we look at as being desirable but may not necessarily be on the market. So we've got a pretty comprehensive process looking at these and we would expect that, particularly those that are pressed by financial obligations in the course of the next 12 to 24 months, that certainly we would be looking hard at and attempting participate in.

Okay, thanks.

Your next question comes from Ali Agha, SunTrust Robinson Humphrey. Your line is open.

Thank you, good morning.

Good morning.

When I look at your EBITDA assumption for your Generation business as you model it out currently, I compare that to the last data point you had given us at the end of the third quarter, it appears to be a significant decline in total expenses, the resumptions this time around as last time around. Can you tell us what's causing that and how sustainable you assume those expense reductions will be?

This is Jack. To your point, there has been a decline in operating expenses. I would say as we move forward with the efforts to redefine the segments of the business, we've been looking for in more detailed fashion at the services supporting the level of business and we've adjusted the internal score carding if you will of how we account for operating expenses at the Generation fleet and shifted those expenses to other parts of the business.

So Jack, to be clear, what you're implying is hedges as a whole have not come down that significantly, but the Generation allocation has come down. Is that what you're saying?

Yes, the Generation allocation has come down to more accurately reflect the services and support that under pin that business.

Okay, and second question, as you're looking at buying more generating assets in the future, give us a sense of what your preference would be from a fuel effective, is it primarily coal or nuclear? How would you prioritize the fuel side of it?

Well, I think we have an open mind on that. Obviously we have a new nuclear initiative that's probably more likely to yield results than how we perceive the current state of existing plants. There hasn't been a lot of movement in that arena in the last several years and we don't really expect there to be in terms of companies interested in divesting. Obviously gas plants are very interesting to us. I think they probably match our load requirements to a better degree than perhaps some other types. We are looking at renewables from a development standpoint, particularly in Maryland and we've announced some moves in that respect. So I think that although we keep an open mind, I think region by region, we have a slightly different hope with respect to the type of generation we have, we probably prefer to keep that to ourselves, but we do have a plan that matches particular types of generation or optimizes that to the kind of load we have in that region.

Thank you.

Your next question comes from Paul Fremont, Jefferies & Company. Your line is open.

Good morning, Paul.

Thank you. Just to follow-up on Ali Agha's question, should we then assume that the shift in expense would be primarily towards the retail supply business?

That's correct. It is effectively the corporate overhead and hedging services that are driving the reallocation of expenses. This is a topic that we'll cover in some detail at the March Investor Day and it's a shift, not a reduction.

Okay, and then the second question that I have is you've given sort of what you think are the normalized retail and wholesale supply margins and I assume the contribution historically has been about 50/50 from each of those businesses?

Well if you turn to slide thirty three, it will show in the additional modeling, it will show the break down of volumes served at the retail and wholesale business and if you look at the business historically, it's been more heavily weighted to wholesale volumes as we've realigned the sizing of that business and margins are attractive on the retail side, it's shifted to more of a 50/50 business.

For the 2010 and 2011 guidance, can you tell us with respect to sort of that normalized range whether the margins are, where those margins are for what you've assumed for 2010 and 2011?

We've modeled margins consistent with the $5 to $7 range that we've disclosed today.

So within the normalized ranges for both the retail and the wholesale businesses?

Yes, that's correct.

Thank you.

Your next question comes from Reza Hatefi , Decade Capital. Your line is

Good morning, thank you. I guess you mentioned making investments over the next 12 to 24 months a billion dollars or so. If you're unable to find enough attractive investments, would a special dividend like a billion dollars of $5, would a special dividend of that kind be a possibility?

Well, I think it's fair to say that we would consider some form of return to shareholders if we were unsuccessful and of which that would be one option, but I am anticipating that we are going to find opportunities to deploy that capital during that time frame.

And I guess looking at slide fourteen even after using a billion dollars of cash, you're still left with equity ratio that's 65% to 70%. Are you going to further use that balance sheet strength to I guess add shareholder value or you're kind of comfortable staying in that range for the near to medium term?

I'd say with respect to that, you rightfully point out that we have a very low debt to total cap ratio really reflecting the value attributed to the nuclear plants that after the EDF transaction, you see reflected on the balance sheet as we incorporated the current market value of those assets. With respect to the agencies, we find them far more focused on an FFO to debt ratio and with respect to where we find ourselves, clearly, we're at the upper end of their expectations for Triple B in 2010 and 2011 and 2012 as we pointed out. We and others in the industry, as hedges roll off, face some headwinds on that FFO to debt side, but importantly, we see ours improving back into that 30% range in 2013 and 2014. We will be, as we contemplate asset acquisitions, working with the agencies to ascertain if there are opportunities to increase leverage as we deploy the billion and if we can use debt to help finance some of those opportunities, we'll certainly consider it, but working very closely with the agencies and consistent with our desire to achieve that Triple B stable rating.

Thank you very much.

(Operator Instructions) Your next question comes from Paul Patterson, Glenrock Associates. Your line is open.

Good morning.

Good morning. Most of my questions have been answered. I just did notice on the balance sheet quarter-over-quarter the unamortized energy contract seem to have gone up a bit. I was wondering what was causing that and how we should see that unwind.

Paul, as you point out, they have gone up. Really that's the reflection of the PPA with the JV.

Okay.

So if you think about those -- think about that $350 million of net present value. That's accounting for how as that comes in over the next two years that will amortize until it gets to zero.

Okay, well I'll follow-up afterwards, thank you.

Thanks, Paul.

Your next question comes from Vedula Murti , CDP US. Your line is

Good morning.

Good morning.

Wondering should asset opportunities not materialize on an economic basis that you'd be thinking about today, should we expect you to consider building a new generation in those markets to match up the load?

I don't think that that's going to be something that's forced on us. I think that our development opportunities really focused on smaller renewable projects particularly in Maryland as well as whatever the outcome is on the new nuclear side and how much capital is deployed there. So I think that the idea would be we are in a depressed commodity cycle, that the value of these assets, some of which are completed and operating for many years, some of which are not even completed yet, that there will be sufficient opportunities in that realm for us to participate.

And this is Jack. To Mayo's point on the renewable side, one of the real opportunities that we see prospectively is the ability to work with our customers on the retail side to participate and partner with them on renewables like rooftop solar. It adds to customer stickiness, it deepens the relationship and we view that as an important objective for our business as we move forward.

And as a follow-up, wondering if the timeliness of being able to match up assets ODAR mismatched will you continue to operate through contracts and maintain that mismatch until things get equalized or will you consider in certain markets simply letting the retail book mature and just kind of run itself off?

No, I think that in fact overall the business will be somewhat mismatched going down into the future. This is an unusual opportunity because it's not just a sort of a collateral efficient opportunity for us to buy the physical assets, but those physical assets in theory should be priced quite a bit lower in this part of the market cycle than others. So I think we're marrying two concepts together that make the business more efficient and more profitable. It is not that we are uncomfortable with our ability to match the load in the markets that exist today which we've been doing for the last 10 or 12 years. So it's really just a process that we've gone through to determine how to optimize the capital we deploy in that business and return higher returns.

Thank you very much.

Great. I think we have one more question in the queue, Operator?

Yes, sir, thank you. Your last question comes from Michael Goldenberg, Luminus Management.

Good morning.

Good morning.

I just had a couple of questions about your financial statements. I'm trying to understand this amortization backout one-time. Which line item is listed in your Income statement?

Michael, this is Jack. I think that's something we can speak to you offline. We can walk through the financial statements.

Okay, then as far as the UniStar loss being backed out, is that something that you plan to do going forward in 2010 and can you give us an idea of what the costs of that JV are going to be in the meantime while you're developing the projects?

Sure. Right now, given that we have not committed to moving forward with Calvert Cliffs 3, and as Mayo pointed out, the DOE loan guarantee is a key hurdle in that decision to move forward with Calvert 3, we only have UniStar investments in our business plan model through 2010 to the extent that we're successful in achieving that DOE loan guarantee and we can satisfy a number of other objectives in the course of finalizing that project. And moving forward, we would then move that from a how we're treating it now is really a special item into the ongoing guidance of the Company and into the ongoing operating results. The drag in 2010 from the UniStar joint venture is roughly $0.10 to $0.15.

Got it. Thank you very much.

All right, thank you all for attending today and we look forward to seeing you all on March 29th for our Analyst day. Thank you.

This does conclude today's conference. Thank you for attending. You may disconnect at this time.