艾索倫電力 (EXC) 2010 Q2 法說會逐字稿

Good morning and welcome to the Constellation Energy Group's second quarter 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. And welcome to Constellation Energy's second quarter 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 the 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 under our operating performance. We have attached an appendix to the charts on the website reconciling non-GAAP measures to GAAP measures. With that, I will turn the time over to Mayo Shattuck, Chairman, President and CEO of Constellation Energy.

Thank you, Carim. Good morning, everyone, and thank you for joining us today. This morning, we reported second quarter adjusted earnings at $0.71 per share. Including one time items, Constellation reported second quarter GAAP earnings of $0.36 per share. We are reaffirming our guidance range of $3.05 to $3.45 per share for 2010, and $3.25 to $3.65 per share for 2011. Jack will discuss this in more detail during the financial section of the presentation. During the quarter, our NewEnergy platform continued to perform well. Our wholesale business had a successful quarter winning new business with strong margins and profitability. In addition, we had opportunities to purchase existing load contracts from other integrated companies at attractive returns. Our retail business experienced a strong sales quarter, meeting or exceeding our plan for volume, gross margin originated, renewal and win rates, and equity returns on originated business. As we spoke about during the quarter, originated unit margin declined as compared to previous quarters. Jack will speak more to this later in the presentation.

In the second quarter, we added more than 1800 megawatts of additional capacity to our portfolio. This included closing on the purchase of the two 550 megawatt gas plants in Texas, and bringing our Hillabee Gas Plant in Alabama into commercial operation. This brings Constellation's total-owned generating capacity to nearly 9000 megawatts and continues our effort to increase our physical generation footprint. These plants provide working capital and collateral efficiencies for our NewEnergy business. In addition, during the quarter, the profitability outlook for our generation fleet improved on the better than expected 2013 to 2014 PJM Auction clearing price for the max zone. As you know, the majority of our non-nuclear generation is located in this region. As was widely reported during the second quarter, BGE filed its expected electric and gas distribution rate case with the Maryland PSC. It is important to note that BGE's last electric rate case was in 1993. In the 17 years since, BGE has continued to invest in safety and reliability, and has become an industry leader in operating efficiency. Proceedings are underway and we anticipate the PSC will conclude its review by the end of this year. With regards to BGE's Smart Grid initiative, this past months, the Maryland PSC issued a disappointing decision denying our application and with it the $200 million Federal Stimulus Grant from the Department of Energy. BGE has clarified and modify its proposal and filed for an expedited reconsideration by the PSC. The DOE has stated they intend to decide by July 30 if their grant might be redirected to another applicant. As we have explained to the PSC, because their schedule for review extends beyond that date, we cannot be certain that these funds will remain available to help reduce the cost of BGE customers. We are working hard to have this resolved favorably in the next several weeks. Finally, in the federal policy arena, Congress recently passed the financial reform bill and the Environmental Protection Agency has proposed to revise clean air transport rule. Both may have implications for our industry and for Constellation specifically. Before I talk about these in more detail, I want to spend a few minutes on the status of our new nuclear efforts at UniStar.

If you turn to slide five. As we've discussed many times over the past four years, the development of our new nuclear option requires that we mitigate a large number of risks. Most notably, given the scale and the development time of these projects, it was clear that we needed to acquire as much government support as possible as one step in de-risking such a large capital investment. Virtually all countries and jurisdictions in the world that are pursuing new nuclear plants have sovereign support either by ownership, or indirectly through policy and regulatory certainty. It is not just about the power generation, there are geo-political reasons why countries wants commercial nuclear programs, to sustain the integrity of their national security interest or energy independence objectives. Unfortunately, in the US we have struggled to get real federal support in the form of a national energy policy but we have made significant progress through the loan guarantee program and through that program some of the needed sovereign support could be accomplished.

Since we operate as a merchant in a competitive market, we understood from the beginning that we would need additional support beyond that provided by a federal loan guarantee. EDF has been a great partner in that respect, not just because they share our investment risk, but because France has a broader industrial interest in the new nuclear around the world. The wait for the conditional DOE loan guarantee in the United States has begun to effect the prospects for the Calvert Cliffs project. While our application is still moving through the DOE approval process, it is taking longer than expected. As a result of this delay and uncertainty, we have begun reducing our spend rate on the project impacting jobs. As we have said before, the conditional loan guarantee is a necessary hurdle and not the only one which must be addressed before any shovel goes into the ground. We are fortunate to have a tremendous amount of support from our communities, labor, our state government, and our congressional delegation. But it's also obvious to everyone that the market signals to build a base load plant of any kind, let alone nuclear, have suffered significantly since we started the project four years ago. Natural gas is now under $5, not at $8, and the expectations for carbon pricing in the market keeps getting pushed back. Demand destruction has been pronounced while interest and demand response has increased.

At the same time, due to the global push for new nuclear, construction costs have not fallen at the same pace as fuel and power prices. Very few experts would dispute that we must have new nuclear in our future energy mix to meet national security, environmental policy and energy independence objectives, but the complex interplay between various fuel input prices in an unknown carbon policy makes decision making on long term investments very difficult. My message today is a mixed one. We remain interested and focused on pursuing this project. However, time is running out. We definitely can't keep spending without a near term commitment in the form of a loan guarantee. If that were to be resolved this summer, we will be working to finalize the project cost estimates and determine whether the plant meets our investment profile and risk criteria. It will be a joint decision with EDF as to whether to proceed, and as a consequence, we continue to work with EDF closely on all matters as our strategic partner in this endeavor. I'm not going to use a quarterly earnings call to once again extol the virtues of nuclear power, we are strong advocates and fundamentally believe we have to build a new generation of plants in the United States. Building plants has all sorts of advantages in helping the economy, creating jobs, and new supply chains, and maybe these will serve as catalysis for the federal government to do the right thing. But more importantly, as a nation, we cannot let our national security, energy independence and climate objectives languish as this debate lingers. It could be that we are a bit too early, but as we look at 61 plants being built around the world today, 23 in China alone, we as a nation can't be too late.

Moving on to slide six, the financial reform bill was signed into law last week and authorized as new regulations of the over the counter derivatives market in a manner that preserves the ability of venues that are in our sector to hedge their risks. After months of debate and serious concerns expressed by our industry the final bill did not have the type of [clearing] requirements for electricity providers that could tie up large amounts of working capital, squeeze liquidity and thereby raise prices to consumers. And we were pleased to receive that the two Senate committee chairs most responsible for the legislation, Dodd and Lincoln, issued a letter that clearly detailed this Congressional intent. It is particularly important that their letter bluntly stated that, "The legislation does not authorize the regulators to impose margin on end users." We plan to be involved as much as possible in the rule making process and will work with our fellow EEI members to insure the outcome respects this congressional intent to avoid diverting working capital from the economy into exchange margin accounts. Many rule makings need to occur to implement the new law including some multi agency activities which will likely take more than a year to resolve. Meanwhile, as you can see on the slide, our projected liquidity balance will be more than sufficient to cover our expected and stressed collateral requirements even factoring in the possible adverse rule making. Accordingly, we believe that this bill will have limited impact on our businesses.

Turning to slide seven, earlier this month, the US EPA issued proposed regulation to replace the Clean Air Interstate Rule or CAIR. The new regulations now known as the Transport Rule will limit power generation emissions of SOx and NOx in 31 states. The proposal would oppose tighter caps, somewhat earlier than CAIR. It would allow limited trading of SOx and NOx allowances within some sub-regions or individual states. Combined with the series of other rules in the work to the EPA, this new regime will further compel companies to reevaluate the long term economic viability of older, less efficient coal plants that do not had a environmental controls. We expect this to lead to plants retirements over the next few years, likely causing dark spreads and prices to increase. This in turn would benefit the profitability of the surviving plants, especially ones that have already completed major environmental upgrades such as those in the Constellation fleet. Approximately two-thirds of the power generated from our fleet comes from clean nuclear hydro renewable resources and combined cycle gas plants. The balance of our output comes primarily from coal plants located in PJM. The largest of these facilities have completed their environmental upgrades in order to comply with the stringent standards under the Maryland Healthy Air Act which positions us well to comply with the transport rule. Although forward dark spreads remain a headwind for many coal plants, Constellation's coal facilities are also advantaged by their location. Approximately 75% of our coal capacity is located in the MAAC region, where capacity values including those from the recent 2013/2014 planning year auction have improved the economic outlook of these plants. With that, let me turn the presentation over to Jack for the financial review. Jack?

Take you, Mayo, and good morning everyone. Turning to slide nine, I will review our financials for the second quarter of 2010. As Mayo mentioned, our GAAP earnings for the second quarter of 2010 were $0.36 per share. During the quarter, we recognized special items of $0.35 per share. Details of these items can be found on slide 16 in the additional modeling section. Backing out the special items are second quarter adjusted earnings for $0.71 per share. BGE reported adjusted earnings of $0.07 per share for the second quarter of 2010, as compared to $0.06 per share for the second quarter of 2009. This favorable variance is driven primarily by improved collections from our customers in 2010. Our generation segment reported adjusted earnings of $0.29 per share down $0.08 per share as compared to the second quarter of 2009. This decline was driven primarily by the sale of 50% of our nuclear assets offset in part by lower interest expenses. Giver our highly hedged profile, commodity price fluctuations have little impact on this segments second quarter earnings. Our NewEnergy segment operations reported adjusted earnings of $0.21 per share in 2010, as compared to adjusted earnings of $0.66 per share for the second quarter of 2009. As you will recall, during the second quarter of 2009, we monetized the wholesale contract that returned liquidity and accelerated earnings, increasing earnings by $0.29 in that quarter. The rest of the year-over-year change is primarily the result of Constellation's previously announced restructuring of its wholesale energy business results in lower electric volumes. The second quarter 2010 results reflect a new scale of the business.

Turning to slide ten. Constellation is officially managing its balance sheet, maintaining its investment grade rating and deploying excess cash at attractive risk adjusted returns. Our competitive business maintains a sizable cash balance with approximately $1.3 billion on hand as of the end of the second quarter. In this business, we are targeting a minimum cash balance of approximately $400 million to manage changes in working capital. Of the remaining $900 million we plan to use approximately $400 million of cash to fund business opportunities and organic growth initiatives. The remaining cash, approximately $500 million, is available for acquisitions. At BGE, we are sufficiently funded to sustain investment in reliability and infrastructure. While dividending cash to our parent to support shareholder dividend payments at their anticipated levels.

Turning to slide 11. During this past quarter, changes in forward power and capacity prices have significantly improved the generation segments earnings outlook. As you are aware, in 2010, our fleet has been highly hedged since the beginning of the year. Thereby insulating it from fluctuations in spot and forward commodity prices during the quarter. This has resulted in relatively little change since our first quarter update. During the second quarter, forward power prices began to improve in regions where we owned generation, with around the clock pricing increasing by approximately $3 to $4 per megawatt hour. As we look forward to 2012 and beyond, we are less hedged and positioned to benefit from improving forward prices. In 2012, for example, our forecasted generation EBIT increased in the second quarter by approximately $80 million as compared to what we showed you in the first quarter. As Mayo mentioned, the MAC region of PGM had better than expected results from its recent capacity auction, clearing at $226 per megawatt day. In 2013, these capacity results drive $104 million of the $234 million quarter over quarter improvement.

Turning to slide 12. During the quarter, NewEnergy's originated volumes were above our plan estimates with expected earnings within the 11% to 14% target equity range we showed you during our analyst day earlier this year. We were able to maintain attractive equity returns by leveraging our size and scale, spreading the fixed costs across our NewEnergy platform. The low power price environment has reduced collateral costs contributing to the attractive profitability levels in the quarter. By the end of the quarter, we had originated or contracted for approximately 85% of our 2010 and 40% of our 2011 plan estimates. Highlighting the annuity-like nature of these businesses. Results for our wholesale business remain relative unchanged during the quarter, with average unit margins of $3.21 per megawatt hour during the quarter, and $3.13 per megawatt hour year to date. Within our retail business, we shifted our focus to signing new and larger customers. These customers tend to be more competitively priced, but also allow us the opportunity to leverage our multiple energy related product strategy and develop enduring customer relationships. This multi product strategy is an important piece of our customer focused approach, moving our relationship with our customers beyond the simple commodity sale. This shift in customer mix combined with the lack of market volatility and heightened competition resulted in average unit margins declining to $4.35 per megawatt hour during the quarter, and to $5.54 per megawatt hour year to date.

Let's now turn to slide 13 to discuss our earnings guidance. As Mayo discussed we are holding our 2010 guidance range of $3.05 to $3.45 per share, and our 2011 range at $3.25 to $3.65 per share. At BGE, we are expecting to earn between $0.55 and $0.70 per share in 2010. In 2011, we would expect results of $0.75 to $0.90 per share as we increase our capital spending and earn adequate risk adjusted returns on these investments. In 2010, our generation segment is expected to earn between $1.05 and $1.20 per share. In 2011, we would expect our results to be at the higher end of our stated range of $0.60 to $0.80 per share, driven primarily by the impact of improving forward commodity prices on the unhedged portion of our fleet. We are forecasting our NewEnergy segment to earn between $0.80 and $0.95 per share in 2010, consistent with what we showed you during last quarter's earnings call. In 2011 we would expect our results to be at the lower end of our stated range of $1.20 to $1.40 per share, driven by an expectation of increased competition and customer shopping. As currently hedged in 2012 and beyond, Constellation's earnings are increasingly leveraged to dark spreads and outright power prices. If we see continued price recovery our fleet and earnings will further benefit. With that, let me now turn the call over to the operator for questions.

Thank you (Operator Instructions). One moment please for the first question. Your first question comes from Dan Eggers, Credit Suisse, your line is open.

Good morning. Jack, could you get more into the NewEnergy margin trends in this second quarter. You had given a pretty significant backlog you already had in place, the dollar per megawatt hour margins and retail are a bit surprising. Can you explore that a little more, please?

Hi, Dan, this is Kathi Hyle. We continue to expect $5 to $7 margins in the retail business over the long term, and the $2 to $4 margins that we previously communicated to you in the wholesale business as well over the long term. And margins as you've heard really before is just one of many factors that we use to assess and manage our business, so other factors including renewal rates, win rates, collateral costs, customer mix, operating costs and more importantly, or most importantly, profitability. We have been, and we target returns in the 11% to 14% range, which I think we shared with you on analyst day. We've been, and are, conscious and intentional in targeting the right customers, and it's these customers that will prove more profitable as they are renewed and as we have the opportunity to provide multiple products to the customers.

Okay, so Kathi, if you think about the fact you had a backlog expectation and a volume expectation coming into the year, and then I see the other margins as under as much pressure as they were just on the retail side of the business, clearly, I don't think you expected a hot quarter to put the volumes through, so why did the margin decline relative to what presumably was in the backlog?

Let me clarify, the margins that we presented, I think, in slide 12, that Jack was talking to, are originated business, business that we sold in the quarter which differentiates from business that we realized or that we flowed in the quarter. Those margins were significantly higher -- north of $6 in the retail side. Does that help?

The old margins were higher that was in backlog, but if you look at the unit margins in the $4s for the quarter, that would tell you there was an interesting mix either on volumes that weren't hedged or the backlog didn't show up the same maybe as the $6 plus dollar originated margins?

No, the backlog absolutely showed up. Help me.

So to dilute down -- not to belabor this -- but to dilute down to the $4 and some odd dollar per megawatt hour margin you saw in the second quarter, you had to have a huge amount of volumes that weren't hedged that came in well below target?

The $4.35 does not include any backlog. It is just new business that we booked in the quarter for realization in the future. So there's no backlog in that $4.35 number.

Okay. We might follow up on that. Just from a -- what pricing you're doing new business at or what you're adding back -- I think you had recently said that was coming at the lower end of the range? Does that affect the outlook for guidance for next year, for the business if the current conditions continue?

We're comfortable as Jack said with our guidance range for next year, although we're likely to be in the lower end of that guidance range based on what we're seeing right now from origination standpoint.

So if you're doing new business on the retail business at $4 to $5 a megawatt hour signing up new business there today, you're still going to fall at the low end of the range?

That's correct.

Okay. Great. Thank you.

Your next question comes from Greg Gordon, Morgan Stanley, your line is open.

Thanks. Several questions, just a quick followup on that first (inaudible). You mentioned in your opening comments that you also acquired load from other entities during the quarter, so should I presume that the volume expectations for 2011 are also up significantly relative to the last disclosure? You're making -- you're able to hold your guidance because you're making lower average volumes but on a much higher expectation of deliveries?

Greg, this is Jack. Why don't I take that one. I think our volume expectations for 2011 have not changed from Q1's guidance.

Great.

Greg, the important part there, maybe this is a bit too nuance, but one of the comments I made in the presentation is in this lower volatility, lower priced environment, the collateral charges that we are, that the collateral we're paying for to reserve or to post, to support business is lower. So the overall profitability for megawatt hours, put aside the gross margin discussion, but the profitability EPS contribution is what, is higher -- so that's what allows us to sustain that guidance range at the same price level.

So when we drop down from gross margin per customer to EBIT, and then to earnings, the collateral charge is being allocated to NewEnergy or lower?

That's correct.

Greg, I might add that a pretty consistent phenomenon over the years at the wholesale level is that competitors come and go, and what has happened this year is some acceleration of the exiting of certain participants at the wholesale level. And they are remarketing their load obligations back to people, who are active in the market like ourselves.

And so we do model that to our plans in terms of wholesale volumes, but what's been interesting is the fact that we can lose at the front end of some of these wholesale auctions, but it's not that infrequent that that load actually comes back to us again as people come in and out. And I think that speaks to the fact we've been in the business for 12 or 13 years now. Some of the exiting players will come to us in the normal course to offer up their load obligations knowing that we're a quick responder, we're commercial, and we've been in it for a long time. People sometimes use the wholesale auction level for various strategic purposes, but we're in it consistently year in and year out and participating as a core business.

Thank you. One more quick question on that, and I have a couple other questions. So the lower collateral charges, is that a lower inter-Company charge or does that relate to the fact that you're saying he only need to hold $400 million of cash versus your prior guidance that you needed to hold a $1 billion of cash, so therefore you're able to redistribute that capital? Or is it actually just an inter-Company allocation?

It's perhaps a little more nuance than that. The actual, the posting requirements are lower, the cash posting requirements are lower.

(inaudible) all their posting requirements?

That's correct. And so while some of it is as you suggest an inter-Company charge in terms of how much collateral we have to reserve to be able to post, if prices decline, just because prices are at a lower overall level and have lower volatility, the actual cash we have to post externally to the extent we hedge the exchange is also lower which, obviously, it has lower costs.

Great. So now you had been telling investors that we should presume that $1 billion of your cash balance was reserved for back stopping this business. You've indicated here on one of your slides that you think your cash balance now needs to be around $400 million? Should we assume that you've essentially changed your guidance on how much cash you need to hold by $600 million?

I think that's correct. Now that we have clarity on the spend reg -- regulations -- while it's going to take 18 months likely to translate the thousand pages of legislation into actual rules and implementation, it's our view that we're quite comfortable reducing what we described as perhaps a $1 billion of cash we could keep around to $400 million of cash for working capital.

That's $600 million you can deploy that's by asset?

Yes.

Great.

Or invest in growth elements of the business like solar, like wind.

Couple other questions, switching to the generation business. Generation margins -- generation earnings guidance improved $0.10 to $0.15 in 2011. And all things equal, that would infer a fairly large exposure -- larger exposure to changes in commodity prices that you guide to for '12 and '13, but going through the deck, I see you've increased your assumed generation output in PJM at the coal fleet? Could you go through what the components are that drove up the guidance for 2011 by $0.10 to $0.15? How much is higher output from the coal fleet, how much is the Texas acquisition, et cetera?

I guess first off, I don't think we would say that we anticipate raising guidance on 2011, it was more we would come in at the upper end of the range. With respect to, as we mentioned, in Q1, we had a 74% generation hedge on 2011. As of Q2, we're about 77% hedge, so we have kept ourselves open to benefit from the rise in prices that we did see during the quarter. And as we mentioned, during the call, we've seen significant improvement in 2012 and 2013 as prices have rebounded, and were less hedged that that.

You know what? I read that slide wrong. That was a silly question. I apologize. You flipped around some of the lines there. Going to date 2012, and 2013 -- specifically in 2012, you indicated that generation is up $104 million because of the capacity. That leaves $130 million unexplained, obviously power places are up, but just power prices -- power price changes since your last update don't explain the full $130 million. Vis-a-vis, the sensitivities you laid out. Could you give us a water fall that would chart -- verbal water fall that explains the other $130 million?

Sure. And just to provide some numbers, the change is about $79 million in 2012 and the real benefit from the MAAC capacity is $234 million increase in 2013. That's really when we see the half year benefits, so $104 million comes from capacity. I think importantly, as you look out to 2014, I know that's a long ways out there for people, but we would expect to get a full year benefit from this higher -- higher sustained capacity prices so it starts to improve things in 2014 and beyond. You're seeing about half of that $79 million come from capacity, and about half of it coming from a rise in power prices. I'll tell you that Navasota is starting to contribute to the bottom line in 2012 and 2013 as well.

And, so in 2013, there's $104 million benefit, so there's $130 million that has to be explained by other factors. You're saying part of that is the curves part is the acquisition of the Texas plant?

Part of it is acquisition of the Texas plants, I would say the majority is just an outlook for improved dark spreads and [E-rates] out the curve.

So it's reflective of the curve or reflective of your point of view where things are heading?

Reflective of the curve.

Thank you.

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

Thank you.

Good morning.

There were a couple of data points over the last day on nuclear loan guarantees that maybe you could help clarify and make sense of. The passage of the war bill, and whether or not that included an increase and also the report from France on the commitment to nuclear globally.

Yes. I'll have Mike Wallace speak to both those issues.

Sure, to the first issue. Our application for Calvert Cliffs Unit 3 continues to move through the DoE process in, from our perspective in acceptable form, and we are hopeful that the remaining authority that the Department of Energy holds today will be used as a basis for granting a loan guarantee to our project. In addition, as you recognize, there are a number of efforts that are underway to provide additional funding authorization for DoE to grant loan guarantees to yet other project and we're supportive of that effort as well for the industry. But we're very focused to work with DoE with our application. We believe it is ripe. We're pleased that the DoE actually approved our application on June 10 through their credit committee, and we have one step remaining, and that's the credit review board at DoE. And we're hopeful we will see action there sometime in the very near future.

Thank you.

In addition, you asked about the developments in France. There have been several issues with respect to EDF and AREVA and the relationship between the two, as well as some focus on France's overall effort to support new nuclear globally. Just yesterday, the so-called Roussely report was issued -- that was by Francois Roussely report to the President of France -- bringing forth a number of findings and recommendations, all with an objective of improving the way France is positioned to succeed with new nuclear. And they have put a very specific focus on the success of activities with their plant in France and the preparation for their activities in the UK, and drawing the lessons learned from both Finland and China into that process.

In addition, the working relationship between EDF and AREVA is now made much more clear so that there will be a focal point and it will be EDF to lead the French nuclear efforts around the globe. And that includes, of course, here in the US -- we have been working very closely with EDF for the past three years, in all matters related to new nuclear, and in particular, our project stands to benefit from the lessons learned of the one unit in Finland, one in France, and two in China before we are ready to really put a shovel in the ground and move significantly forward here. So the further the delay of our project in the queue compared to the others will benefit from the lessons learned that France is now bringing to the forefront.

Okay. Thank you.

Your next question comes from Brian Chin, Citigroup, your line is open.

Good morning. I have a followup on Gregg Orrill's question. You mentioned the credit review board at the DoE is the last step for the application. What's the likelihood that the credit review board could approve your application before Congress decides whether or not to expand nuclear loan appropriations? Are the two decisions independent or is one tied to the other?

Well, I don't think it would be appropriate for me to opine on exactly what DoE may or may not do. What I can be clear about is they have authorization in hand today to be able to provide a conditional loan guarantee commitment for our application. However, additional authorization is needed for future projects that get to a similar state. Our project is the only one that is as advanced in the DoE process as it is. And there for, would seem most readily available to be assigned to the authorization available today. But exactly how the administration and DoE will move the process forward, I think, is not for us to opine. We're hopeful and we see everything lined up but we don't know exactly what the schedule might be.

Great. I've got one more follow-up on an earlier question from Greg Gordon. With regards to the 2013 EBIT outlook, you mentioned it was Navasota plus just the forward curves and heat rates that explain the delta upwards in EBIT year over year relative to capacity prices. For Navasota, do you have an utilization assumption at Navasota that is dramatically increasing from 2011, 2012, into 2013? And, can you talk to that a little bit?

With Navasota, it operates about 25% capacity factor, we do see that region growing. And the market tightening. Importantly, there's no capacity value in the market so, and there's a willingness from ERCOT to let power prices go quite higher. So what we're expecting is both an increase in capacity factor utilization. We model that it gets to approximately 50% as you progress throughout our five year plan. We're expecting higher power prices as you see reserve margins tighten and, ERCOT uses rising power prices to send the [new built] signal.

Thank you.

Your next question comes from Neel Mitra with Simmons & Company International. Your line is open.

Hi. Just wondering if you could discuss the margin assumptions you're using for NewEnergy on the unoriginated portion of the backlog for 2011? Are you assuming that the contracts move back to the previous range of $5 to $7 a megawatt hour, or assuming they stay in the $4 range?

Hi, this is Kathi. So on transactions we have originated that are in the backlog, the level at which we originated we assume we will realize. So in the chart --.

What about the 41% that hasn't been originated. What -- .

The 41% that has not been originated, if we -- for 2011, if we don't do anything better than what we've done to date in Q2, so $4.35, $4.50 range, we would expect to be in the low end of our guidance range.

And Kathi, importantly, you did suggest that $5 to $7 still remains our expected outlook?

Absolutely. Long term over the cycle, we believe $5 to $7 is the right margin range.

And I do think Neil just, again, I touched on this a little bit earlier, but part of our logic in breaking out the NewEnergy segment is really to transform the discussion from one of gross margin. Because I think -- we've seen this as others have reported but also as Mayo mentioned -- people exiting the business, we looked at the business, and what we've learned is the there's a variety of definitions of gross margin within the industry. And really, obviously, what everybody cares about is profitability per megawatt hour, and the intent of our new disclosure is around trying to demonstrate the actual profitability of this business and importantly, as we leverage our size and scale over our risk platform and more of that profitability as we gain efficiency drops to the bottom line. That's really what we care about which is why you hear us focusing on this return on equity concept of 11% to 14%.

I might add also that hopefully, you hear from us the strategy of being customer centric across a broader set of products so that at some point, the goal is to not exclusively be looking at the margins specifically on the commodity, because we're -- have been and will continue to introduce more product content to that relationship with adds to the profitability per customer. So, Jack alluded to the fact we have about 15% of our revenue now flowing outside of the commodity arena, and our charter here strategically is to increase that product penetration. So over the quarters ahead, hopefully we'll be able to expand a little bit more on that progress because we have a number of initiatives that are geared towards stickier relationships, and more value-added type of relationships with our customer base. So we'll work on ways in which to communicate profitability per customer, profitability per channel, and other -- transparency that helps a little bit as to whether we're executing on that strategy very well.

Just to be perfectly clear, with the backlog that we've already locked in for 2011, and with our expectations on what we will originate for rest of year that may impact 2011, we would expect our margins that would flow in 2011, will be well within that $5 to $7 range.

Right. That's helpful. And just the general macro environment for retail, what caused the lower margins this quarter to be originated closer to $4 rather than the $5 to $7 range which you think is sustainable over the long term? What was really special about this quarter in terms of competition? What would change going forward to get back in the range of the $5 to $7 range?

Certainly, this was a competitive quarter, but it's a mix of our business, so as you look at the mix of our renewals, versus our new customer -- the size of customers. We had a much higher percentage of our absolute largest customers -- over 40% of the business we originated this quarter were our absolute largest customers. And they tend to be a little bit lower margin customers because quite frankly, from a profitability standpoint, they are cheaper to serve from an operating cost standpoint. So we look at profitability, we're targeting that 11% to 14% range, and mix will impact these margins.

Okay. Great, just one last question. Are their opportunities right now for you to make accretive acquisitions in New England or other regions where you're short generation for the remaining $500 million to $600 million in cash?

Well, as I think we've stated we have a -- our strategic intent is to acquire more generation to back the load serving business, so we have a team here that does look at what we believe to be available opportunities and we have them appropriately analyzed -- some are in process, obviously, the Navasota deal closed. We've looked at others, and that will continue for a while. So our intent is to continue to execute on the strategy of acquiring plants in the regions where we're operating on the load serving side. So it's active, we've got the right resources here to focus on it, and I think we've got a pretty high level of confidence that we're going to execute on that in the course of the next 12 months or so.

Mayo, just some incremental comments. I think our original thesis that we would see an increasing level of opportunity for investment broadly in the competitive markets as this new sustained power price environment plays through is actually coming to fruition. We are starting to receive more inbounds, we're starting to see other private equity owned or hedge fund owned assets coming to market. As well as you're starting to see companies go back to basics and explore divesting their merchant fleets.

Okay. Thank you.

Your next question comes from David Frank, Catapult, your line is open.

Good morning. Question, you touched a little on the impact from the stricter environmental requirements, and I was wondering what steps do you think the EPA will take with regard to the Mercury rule. What is the likelihood they will require a maximum achievable control technology standard, and what opportunity, if any, does this present for you?

I'll have Paul Allen, who is our Chief Environmental Officer address that.

Hi, David. Our view is that EPA has shown every indication of staying on target with the [HAP MACK] rule, which would mean we would probably begin to see compliance around the industry in the 2014 to 2015 time period. And that's highly likely to drive either Retrofit's repowering or retirement of some significant part of the fleet, and that we would be well positioned to meet that. We would probably have to incur some capital expense, but highly likely the fact we've already taken care of what we needed to do to comply with Healthy Air Act of Maryland positions us much better than others.

Okay. Great. Thanks a lot.

Thanks, David.

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

Thank you, good morning.

Good morning.

Going back to your opening remarks when you talked about the slow process so far on the DoE approval process and you're slowing down your work. Can you remind us or let us know -- when would you, when by the latest do you need a decision from the DoE, otherwise you'll have to stop the project completely?

It's definitely a year decision. I think we've all been geared towards having an answer before this point in time, frankly. And so there's some level of frustration that we haven't had an answer at this point, but as Mike alluded to, we're well into the process, we know our application is the most advanced. And there are other variables that we just don't have a lot of transparency on as to why it's been tied up. But we've indicated to all of our constituencies, and there are have been a lot of them who have been attempting to help us on this, including labor and our congressional delegation, and others that we can't keep going at the rate that we're going without clarity on the loan guarantee.

And when we get that loan guarantee, you know that there's a negotiating process with DoE, so it's typically 90 days, Southern was given a 30 day extension before solidifying that. There are other -- there are things that we need to get on with of which the loan guarantee is the principal catalyst, and we need to get that such that we can keep pursuing EPC contract, and other risk mitigating aspects before we put a shovel in the ground. So time is a little bit of our enemy at this point, and I think what we're signaling is some level of frustration that this has gone on a little bit too long, and we all recognize we do need government support. And these are huge projects, and any single company -- in our case, we have two companies involved -- needs to balance all of the risks and make certain decisions as to whether they can contain the ones they need to contain, and we are very much focused on that.

But just to be clear on that, even if they were to stretch it out in the fourth quarter, as long as it's under 2010, there's a -- even though it may be late in the year, you would still be moving forward assuming you would get it.

We're still planning on funding UniStar through the end of the year, so we have plans. But during that period of time, we need to have a signal that the loan guarantee is in place.

Okay. And separate question on slide 24, when you laid out your liquidity, I noticed that you had the EDF put option in there and then you signal that it goes away in December and so on and so forth. As long as you, Mayo, frankly that realistically you are looking at that less in terms of exercising it, more in terms of some other benefits that you could get out of having it in hand, is that still the way we should be thinking about it?

As I alluded to last time we spoke, the -- we acknowledged the issues around the put option, but we're frankly really, we're working with EDF holistically on a new nuclear project, and in conjunction with being our operating partner. So it's really, at this point, not constructive to introduce the put issue into the equation, because we have a very detailed and thorough discussions with EDF with respect to the strategic initiatives that we are involved in together, and we have till year end to address that issue, and we really don't have a lot to say about it, in the meantime.

And just one last question. Theoretically, you could run into a situation if my dates are right where the Put option is expiring and the DoE has not come back to you, I guess that's a theoretical possibility? Is that right?

I think -- so your question is -- the facts are that the put option expires at the end of the year. Our tolerance with respect to investment without a loan guarantee is pretty much the end of the year, so yes, I think that the good news for investors is that my view is that a lot of this will resolve itself by the end of this year. We will definitely have a clearer path and be able to resolve these issues.

Fair enough. Thank you.

Thank you.

Your next question comes from Paul Patterson, Glenrock Associates. Your line is open.

Good morning. Could you remind me why the EDF put goes up to $1.4 billion from $1.1 billion?

It's actually based on the approval of -- from the Pennsylvania PUC that allows us to transfer Safe Harbor -- which is our hydro assets, that's the reason that went up in the quarter.

Okay. And in the press release, you said you purchased some load from other companies that was very attractive, could you elaborate on that? What was that and how does that work?

See, that's simply the business that we've been in, and in a continuous way that particularly along the east coast that the load options that take place in New England, and New Jersey, and here in Maryland. Historically, we win a fair share and we lose a fair share, and some of that share that we've lost comes back on the market. And in effect, they conduct either auctions or bilateral discussions about whether we would take on that load. And sometimes that's a function of the load being in the money to a winning participant, and they are trying to extract some cash and in other cases it's just the option, they simply want to get rid of the obligation. But since we're in and out of the business as long as we're pricing it accordingly, we're happy to participate in effect and what is a secondary auction.

So was it a particularly attractive situation (inaudible)? Could you give us a feeling as to how much that was in the quarter?

Well, I will give you a sense that I believe it's a significant number that we have bid on and I'm not sure we would size out below, but yes, we feel very comfortable about the margins that we're achieving in the course of those secondary sales.

Give us what the mark-to-market impact was for the quarter.

Before we get there, just as we build our plans for the year, we always anticipate because we -- as Mayo's mentioned -- this has been a continuing part of our business so we always have in our forecast some projection of margin and earnings coming from these types of endeavors.

True.

With respect to the question on mark-to-market, quarter -- in the quarter, it was positive $47 million. On a year to date basis it's 10.9, as you recall mark-to-market was negative in the first quarter.

Okay. And just finally, there was this carbon taxing in Montgomery County. Is that isolated, do you think to Montgomery County? Are you seeing any stuff like that happening anywhere else in Maryland? It's always an interesting political environment there. Are you seeing anything other than that, which my understanding is that would not affect you -- what was happening in Montgomery County. Are you seeing any other activity like that in Maryland?

This is Paul Allen. That's very isolated instance, and it has to do with really with interior Montgomery County politics, and some antipathy towards one large company in particular, and I don't see that spreading anywhere else in the state.

Great. Thanks so much.

Time for one more quick question.

Your last question comes from Paul Fremont, Jefferies. Your line is open.

Thank you. Quickly on slide 34, the retail power margins that you break out by quarter, point of clarification, each of those bars represents just new business? Or does it represent the realized margin for the quarter?

It just represents new business originated in each quarter.

That's what I thought. Okay. Second question, there's a major increase in PRB -- decrease in PRB coal price projections -- first quarter, it was $65 to $75. It drops to $55 to $70 in the second quarter. Is that all rail?

With respect to, if you think about our PRB, it is a long delivery route. The fluctuations on PRB on a tonnage basis aren't going to drive that nearly as much as rail so, I think your supposition is correct.

Have you been able to sign up any contracts at the lower level of price?

The reality is we burn such a small fraction of PRB that it really -- and we're looking at that in our Crane facility, it's not all that material to the earnings of the Company.

Last question, given what you know about the interstate transport rule and potential additional EPA restrictions, can you talk to us about whether it makes economic sense to potentially add scrubbers to CP Crane and to Wagner?

I think the reality is those assets are more mid-merit in the stack so the likelihood of us making that investment is probably quite small.

And both of those plants, I believe, are included under the put option; is that correct?

Crane is in -- is covered in the put option, Wagner is not.

Thank you very much.

Thank you.

Thank you all again, for attending this morning, we'll see you next quarter. Thank you, operator.

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