艾索倫電力 (EXC) 2010 Q4 法說會逐字稿

Good morning and welcome to Constellation Energy Group's fourth-quarter and full-year 2010 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 Director of Investor Relations for Constellation, Sandra Brummitt. Sandra, you may begin.

Thank you. Welcome to Constellation Energy's 2010 year-end earnings call. We appreciate you being with us this morning.

With me here in Baltimore today are Mayo Shattuck, Chairman, President, and CEO; and Jack Thayer, Senior Vice President and CFO. Mayo and Jack will provide you their perspectives on our performance for the quarter and the year as well as our expectations for the future. Following their remarks, we will take your questions.

Please turn your attention to slide 2, a reminder 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 3 you will 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 would like to turn the time over to Mayo.

Thank you, Sandra, and welcome to your new role. Good morning, everyone, and thank you for joining us today. This morning we reported full-year adjusted earnings of $3.06 per share, which includes a non-cash mark-to-market timing loss of $0.23 per share.

Including one-time items, Constellation reported a full-year GAAP loss of $4.90 per share, primarily driven by impairment charges on our CENG and UniStar investments. Importantly, the one-time items resulted in a positive cash inflow of approximately $240 million.

Looking forward, our guidance ranges remain at the previously disclosed $3.10 to $3.40 per share for 2011, and $2.40 to $2.70 per share for 2012. Our 2013 earnings estimate continues to be north of $3.00 per share. Jack will discuss our 2010 results and earnings outlook in more detail later in the presentation.

In 2010 Constellation performed very well, completing all of the strategic initiatives we announced at the end of 2009. We strengthened and grew customer relationships; invested in physical generation assets at attractive prices; and improved system reliability and corporate-wide efficiency. We believe the successful completion of these initiatives lays a solid foundation for prospective growth of our customer-centric business.

In February of last year we spoke with you about our plan to deploy more than $1 billion to acquire generation. In less than 12 months we completed our goal by purchasing combined-cycle facilities in ERCOT and NEPOOL at attractive prices. We also completed construction and are now operating our Hillabee combined cycle plant in Alabama and the Criterion wind project in western Maryland. Collectively, through acquisitions and investments, we have added more than 4,300 megawatts of physical generation capacity to our portfolio, bringing the total installed capacity of our generation fleet to approximately 12,000 megawatts.

We are expanding the bundled products and solutions we offer customers and are leveraging technology to do so. To further strengthen our demand-response business, we acquired CPower, increasing our managed demand-response portfolio to over 1,500 megawatts. We are now the second-largest demand-response provider in the commercial and industrial competitive markets.

We expanded our solar business, selling 36 megawatts of on-site solar projects, which significantly exceeded our target. These projects include long-term Power Purchase Agreements to customers across the country including a Benjamin Moore and the Denver International Airport.

Our regulated electric and gas utility, BGE, had another strong year in 2010, significantly exceeding targets for safety, customer satisfaction, and financial performance. While Maryland continues to be ranked by many as a challenging jurisdiction, our recent experience with the Maryland PSC during the Smart Grid review and rate case suggests a workable environment for our utility. During the year, BGE received approval for its Smart Grid initiative and is investing the proceeds of the $200 million federal stimulus grant to partially fund this investment. BGE also received its summary electric and gas distribution rate order from the Maryland PSC. Notably, it was our first electric rate case in more than 17 years.

In summary, as I reflect on this past year I am proud of what Constellation and its employees have been able to achieve. We invested organically and through acquisitions at a trough in the economic cycle to grow our customer-driven business and leverage our earnings exposure to rising power prices. Importantly, we provided investors with transparency to more easily monitor our results. We look forward to a strong 2011 with continued growth in each of our customer-driven business segment.

Now let me ask you to turn to slide 5 where I will discuss the outlook of each of our key business segments.

BGE. BGE continues to invest in safety and reliability and is an industry leader in operating efficiency. During the year, Platts recognized the BGE's Smart Energy Savers program as the Energy Efficiency Program of the Year, another recognition in a string of industry awards for our energy efficiency, demand-response, and Smart Grid initiatives. BGE's Smart Grid initiative is designed to deliver significant customer and operational benefits, including more than $2.5 billion worth of savings over the life of the project. BGE will install over 2 million meters throughout its service territory beginning later this year.

Over the next five years, BGE's earnings will be driven by four key factors. These include rate case filings on a more regular basis; robust infrastructure investments, yielding rate base growth; efficient implementation of our Smart Grid initiative; and continued cost savings. As I mentioned previously, during the year we received a summary order from the PSC on our combined electric and gas rate case which allows for a modest increase in rates.

BGE plans to file more frequent rate cases beginning in 2011. This will promote a measured increase in distribution rates to pay for system improvements and reduce regulatory lag. Importantly, this is occurring during a time of declining total energy bills in Maryland.

BGE plans to invest over $3 billion of capital over the next five years to further improve system reliability and quality of service. The bulk of the investment will be for core electric and gas distribution infrastructure, with the remainder comprised of investments in transmission and BGE's Smart Grid, peak rewards, and conservation programs.

As we think about the returns for these investments, more than half of this capital will be subject to traditional rate recovery. Roughly one-third will be subject to tracker recovery, and the balance will be subject to regulated asset recovery. This capital spending should grow the utility's rate base and its earnings as we provide improved for reliability and service for BGE customers.

Lastly, as you can on this graph, BGE is a low cost provider. Since 2001 BGE's operations and maintenance cost per customer has consistently ranked in the first quartile of approximately 100 utilities, about 20% lower than the average of its peer group.

In 2010, BGE employees overwhelmingly voted to remain union free and maintain a productive, flexible, and adaptable workforce. We believe this organizational flexibility promotes the cost excellence and employee engagement that makes BGE an industry leader.

Now let's turn to slide 6 for a review of the Generation business. In 2010 we added more than 4,300 megawatts of gas and wind-based generating capacity. We acquired assets at very attractive prices in the current depressed asset and commodity price environment. Each of our acquisitions should drive significant earnings, cash flows, and investment returns as commodity prices recover.

Constellation currently maintains an environmentally advantaged fleet of assets, with more than 90% of our total output coming from nuclear, gas, and coal plants that have completed scrubber projects. Most of these environmental projects were completed to comply with the Maryland Healthy Air Act, one of the most stringent air emission laws in the country.

As new federal environmental regulations take effect, these completed environmental projects position us well relative to other coal generators who have not yet installed control equipment. We expect companies will have to deal with the decision of investing in costly retrofits, repowering to natural gas, or preparing to retire assets in the near future.

As you will recall, our earnings forecasts are based upon observable liquid market prices. We believe the current forward price curve does not reflect the full extent of the potential impacts from new EPA policies. Our fundamental outlook anticipates dark spread, heat rate, and spark spread improvement. Beginning in 2012 our Generation portfolio is less hedged than many of our peers. This hedge profile reflects our belief that prices will recover, allowing our fleet to capture potential upside.

Lastly, as we think about future growth opportunities, Constellation will continue to pursue asset acquisitions in core new energy markets. We expect to fund these transactions in a credit-neutral manner which may include the use of proceeds from the sale of less strategic assets currently in our portfolio.

Recent examples of such activity include the sale of our Mammoth Lakes facility and the pending sale of our Quail Run facility. We expect future additions to our fleet to provide even greater collateral efficiencies for our NewEnergy segment as power markets recover.

Now let's go to slide 7 for a review of our NewEnergy business. At NewEnergy we are working diligently to provide a best-in-class customer experience. We are leveraging technology to broaden the range of products and services that we offer customers.

In addition to the solar installations and added demand-response capabilities I referenced at the start, we also launched VirtuWatt, a unique combination of hardware and online applications that allows customers to manage and optimize electricity usage in real time. We believe these products are key elements of our long-term strategy to strengthen customer relationships beyond a pure commodity sale.

As we look forward we expect our business to increase the amount of electric and gas load we serve. We will accomplish this by evaluating and targeting new markets and customer segments.

For example, in 2010 we entered the retail residential market in Maryland and New Jersey. With limited marketing we have already acquired more than 80,000 customers. We see opportunities for further growth; and as Jack will discuss, we expect to invest additional marketing dollars over the next few years to expand into new regions and increase the number of mass-market customers we serve.

We have streamlined our technology platform and improved throughput and operating leverage to support growth. We also restructured our sales force to create one unified team that sells the full range of solutions that we can provide to our customers. Supporting this team are product experts who are focused on finding the right solutions for our customers.

Underpinning all of these efforts is our industry-leading physical risk and portfolio management capabilities.

Now if you turn to slide 8, at NewEnergy, we are increasing the number of products and services that we sell to each of our customers. We believe that the unification of our sales force will help us achieve this goal as we advise customers on their efforts to buy, manage, and use energy.

As an example of an evolving customer relationship, we partnered with the city of Rochester in February 2006 to provide over 50,000 megawatt hours of power to the city each year. Over time we helped them with their ongoing efforts to reduce the use of fossil fuels and exceed state standards for use of renewable energy sources by providing them Green-e certified renewable energy.

We also installed demand-response solutions across nine buildings including City Hall. We are exploring other energy efficiency measures in several other buildings using available funds.

Our relationship with Benjamin Moore is another example of our ability to provide our customers with comprehensive integrated solutions. We supply power to their facilities in New York and New Jersey and the use of our VirtuWatt technology. In December we installed a solar facility that is expected to generate approximately 70% of the electricity needs for their product development center and testing laboratories in Flanders, New Jersey. This is one of the largest solar facilities in the state, and we own and maintain the system, selling the output to the company under a 20-year solar Power Purchase Agreement.

Let me now turn to a discussion of the competitive markets that enable customer choice. Turn to slide 9.

We are pleased to see so many of the promised benefits of a market-based approach to energy policy begin to materialize across the country. In Maryland, more customers are shopping, with nearly 46% of the total energy consumed in the state selected from a competitive energy supplier. These customers are benefiting from the sharp decline in wholesale and retail power prices, achieving additional monthly savings.

Other states like Pennsylvania, Illinois, and Ohio are seeing the benefits of the competitive market framework. We hope to see policymakers in states like Michigan, Arizona, and California also embrace the competitive market model so that the benefits can be scanned by thousands of additional customers across the country, providing additional opportunities for our competitive businesses.

Constellation, like many of our peers, strongly supports the competitive market design, including capacity markets and specifically the reliability pricing model, or RPM. A function of the RPM is to produce an effective and transparent market that promotes investment in new generation and reliability of infrastructure. It also creates incentives for major investments in new Smart Grid technology and new market programs that foster efficiency, conservation, reliability, and consumer benefits -- all of which avoid the need and cost to build new generation.

Although there is opportunity for improvement, since its implementation in 2007 RPM has produced a net increase in available capacity of almost 18,000 megawatts, equivalent to approximately 12% of the total capacity in the region today. This includes capacity provided from generation, energy efficiency, and demand response.

In the face of such positive competitive trends, market improvements, and a solid reliability picture, we are deeply concerned by the efforts of the Maryland PSC and the New Jersey Legislature to require the construction of new, unnecessary generation whose costs are to be socialized across customer utility bills. While some near-term increases in jobs may result, the long-term impacts would include higher costs for customers and a substantial reduction in business development and jobs in these states.

Constellation will vigorously defend the competitive markets, as evidenced by our work with P3, PJM Power Providers, where we are appealing the New Jersey matter to FERC. We will work diligently with the compete coalition and others to continue to explain to policymakers the significant value of competitive markets for customers and the severe unintended consequences of what appear to be well-intentioned but ultimately misguided and risk-increasing policy proposals.

Now I would like to turn the presentation over to Jack for a more detailed review of our financial results and forecasts.

Thank you, Mayo, and I am on slide 10. As Mayo mentioned, full-year 2010 adjusted earnings were $3.06 per share. As you may recall our adjusted earnings include non-cash mark-to-market gains and losses that serve as hedges of customer and generation positions.

This past year we recorded a mark-to-market loss of approximately $0.23 per share due in part to steep changes in commodity prices, in particular natural gas. Excluding these mark-to-market losses our adjusted earnings would have been $3.29 per share, in the upper end of our guidance range.

Looking at our results by segment, BGE reported adjusted earnings of $0.69 per share, down from $0.80 per share in 2009. This decrease was due to the impact of higher storm-related expenses and inflation, partially offset by lower bad debt expense and higher transmission revenues.

Our Generation segment reported adjusted earnings of $1.25 per share, down from $2.11 per share in 2009. This decline was primarily the result of the sale of approximately 50% of our nuclear assets at the end of 2009.

Our NewEnergy segment reported adjusted earnings of $0.54 per share in 2010, improving $0.08 per share as compared to 2009. This improvement is primarily the result of improved profitability in our power business and greater upstream gas production.

Turning to slide 11. Similar to other utilities, BGE is currently in a growth phase, investing considerable capital in technology, infrastructure, and efficiency projects. Over the next three years BGE's average rate base is projected to grow to approximately $4.8 billion, representing a 28% increase over our current rate base.

We're investing capital to improve system reliability and quality of service for BGE's customers. We expect to file rate cases in a more frequent manner, reducing regulatory lag and driving improved earnings. With regards to the implementation of our smart meters and our overall Smart Grid initiative, these investments will be accounted for as regulatory assets, with cash recovery received as benefits are demonstrated.

Let us now turn to a review of our earnings outlook for our Generation segment, turning to slide 12. As Mayo mentioned and as you can see on this slide, our Generation assets are less hedged than many of our peers. Our fleet is 59% hedged for 2012 and we feel comfortable with this profile based upon our expectation for a widening of dark spreads and heat rates. This posture is working well, as our forecast has improved considerably from this positioning as power prices have risen.

In addition, this slide now includes our recently acquired Boston Generating assets. These assets should contribute approximately $80 million to $100 million of EBITDA per year.

An important element of our Generation earnings outlook is capacity revenues. We continue to view our PJM fleet and their associated capacity revenues as an important foundation of stability to our earnings and cash flows. As you can see, a significant portion of our total unhedged gross margin is driven by these payments, which we'll realize into earnings regardless of how commodity prices fluctuate.

While capacity payments have been discussed in conjunction with the Maryland and New Jersey initiatives, the effect of capacity prices from these initiatives is not yet known. Recently, PJM released the planning parameters for the 2014/2015 auction to be held this May. We do see potential downside to the clearing prices for the zones in which our plants operate.

Before we move on to a review of our NewEnergy segment I would like to highlight that included in our Generation segment are tolling arrangements with four plants. We entered into these contracts when forward heat rates and power prices were at much higher levels. These contracts have remaining durations of about five years, after which the negative earnings drag will cease.

As we move forward we plan to acquire physical generating assets to replace the output generated from these tolling arrangements. However, to the extent there are economic opportunities to contract for long-term power with generation counterparties, we will continue to do so.

Let us now turn to slide 13 to review earnings of our NewEnergy segment. This is a slide we introduced to you last year that now provides the expected earnings contribution of our NewEnergy segment through 2013.

Looking at individual lines of business, our customer power and gas results correspond to the load we plan to serve through our core customer-facing activities. These are characterized by high retention rates in retail and predictable opportunities for wholesale utility auctions. As of year-end, we had already contracted for approximately 74% of 2011 and 32% of 2012 load volumes, creating a stable base of predictability upon which to further grow.

Beginning in 2012 our gross margin estimates for this operation increase, reflecting additional electric volumes from new market opportunities and our growing mass-market retail business.

Our upstream gas operation owns properties that produce gas, oil, and other distillates. The proven gas reserves from these fields provide collateral efficient fuel hedges for our natural gas generation fleet. Similar to our Generation outlook, this operation is influenced by changes in commodity prices. The gross margin we are forecasting from our upstream gas operation is decreased due to lower gas prices coupled with the related decrease in expected drilling and production rates.

As we have discussed in the past, our sales force is increasingly focused on providing our customers with other energy-related products and services beyond the commodity sale. These activities are comprised of solar projects, energy-efficiency activities, and demand-response management. We have adjusted our forecast to include the positive impact of our CPower acquisition and the more than offsetting impact of a longer solutions sales cycle.

The net result is a move of approximately $10 million worth of margin that was previously forecasted to realize in 2011 to 2012. We continue to be confident in the growth expectations for this business.

We have spoken about the scalability of the NewEnergy platform and our efforts to drive added efficiencies and reduce costs. We are enjoying considerable success on this front.

However, as compared to previous estimates, the operating expenses have increased by $30 million to $40 million. As you will recall, we have discussed with you the possibility of expanding to serve residential customers. We are moving forward with this initiative and are now including additional investment dollars to fund the added upfront marketing expenses needed to grow our mass-marketing activities to scale.

Importantly, by 2013 we expect to see significant gross margin and profitability contribution from these efforts. This increased marketing spend, and to a lesser degree the operating expenses related to the CPower acquisition, are what is driving the change in operating expenses.

Turning to slide 14, before I discuss our earnings guidance I do want to highlight the successful debt offering that we completed during the fourth quarter. We issued $550 million of 5.15% notes due in 2020. We used approximately $215 million of the proceeds to prepay the remainder of our 7% notes due in 2012. We also used approximately $50 million to prefund certain pension liabilities. With this pension contribution we will have contributed a total of $600 million to pension obligations over the past two years and, when combined with asset returns, improved the funded status of our pension from 48% in 2008 to 87% at the end of 2010.

We used the balance of the debt proceeds, approximately $285 million, to fund a portion of the payment required for the purchase of the Boston Generating assets.

Looking ahead, despite depressed commodity prices, Constellation expects to have an FFO to debt ratio north of 30% in 2012 with further improvement in 2013 and beyond. Over the next two years we hope to achieve a stable BBB or equivalent rating from all three major rating agencies. Importantly, given our current protections we believe our metrics support incremental debt capacity starting in 2013.

Turning now to slide 15 to discuss earnings guidance. As Mayo mentioned we are maintaining our previously disclosed guidance ranges of $3.10 to $3.40 per share for 2011, and $2.40 to $2.70 per share for 2012. Let me now take a moment to walk you through our segment-level estimates and the key drivers behind each.

At BGE we are expecting to earn between $0.60 and $0.80 per share in 2011. In 2012, we forecast this segment to earn $0.85 to $1.05 per share. Earnings growth for BGE is driven by increasing rate base from our planned capital investments and future rate cases.

Our Generation earnings guidance range for 2011 is $0.80 to $1.00 per share, an increase from the $0.60 to $0.80 per share that we had shown last quarter. The difference is driven by the inclusion of the Boston Generating assets. This acquisition has increased EPS and has also further levered Constellation to expanding heat rates.

In 2012, where we are considerably more open than most, we are forecasting $0.15 to $0.35 per share. This outlook reflects the current forward commodity curve, one that we believe does not fully reflect the impact of new potential environmental standards and plant retirements. Any improvement relative to the current forward curve would result in higher earnings for this segment.

We expect our NewEnergy segment to earn between $0.90 and $1.10 per share in 2011, and $1.25 to $1.45 per share in 2012. We have shown you the detail of this outlook on slide 13, and as you see we are forecasting higher gross margins for our customer power and gas operation, primarily driven by higher volumes and better retention rates, and increasing product sales to customers from our customer services and solutions operation.

Before turning to talk about 2013 let me comment on the unexpected ice storm in Texas that occurred earlier this week. This storm negatively impacted many generators and load-serving entities, including ourselves. Power prices rose to extreme levels, as high as $3,000 per megawatt hour.

These types of events illustrate the reason why our business and our margins for assuming supply and other risks on behalf of our customers. Importantly, while the cost impact of this extreme event creates a headwind for us in 2011, our earnings range is intended to take these types of events into account.

As we look to 2013, we have previously stated that we expect earnings to improve to more than $3.00 per share. Through our segment-level disclosure you see that we are forecasting growth from our competitive businesses. We expect to NewEnergy to leverage its platform and drive greater earnings and profitability.

With our unified sales force we expect to increase sales of commodity and non-commodity-based products. Our Generation segment, even assuming the current depressed commodity curve, is expected to benefit in 2013 from higher capacity prices in Southwest MAAC.

At BGE, earnings are forecasted to improve as we earn returns from increased capital spending and corresponding rate base growth. With that, I would like to turn the call over to Mayo, who will provide some closing remarks.

Thanks, Jack. So in 2010 we took advantage of growth opportunities both organically and through acquisitions. As we look forward to 2011 and beyond, we expect to grow in each of our business segments.

As we have discussed, in 2010 we acquired generating assets and funded these acquisitions with excess cash on hand. Looking forward, we continue to pursue attractive opportunities to further expand our physical generation fleet in regions such as ERCOT, where the load we serve is greater than the amount of physical generation we own or contract. This approach to our generation and load-serving businesses in competitive markets should drive greater efficiency in terms of capital requirements and realized earnings and cash flow, sustaining a balanced earnings model.

We believe that we will be able to fund these acquisitions by accessing the equity and debt markets.

We will continue to be a leading supplier of power and gas to retail and wholesale customers. We are expanding our offerings to include more innovative products and services that 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 and provide us with additional sources of non-commodity-based earnings.

We are increasing our capital spending program at BGE, investing in reliability and energy efficiency. Our Smart Grid program is just one example of this increased spending commitment. Prospectively this increase in capital spending should grow the utility's rate base and its earnings.

Finally, Constellation is committed to further streamlining its businesses, making Constellation a leaner, 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 will turn the presentation over for questions and ask the operator to open it up. Operator?

(Operator Instructions) Angie Storozynski, Macquarie Capital.

I have two questions. The first one, the growth in the NewEnergy business. You are not providing any more the split between retail and wholesale. Should we assume that the growth since the third quarter is everything in retail?

Kathi Hyle is here, and I will have her address that.

So the growth in the fourth quarter was primarily, primarily retail. It was across the power business in the fourth quarter.

But I am asking about the forward-looking volume.

Forward-looking? So there is half a dozen things that are driving our growth. One is the markets are growing; so we have talked about Pennsylvania, Ohio, Illinois, Michigan, caps, and maybe Arizona.

KEMA put out a Retail Energy Outlook published in late January, and they state that they expect the '10 to '11 period to be one of the largest growth periods for competitive power sales. We certainly have seen that, where we have seen volume growth of over 30% year-over-year in 2010. We expect to see 2011 levels be very good.

The second issue is we have got this national platform that is different than anyone else, and we can really drive growth through that national platform. As Jack mentioned, for the first time we truly had a unified sales force.

We have got -- we are selling commodities with one sales force. We have got product specialists, we have got quotas, and our compensation is aligned to those expectations.

We have a scalable model. We completed in 2010 our systems integration. We have got one system, and we really are on the brink of being able to realize true scalability.

We have got the breadth of our product offerings. So with solar, energy efficiency, demand response, information management -- that allows us to deepen our customer relationships and that drives renewal rates and profitability.

Lastly, we are supporting all of this with investment dollars for greater training, education, and marketing support. So that is really the fundamental reasons why we are seeing the growth in the business, Angie.

Yes, but I was actually asking if this is retail volumes or is it wholesale volumes?

Yes, it is primarily retail volumes.

Okay, and similar drivers for the pickup in gas volumes?

Yes.

Okay. My second question, I understand that we're having a lot of uncertainty as to what happens with PJM capacity prices. But you are providing a disclosure of your capacity revenues for 2014. Could you tell us what kind of assumptions do you have behind those numbers?

Sure, Angie. This is Jack. We do anticipate and we include in here our fundamental view that capacity prices will decline in the '14, '15 auctions in Southwest MAAC relative to the '13, '14 planning years capacity price clearing.

And just as you think about a sensitivity to that, if prices were to go down by $10 million, that results in about a $7 million gross margin hit in 2014 and about an $11 million in '15. So as you will recall it is back-end weighted to the '15 planning period. Obviously, if prices were to go up, then we would see the inverse of that happen.

Jack, just for clarification, the predicate was if prices went down by $10.

That's correct, yes. I was just trying to give the [six delay].

Okay, but what is already embedded in this assumption is a much lower number than last year's auction. Is that correct?

What is embedded is a lower number; but you will recall that the impact of that is roughly five months of the year.

I know. I mean our calculations imply a significantly lower number embedded than your estimates, and that is why I was asking. But I will follow up off-line. Thank you.

Gregg Orrill, Barclays Capital.

Thanks a lot. I was wondering if you could comment on the cash balance at the end of the year and how much you think you have to potentially --

Sorry, Gregg. I am struggling -- we are struggling to hear you on this end.

Cash balance at the end of the year, and how much you think you have available for acquisitions. And outside of load regions, specifically where you might look to deploy that.

Well, obviously, with the close of the Boston Generating assets we used a significant portion of that cash balance in the opening week of 2011.

With respect to the cash on hand, as we have guided you before, across the businesses we would like to keep roughly $600 million of cash on hand at any given time. As we do expect the Quail Run facilities sale to close in generally the end of the first quarter, maybe early in the second quarter, but that would increase the cash balance by $180 million or so. And we would look to use those cash proceeds to grow our business. That could be in the form of generating acquisitions or it could be growing the NewEnergy business.

Okay. Maybe I missed it, but how much of the $0.23 mark-to-market was in the fourth quarter?

$0.10 of that mark-to-market was in the fourth quarter, and we will realize the offsetting position primarily in 2011 but some '12 and '13.

Okay, thank you.

Brian Chin, Citigroup.

Question on the collateral chart that you guys put in your presentation. It is that intended to include Boston Genco or no?

Yes, it does.

If I compare the collateral chart versus the prior-quarter's collateral chart, it doesn't look like there is a whole lot of movement in necessary collateral positions. Should we have expected some change given the acquisition of Boston Genco there? Or is that not right?

I would say, Brian, you have two offsetting moves. One, obviously, we do add; but -- we do add the Boston Generating facilities but prices have gone down. Therefore as we calculate n that lower price environment the benefit from generating capacity and offsetting collateral postings, or the potential need to host in extreme events, goes down.

Okay. Then just following up on the capacity commentary, the capacity price commentary. Is it the view that capacity prices should be lower for your portfolio because of transmission line capacity and convergence of prices between Southwest MAAC and RTO? Or is there some other issue that you guys are expecting?

I think it is more fundamentally the demand statistics that have come out from PJM in their recent guidance are lower. That is offset in part by a higher cost of new entry charge, but that clearly doesn't make up for the different.

Okay. So then do you expect Southwest MAAC to clear separately from the MAAC and RTO regions, or no?

We do expect more impact in MAAC than we do in Southwest MAAC.

Okay, thank you.

Brian, I might just add to that that the modestly bearish signals were obviously the load forecasts went down and there was also increased transfer limits into MAAC.

And on the other hand the question marks that will sort itself out through the auction would be unknown, coal retirements, what the DR bids will be, and then the bidding strategies from the other companies. So I think on balance this is like a little bit of a forecasting game that we don't play out publicly. But those are probably the most important variables that will realize themselves when we get the answer.

Right. Thank you. That's helpful.

Ameet Thakkar, Bank of America Merrill Lynch.

I don't want to belabor I guess the capacity discussion, but I was looking at slide 32, and you guys have a footnote there that says -- I guess it says, reflects clearing prices 2013/'14 only. Just so I'm clear, the '14 generation EBITDA or gross margin you provided, does that assume that capacity prices are flat? Or as Jack mentioned you guys are assuming a lower price reflecting your fundamental view?

I would say, Ameet, on 32 it is really -- this is just for presentation's sake. This is not the number that is included in our generation hedge disclosure.

Okay, I got it.

On '12, yes.

Okay, that's clear. Then just real quick on I guess the retail gas growth, I think you guys highlighted some of the states where you are seeing increases in switching etc. on the power side. Is it similar on the gas, or are there other areas that we should focus on for describing that growth?

This is Kathi Hyle. So it is similar on the gas side, but really one of the more important things really is the unified sales force, and where we are getting one sales force that is truly selling both. Larger power sales force now has the ability to sell gas.

Okay, and if I could just ask one more quick question. I noticed that guys didn't provide I guess the gross margin on a dollar per megawatt hour basis on retail. But you did discuss some of the drivers -- higher volume, higher retention rates.

I guess, should we assume that I guess gross margins have -- on a per unit basis are flat and you are just really driving this by higher retention and higher volume?

You know, we had given you ranges of 5 to 7 for retail, 2 to 4 for wholesale. We certainly expect to be within those ranges over our planning period.

Thank you very much.

Daniel Eggers, Credit Suisse.

Just first question, as you guys look at the 2012 open position on hedging and your point of view in the market, how should we think about ratably hedging into '12 and '13 over the course of this year? Are there metrics we should be paying attention to as far as free cash flow or coverage metrics that will affect how you guys put on positions?

Dan, as you know we sell the power from our generating fleet to our NewEnergy business, who in turn hedges externally. Typically in any given year as we roll into a new year -- so let's move forward to stay where at this time next year in 2012, we would anticipate being anywhere from 80% to 100% hedged depending on our bullishness or bearishness on pricing.

What we have seen certainly in the 2011 period, as you get closer to the delivery year, the more fundamental physical elements of plants actually needing to make money to run have caused dark spreads to increase, as we have gotten closer to delivery. We would anticipate similar occurrences in 2012 as we get closer.

You talked about the idea of expressing a view with where you are hedged right now. How far off of what you would be at normal run rate hedge are you guys, in the expression of your view? Or is the hedge percentage now just the natural hedging, so there is not a significant view being expressed in where you are hedged today?

I would say we are at the lower end of where -- of the range at which we would be hedged for 2012. Generally we like to be about 60% to 80% hedged in the current year plus one; and we are just right at the lower end of that range.

Okay, thanks. Then I guess, Kathi, maybe you could talk to this a little bit. But extending a year on NewEnergy we see customer services and solutions with about a 24% CAGR over the next three years from a growth perspective. Can you just share a little bit of where you are seeing some of that scaling? How much of it is the ability to grow into it with some of the new acquisitions, and how much of it is just deeper customer penetration?

It is primarily deeper customer penetration, although certainly the CPower acquisition gives us a formidable position with the demand response.

But as we are seeing -- and you saw great results in the solar business, where we sold 36 megawatts to customers this year; we expect that to continue. The energy efficiency has been a little bit slower in 2010 than we would like; but we are starting to feel very good about that ramping up.

But it really is just this breadth of product offerings that we are seeing in our customers, and being able to penetrate those customers more deeply.

When I look at the fact that O&M isn't moving in that process, is that -- should we be thinking that these businesses are kind of infinitely scalable from a profitability perspective? Or where are you getting the release on O&M on a multiyear basis?

We really are on the brink of scalability right now. I can't say enough about what it means to have us all, all the retail platform being on one system and the ability for us to really drive and leverage this business. You're going to start to see that over the next couple years.

Okay, great. Thank you, guys.

Jon Cohen, Morgan Stanley.

Just PJM power prices had been rising through the end of last year, which we think to some degree is due to strong eastern coal prices. Can you just talk a little bit about to what extent you think the NYMEX quoted prices for cap reflect your true underlying economics for coal purchases?

Also for your open gross margin in '12 and '13, when you are a little bit less hedged, what assumptions are you making in terms of coal pricing out there and also the coal composition, the coal mix, for the fleet?

Sure. So Jon, as you know, we have seen both, because of the Australian flooding but also global demand for, as you mentioned, CAP coal coming out of China, India, and other markets, we have seen Central App coal move higher roughly to $80 a ton. I think our expectation is that you will continue to see a healthy bid for coal in the market, and that that will elevate overall from a fundamental point of view -- overall power prices as coal is on the margin in good portions of the day here in Southwest MAAC.

With respect to our own hedging statistics, if you look at our coal hedging, you can see that we are really trying to sustain more of a dark spread exposure as opposed to a power price exposure. We are only 9% hedged in 2013 in this current environment, where you do have higher prices and there is the risk of potentially locking in higher priced coal and exposing ourself to declining prices should that happen. Then obviously that increases the risk.

We are trying to manage that by appropriately aligning our fossil hedges and our coal hedges.

But is your exposure on the coal side to CAP pricing or can you blend in some higher sulfur Illinois Basin or PRP coals to reduce your fuel costs?

Depends on the asset. Certainly at our Brandon Shores and Keystone and Conemaugh facilities, those are the largest baseloads, we are primarily burning the Central App coal. We do have the ability to blend in at certain other facilities PRB and other, and we can burn some Illinois Basin.

Okay. I just wanted to hit on your comment about the tolling arrangements. Can you just comment on the structure of the two biggest ones, which are the clean energy plant and Calpine's York facilities? How would you suggest that we model those from both an earnings perspective and also a valuation perspective?

Interestingly enough I think on a valuation perspective -- let me start there. Obviously this is a negative drag on earnings and to the extent you're applying a multiple to something that looks more akin to debt, or an underwater hedge that rolls off, I think you are probably overstating the negative impact on the overall earnings capabilities of the enterprise.

The tolls themselves, largely five-year deals, where we have tolls that -- where we deliver gas and we get the power. We have seen an uptick, and you will see this in our Generation stats, an uptick in our expectations of how much in Q4 we expect in terms of output from those facilities.

But nevertheless, certainly not at the heat rates that we would have expected in a much higher gas environment in 2008, when we entered into the long-dated contracts for them.

Okay. Thanks a lot.

I guess we have time for one more question.

Neil Mitra, Simmons and Company.

Just a couple of questions on slide 13. It looks like the 2012 gas load that you project to serve went up about 33 Bcf; and the customer power and gas gross margin went up about $71 million since the last update. I was wondering what was driving the increase in gas load serve. Did you sign a contract, or is it a projection?

Then second, if all of that $71 million is attributable to the new load or if power margins have come up since your last update?

I would say, Neel will you, I would say on the gas side, as Kathi mentioned, as we increasingly sell gas and power through a unified sales force, our expectation is that we will pick up incremental sales. We also did enter into a new gas supply agreement that is more attractively priced, so we also believe that that should also help us be more competitive in the markets.

On the customer power and gas side, as we mentioned earlier in the presentation we are investing significant dollars in growing our mass-market channels. Obviously those investment dollars in '11 really start to pull through in 2012 as we benefit from the growth of that business, as well as ideally market expansion as the Illinois Power Authority contract rolls off and that market opens up as well as others.

Then, Jack, on the operating expenses, excluding upstream gas, they are going up in 2011 and 2012 when the volumes aren't going up that much. Should we view the rising O&M in '11 and '12 as an investment for new contracts in '13 or '14? Or is it a true reflection of your operating expenses in '11 and '12?

Really would bifurcate that into two things. One, as we mentioned, this now includes the CPower acquisition which obviously wouldn't show up in volumes, as it is demand response. So there is increased expense associated with the inclusion of that business.

As you did reference and as I previously did, the investment dollars associated with marketing Constellation electric as a mass-market provider are the other key driver in the '11 and '12 increase. In terms of the overall scalability of the platform that we previously discussed, we continue to believe that that is a key competitive advantage that we are just beginning to realize.

Then just really quickly on the way we should look at the NewEnergy business from a gross margin perspective of $5 to $7 a megawatt hour and ROE of 11% to 14%, do those metrics still apply? Or should we be looking at it differently in terms of profitability?

I tend to be an EBITDA person myself. I think as we have talked previously, gross margin depending on the customer class, if you are earning $5 to $7 from a residential retail customer that is obviously not that great. If you are earning it from someone like Verizon that can be fantastic.

So we don't believe that gross margin is really a good measure of the overall profitability of each customer relationship, which in part is why we went to this level of disclosure and re-segmented the business.

So I think from our end, if you look at the analyst community there is a range of values that is applied to the EBITDA in the business. I would say our hope is that as we shift to a more bundled non-commodity-driven sale -- right now we're at about 13%; our goal would be to get to about 20% of our overall sales being from non-commodity-related activities.

I guess the high end of the Street is probably a 6 times EBITDA multiple in that business. If we are contracting for 20-year solar arrangements with our customers and long-dated energy efficiency relationships and automated load control, that makes it a very sticky relationship with our customer, we believe that as an annuity-like and a highly recurring business where we are providing our customers with very valuable services they can't get elsewhere on a bundled basis. And we think that should merit a higher multiple.

Great. Thank you very much.

All right. Well, thank you all. We will expect to have you all online in another quarter; but we will see you out on the road during the course of the quarter. Thanks all very much.

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