艾索倫電力 (EXC) 2011 Q1 法說會逐字稿

Good morning and welcome to Constellation Energy Group first-quarter 2011 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, Ms. Sandra Brummitt. Sandra, you may begin.

Thank you. Welcome to Constellation Energy's first-quarter earnings call. We appreciate you being with us this morning. With me here in Baltimore today are Mayo Shattuck, Chairman, President and Chief Executive Officer and Jack Thayer, Senior Vice President and Chief Financial Officer. Mayo and Jack will provide you their perspectives on our performance for the quarter, 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, www.constellation.com.

On slide 3, you will notice we will use non-GAAP financial measures in the 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.

Turning to slide 4, we will discuss our pending merger with Exelon during this presentation. In connection with the merger, we will mail to our shareholders a joint proxy statement, prospectus and other relevant documents in connection with the proposed merger of Exelon and Constellation Energy. We urge investors to read the joint proxy statement and prospectus and any other relevant documents when they become available because they will contain important information about Exelon, Constellation Energy and the proposed merger. With that, I would like to turn the time over to Mayo.

Thank you, Sandra and good morning, everyone and thank you for joining us today. Last week, we announced Constellation Energy's strategic merger with Exelon. We are excited about the value that will be created upon completion of this transaction both for our shareholders and our customers. Having visited with investors over the last couple of days, we appreciate that you too see the strategic logic and value of this combination.

At this point, we are focused on the regulatory approval process and Constellation and Exelon will be working diligently to keep the process on plan and on schedule. We have offered upfront a strong package of commitments and mitigation that we believe should be viewed favorably in light of recent approvals such as the FirstEnergy-Allegheny merger. We will make the first of our filings in the next few weeks with the goal of having the S-4 filing and all required federal and state regulatory filings prepared and submitted for review by the end of the second quarter. We expect to receive approvals beginning in the third quarter of 2011 and continuing through the first quarter of 2012.

We have also begun integration planning to work through the steps necessary to ensure a smooth transition for all stakeholders. I look forward to providing additional merger updates as we work our way through the process.

So now let's turn to slide 6 where I will discuss the results of the first quarter. This morning, we reported standalone first-quarter adjusted earnings of $0.63 per share, which includes a non-cash mark-to-market timing loss of $0.13 per share. Excluding these mark-to-market timing losses, our adjusted earnings would have been $0.76 per share. Including one-time items, Constellation reported first-quarter GAAP earnings of $0.35 per share.

We are reaffirming our 2011 guidance range of $3.10 to $3.40 and our 2012 guidance range of $2.40 to $2.70 per share. Our 2013 earnings estimate continues to be north of $3 per share. Jack will discuss our first-quarter results and earnings outlook in more detail later in the presentation.

Our NewEnergy segment continues to focus on providing integrated multiproduct energy supply and management solutions to new and existing customers. During the quarter, we entered into a long-term electricity agreement with the US Department of State with more than half of the power coming from newly constructed wind and solar facilities.

In addition, we signed new retail business, performed well in key load auctions and remain on target to achieve our full-year NewEnergy plan. In January, we completed the integration of the Boston generating assets into our portfolio. We are experiencing higher capacity factors at these plants than originally forecast in our pro forma model.

Our regulated utility, BGE, continues to serve its customers safely and reliably. On the heels of other significant industry awards, BGE was selected by the EPA as one of its 2011 ENERGY STAR award winners. This award recognizes BGE for its commitment to energy efficiency. BGE also received its detailed rate case order with an outcome in line with expectations from the December preliminary order. During the quarter, BGE invested more than $160 million of capital primarily for reliability and efficiency. These investments will further improve service to our customers, as well as grow rate base and earnings.

If you turn to slide 7 please, in March, our NewEnergy segment announced an innovative electricity supply contract with the US Department of State. This competitively bid contract includes a 20-year energy savings agreement that will provide about 120,000 megawatt hours of energy annually to the State Department and other federal government facilities.

This bundled solution enables the State Department to surpass statutory and executive order clean energy goals for reducing greenhouse gases. The energy savings agreement accomplishes this by spurring development of green energy projects in two states that are expected to create 250 construction jobs. One of the projects will be a 5 megawatt solar facility constructed by Constellation in New Jersey. The other will be a 17.5 megawatt wind facility built in Pennsylvania. We anticipate these projects will be completed during 2012.

This energy savings agreement serves as a transformational contracting model for federal agency energy management, which we believe will afford new opportunities in the public sector for NewEnergy.

In closing, Constellation is well-positioned to succeed due to our national footprint, diverse product portfolio, scalable platform and seasoned risk and portfolio management team. Now I would like to turn the presentation over to Jack who will review our financial results and forecast in even more detail beginning on slide 8.

Thank you, Mayo. Before we review our earnings for the quarter, I would like to expand on the comment that we shared with you during our last call regarding the February ice storm in Texas and its impact on our first-quarter earnings. As you will recall, in early February, a cold front moved into Texas causing temperatures to fall as much as 60 degrees over a 24-hour period. The freezing temperatures coupled with winds in excess of 35 miles per hour led to below zero wind chills across the state.

As a result, roughly 8000 megawatts of generation unexpectedly tripped while load demand increased substantially resulting in price spikes as high as $3000 per megawatt hour. Across much of ERCOT, this severe weather event negatively impacted many generators and load-serving entities and we experienced losses on both fronts.

Before we discuss the impact on each segment, I would like to highlight that based on forecasted load obligations, generation availability and hedges, our portfolio was essentially flat. For perspective, we serve approximately 7% of the total load in ERCOT, which is supplied by owned and contracted generation. As you know, we own 1100 megawatts of generation in the region, which unfortunately experienced ice-induced outages and were unavailable to hedge NewEnergy load. In addition, actual load realized was more than twice our forecasted demand and we had to purchase power in the real-time market at peak prices.

On a collective basis, this event reduced our earnings by approximately $40 million pretax. Importantly, we will learn from this event and have refined our hedging and operating approach. We have made freeze protection investments and adjusted operating procedures at our facilities. In addition, we are further pricing in extreme load events into our cost calculations for customer load during the winter months in ERCOT.

While this event proved a headwind for our 2011 earnings objectives, our earnings range contemplates the potential for these types of events. Accordingly, we are affirming our previously stated 2011 earnings guidance.

Let us now turn to slide 9 for a review of our earnings by segment. As Mayo mentioned, our first-quarter 2011 adjusted earnings were $0.63 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 quarter, we recorded a mark-to-market timing loss of approximately $0.13 per share. These non-cash mark-to-market results will fluctuate on a quarterly basis as underlying commodity prices change. Excluding these mark-to-market timing losses, our adjusted earnings would have been $0.76 per share.

Looking at our results by segment, BGE reported adjusted earnings of $0.39 per share for the first quarter of 2011, up from $0.32 per share in the first quarter of 2010. This increase is primarily due to higher transmission revenues and the reversal and deferral of 2010 storm-related costs, which will be recovered in future periods as outlined in the detailed rate case order we received in March.

Our Generation segment reported adjusted earnings of $0.20 per share for the first quarter of 2011, down from $0.44 per share in the first quarter of 2010. Approximately $0.06 of this decrease is attributable to the extreme weather event in Texas. The remaining variance is primarily the result of lower realized prices on our generation output and higher operating expenses associated with our recently acquired generation assets.

Our NewEnergy segment reported an adjusted loss of $0.08 per share for the first quarter of 2011 as compared to adjusted earnings of $0.54 per share for the first quarter of 2010. This year-over-year variance is due primarily to the timing of certain contract assignments related to our divested international commodities operation, which resulted in a loss of $0.24 per share. In addition, our earnings were impacted by lower realized margins and the extreme weather event in Texas, which resulted in losses of $0.11 and $0.08 per share respectively.

Turning to slide 10, as you can see on this slide, in this weak commodity price environment, we are hedging at a more measured pace than our industry peers. Our fleet is 73% hedged for 2012 and we remain comfortable with this profile as we expect dark spreads and heat rates to widen as we get closer to delivery. Over the first quarter, the 2012 forward strip for power prices increased slightly and heat rates expanded while dark spreads contracted as international coal prices and demand increased. The net effect of these movements negatively impacted the value of our open position.

Looking forward, due to investments made to comply with the Maryland Healthy Air Act, our generation footprint is relatively advantaged with respect to pending and future federal environmental and climate regulation. As new federal regulations level the playing field, we are poised to benefit as coal generation will be forced to comply or retire. The range of retirement estimates vary. Our own estimate is currently 50 gigawatts across the United States. We are also seeing signs of recovering industrial demand.

Another factor, which may impact our future earnings, will be the release of the 2014/2015 capacity auction on May 13. As you can see, we have slightly revised our capacity revenue forecast lower as we have refined our capacity expectations. To the extent we are too conservative, we will be happy to capture the unexpected upside to this forecast.

Let us now turn to slide 11 to review the earnings of our NewEnergy segment. Aside from the extreme weather event in Texas, our NewEnergy segment made progress during the quarter and remains on target to achieve our full-year plan. Recent successes like our deal with the Department of State demonstrate our ability to sell multiple products and services to customers. Given our diverse client base and the potential to market to our current total of approximately 300,000 customers, achieving modest success on this front could yield meaningful returns for our shareholders. Our customer power and gas outlook remains consistent with the forecasts provided during our last earnings call.

Our upstream gas gross margin forecast remains consistent with what we have previously shared with you. During the quarter, gas and oil prices modestly improved. Prospectively, higher gas and oil prices can lead to related increases in expected drilling and production rates. Accordingly, higher commodity prices and improved volumes can provide the potential for our gross margin forecast to improve.

Aside from these opportunities, we continue to focus our unified salesforce on providing our customers with other energy-related products and services beyond the commodity sale. Achievements during the first quarter are testimony to the fact that our customer service and solutions strategy is working.

Turning to slide 12. Let me conclude by reviewing our earnings guidance for 2011 and 2012. As Mayo mentioned, we are maintaining our previously disclosed standalone guidance ranges of $3.10 to $3.40 per share for 2011 and $2.40 to $2.70 per share for 2012.

At BGE, we continue to expect to earn between $0.60 and $0.80 per share in 2011. In 2012, we are maintaining our forecast of $0.85 to $1.05 per share. This range assumes that BGE files a rate case in the second half of 2011. Given our pending merger with Exelon, the timing of this rate case may change. Any change in rate case timing would have an impact on our 2012 guidance range.

Our generation earnings guidance range for 2011 remains $0.80 to $1 per share. While our earnings were negatively impacted by the extreme weather event in Texas, our earnings forecasts take tail risk events like this into account. Looking forward to 2012, we continue to forecast $0.15 to $0.35 per share.

While also negatively impacted by the Texas events, we continue to 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. Given our success in recent wholesale load auctions and expected higher realized margins during the balance of 2011, we remain comfortable with these forecasts.

Lastly, as we look beyond 2012, we continue to expect earnings on a standalone basis to improve to more than $3 per share. With that, I would like to turn the call over to the operator for questions. Operator?

(Operator Instructions). Paul Fremont, Jefferies & Co.

Thank you very much. Clearly, the NewEnergy contribution is not going to hit equally in equal amounts for the four quarters. Can you give us some idea of what the pattern of contribution of that $0.90 to $1.10 is on a percentage basis?

Paul, I think we have been pretty consistent in focusing people on a full-year forecast. To your point, depending on how we contract for margins and the shaping of various -- whether it is wholesale load contracts or pricing for certain of our retail activities, those contributions per quarter will fluctuate. In general, I think it is important just to focus on the full-year contribution. We expect to be able to perform in line with plan.

Okay. I guess from the point of view of consensus estimates, I mean part of the reason why consensus was different than where you came in, I think, was because people aren't able to predict that variability. So is there -- is this going to continue sort of in each of the future quarters for this year because people just have no way of understanding the timing?

I guess my comment would be, Paul, that our investors, I think, should be focused on the full-year contribution and our performance and expectation against that full year. Quarterly guidance and how we perform against external consensus shouldn't really impact the value of what people see the contribution from NewEnergy being to our business.

One other quick question. It looks like the NewEnergy outlook for the first quarter looks pretty much unchanged from where it was at the end of the fourth quarter 2010. What types of drivers sort of go into changing that outlook? It is a lot more obvious obviously with the generation in terms of prices, volumes as to what changes each quarter. What should we look for as potential changes for NewEnergy's outlook?

I think where there is sensitivity in NewEnergy's outlook is our sales volumes and margins and as we have mentioned, those are performing consistent with plan. There is commodity sensitivity within the upstream gas segment with really sensitivity to production volumes potentially to the upside given the current high oil prices and distillates prices that we are seeing, but that will be determined by drilling rates.

And then on the customer services and solutions, we are seeing consistent performance in our solar, in our energy efficiency and our demand response segments of that business and again, similar to the commodity-focused power and gas sales, it is really just a sales cycle and we are performing well against plan.

And last question, the $0.13 of mark-to-market, should we apply that back all to generation or does it get split between generation and NewEnergy?

It is in the NewEnergy segment because that is where all the hedging occurs and it is primarily related to some of the volatility we have seen in gas prices.

Thank you.

Ameet Thakkar, Bank of America.

Good morning, guys. Just looking at some of your generation hedge disclosure, it looks like you guys added a meaningful amount of power into coal hedges for '12 and '13. You guys have talked about kind of, I guess, maintaining some upside to power market recovery. I was just wondering what kind of drove that decision.

I'm sorry. Where are you seeing the meaningful increase in --?

Like your coal hedge percentage went up, I think, roughly like -- (multiple speakers).

Okay. I'm sorry.

And then your generation went up a bit as well.

It is actually the opposite of your lead-in. As we look at the increases we have seen in coal prices relative to power prices, our operating assumptions for how much the plants will run has come down. So with lower expected volumes of power coming from those plants and lower coal burn than initially anticipated, our hedge ratios have gone up.

So it is really just a function of your dispatch assumptions there changing the hedge percentages then?

Absolutely. If you look at -- our coal fleet is on the margin and so it is quite sensitive to realized dark spreads.

Okay. And then, Jack, you kind of indicated that your capacity revenues look like they are about $25 million, $30 million lower for '14 relative to what you had shown last quarter. And so that is all kind of related to your outlook for MAAC and Southwest MAAC capacity pricing you have coming on auction. And could you remind us what you were assuming before as far as price?

We do expect them to come in lower. I think our expectation that has been inferred by the investor community has been $160 to $180 per megawatt day. I think you can back into what our expectation would be, but it is somewhat lower than our outlook at the beginning of the year.

Okay, thank you.

Julien Dumoulin-Smith, UBS.

Hi, good morning. Wanted to ask you really quickly, with respect to your marketing initiatives in New Jersey, we've heard from Public Service a little bit that they, at least from their perspective, they saw migration taking place at a slower pace. Any comments with respect to where you are spending your time? You guys had previously talked about ramping up at least on the O&M side in '11.

Let me start and I will see if Kathi has anything to add to it. We are essentially marketing on the residential side in Maryland, which has a more advanced switching rate now above 20%. Both the New Jersey and Illinois markets are definitely at the front end of the adoption curve. And so the rate at which we expect to bring on customers is considerably slower than what we are seeing now in Maryland and others are seeing in Pennsylvania.

So our view is that both of these markets, New Jersey and Illinois, need the education that is being provided by sort of multiple competitors at this point. We are hoping for a little bit greater endorsement in education from the incumbent utilities, but I think the combination of these things eventually leads to an acceleration in that adoption curve, but it is fair to say we are at the front end of that.

That is exactly right. And because we are at the front end, it is really -- it is very responsive to specific programs that we have in place and we enter into the market, we will put specific programs in place, we will assess and then we will go back in with additional programs. So it is a process and it will take a little bit of time and some of the markets -- I think Maryland has done a very good job of touting the benefits of competition. Some of the other markets have been less aggressive in that area and it just means that we have to work harder at educating.

Great. And I know it is a bit tricky to ask you this, but with respect to Maryland, there had been some discussion at least earlier this year with respect to a potential issuance of an RFP seeking conventional generation. Any expectations at least from your side how we should think about that going forward?

We don't have any issuance from the Commission on that subject matter yet and so it is a wait-and-see at this point and we will see what happens.

Perfect. Thank you very much.

Jay Dobson, Wunderlich Securities.

Good morning. Hey, a question for you on Texas. You had the losses there. I just was wondering if you could talk a little bit about the lessons learned and what this means for you in other regions. I know it is a little less relevant because you are merging with a company that has a significant generation fleet and that appears to be at least one of the issues that you suffered in Texas in February. But just talk a little bit about the lessons learned there, what you are changing and sort of how we should think you are changing in other regions as a result of that experience.

Yes, Jay, Jack commented on it earlier and I will have him expand on it a little bit. I think -- I can think of -- in the course of the last nine or 10 years, we have probably had three events that I can think of that I would put in the extraordinary camp. And I remind people here that, to some degree, having these events sort of validates the value and the risk premium associated with being a provider in this business. You are going to lose money from time to time, but the advantage of being nationally scaled is that you can absorb these events and we have had positive events on the other side of the equation over time.

But I think when you are in the business of load serving and you have, for an example, an unusual weather event and that is usually the issue. We have had that, and you might recall, back in New England about six or seven years ago. You are going to take a little bit of a hit and our job is to make sure that we have the hedge profile to mitigate against what we think is an outsized event.

This one was again probably as unusual as they get because we had both generation and load-serving obligations and we got hit on both sides. But I often think that one of these things happening to this industry is not such a bad thing because you have to be big, you have to be nationally scaled and consistent with our thoughts about the merger, it is nice to have a balance between generation and your load-serving obligations.

I think to Texas specifically maybe I will have Jack expand a little bit on it.

Sure. So Jay, as you know, we had recently purchased the Navasota plants and those are combined cycles that we do use for shaping and for events such as this. Subsequent to this event with our operations and generations team, we have gone back and reviewed lessons learned or steps that we might have taken.

I think two specific steps, one, from a capital investment side, we have installed freeze protection and wind effectively blockers that would have addressed certain of both the temperature, but also the wind chill induced elements that caused those plants to trip. I think the other, from an operational side, is the importance of -- when our meteorologists see potential for weather events like this, the importance of actually running the assets even if it is not economic to keep them so that they will be operational and heated effectively so they don't freeze during a cold snap.

On a platform basis, I think it speaks to the importance of the integration of our portfolio management, our trading organization and our generation operations group. And while we have a very integrated approach, I think there is always opportunity to refine how those groups work together and this event certainly highlighted the need for them to be linked very tightly. And those protocols have been addressed and adopted.

Okay, no, that's great. And then onto the BGE case potentially for later this year, maybe talk us through the decision process of filing that or not filing that. Obviously, with the merger pending and a little bit of history might suggest it would be an incredibly bad time to file it. I know it is a very different environment now, but just talk us through maybe how you are going to make that decision.

I think you are right. The last thing we want to do is overload the Commission. They have got a merger case that will be filed shortly in front of them and we are expecting a decision on that in early January if we are successful in filing in the next several weeks. So my guess is that we will make the determination not to double up on that and overload and we would postpone consideration of that until after we get the ruling on our merger case.

That's great. Thanks very much.

Paul Patterson, Glenrock Associates.

Good morning. I wanted to, and I'm sorry if I missed this, but in the release, you guys mentioned certain assignments of the international commodities, the $0.24. That appears to be an adjusted number and if you could just elaborate a little bit more on that.

Sure. So as you remember, we divested our international coal and freight business to Goldman Sachs and there was a legacy book of contracts both in the money and out of the money that, as part of that transaction, we have been working with Goldman to novate. We have novated the majority of those and as you recall, that was a benefit in the first quarter of 2010, which was offset in the second and third quarter by the novation of certain out-of-the-money contracts. We novated or one of the counterparties with Goldman Sachs novated the contract, one of the contracts during Q1 that -- I believe there is one remaining contract that is available for novation and then we will have fully exited any obligation that we have to that international coal and freight business.

Okay, so that is what -- that seems to be obviously a big driver this quarter.

Absolutely.

Okay, and so --.

Particularly year-over-year.

Okay. So then this last contract that you guys have to novate, when do you think that will show up and how might that impact earnings?

It is really outside of our control and we would anticipate if it is novated, one, it is small and two, just as we have done with this, it would be incorporated into our earnings.

Okay. And then on the mark-to-market, I'm sorry, was it $0.13 that was excluded from adjusted earnings?

If you add back the $0.13, yes, you get to $0.76.

Okay. And why was it excluded?

It is non-cash. It is effectively hedges that we will realize in accrual earnings largely in '12 and beyond, so it is non-cash. We, as is practiced with many others, generally exclude that from our earnings calculation when we are talking to you about performance in the quarter.

Okay, so now you guys are excluding mark-to-market in your earnings numbers?

No, it is hedging effectiveness, not -- we are certainly not excluding mark-to-market. That is incorporated in the numbers. It is this non-cash hedging effectiveness number where we are marrying up financial hedges with physical positions that will deliver further out the curve. We do add that back or subtract it whether it is positive or negative because it is our perception that it skews the interpretation of the results because the cash and the delivery timing are mostly delivered in '12 and beyond.

So what was the mark-to-market impact for the quarter in the adjusted number?

The mark-to-market was $3.4 million negative.

$3.4 million negative. I notice in slide 49, it looks to me that you guys are including mark-to-market and in slide 11, you guys are excluding mark-to-market in terms of the NewEnergy outlook.

Paul, I think you are mixing apples and oranges. One is, from an accounting standpoint, we absolutely acknowledge that if we have mark-to-market gains or losses, that is incorporated into our results. This specific item and NextEra and others do the same thing, when you have hedging effectiveness that is related to financial hedges of accrual driven primarily by moves in commodity prices, we add back or subtract whether they are positive or negative in how we view our quarterly results to give you a better picture of our performance during the quarter.

Okay. The demand response for a quarter that came out, now that it has come out, I know I have asked you guys about this in the past, but now that it has come out and we have a little bit more sense as to exactly what FERC is -- I mean has acted on and what have you, and I am talking about the energy market, the demand response FERC (inaudible), what do you guys see now in terms of what the potential impact is, A, on the markets and B, with respect to Constellation? (inaudible) that business?

Yes, a couple things. One, obviously, how it comes out by virtue of the capacity market will be interesting. We are right on the cusp here of learning a lot more about how PJM interprets all of this and we expect probably further refinement, further ruling during the course of the next year, particularly after the lessons of this auction.

From our business standpoint, we believe in demand response; it is an important component of the overall capacity mix. We have programs on both the regulated and deregulated side. There are, in particular on the regulated side, the programs that we have in place at BGE under peak rewards and then prospectively under Smart meters, there is going to be an important component of rebate back to customers in that realm.

And on the competitive side, similarly the arrangements that we have with our commercial industrial customers are some source of revenue to them. I think prospectively to the extent that there is less capacity value in the marketplace for demand response, I think we will find that we will do an increased amount of bundling with our customer base as we mix both commodity sale with other product competencies of which demand response being one and there may well be a different kind of sort of price response that is built into future arrangements with customers as well.

So I think it is definitely going to be evolving and one lesson will come out soon with respect to how the capacity auction ends up.

Ali Agha, SunTrust.

Thank you, good morning. First, Jack, just to be clear on the numbers, your range of $3.10 to $3.40 for the year, does that correspond to the $0.63 adjusted number or the $0.76?

The $0.76.

$0.76, okay. And also sticking to the numbers for a sec, if I heard your commentary correctly, obviously there were headwinds in the first quarter; you identified them. So if I am hearing you right, you are saying the range kind of incorporates that but is it fair to say given the headwinds, it is really the lower end of the range we should be thinking about or are there obvious offsets that help you in the second half and we could be anywhere in the range?

So I mean just for perspective, but for the Texas ice storm, we performed this quarter according to plan. Obviously, there are puts and takes across the entire year of the business, but for that $0.14, we literally came in right on top of plan.

With respect to what we see prospectively in your comments about where we come out in the range, we have had tremendous success in the wholesale load auctions better than expected. And that will be a positive contributor further throughout the balance of the year. We are seeing success on the upstream side and in our solar business and we are seeing good performance out of BGE and opportunities for further cost savings on the generation side reflecting some of the tighter dark spreads that we are seeing. So I think across the board, it is Q1, it is early, but we are very comfortable with our plan and the range that we have provided.

Okay, that's helpful. And Mayo, one question for you. Obviously, the strategic rationale for the Exelon merger, I mean we have talked about and you guys have laid out fairly clearly, but I was just curious -- just wanted to get a little more perspective from you, was Exelon the only one that made sense for you guys? Had you looked at other folks in terms of partners? Was this the best price you got? Could you just give a little more insight into how you ended up with Exelon?

Well, as I think you know, this was not an auction process at all. These are two companies that have known each other and shared a lot of the same philosophies for quite some time, particularly around the climate issues and the competitive market advocacy.

We have tended to be two of, if not the leading, two that are participants in organizations like the Clean Energy Group and the Compete Coalition. So as a consequence, I think that we have been watching each other and know each other well for years.

Our strategy clearly on an independent path required that we continue to purchase generation as we built the load business. We were successful last year to the tune of about 4500 megawatts, but no doubt that part of the long-term strategic plan required us to opportunistically purchase plants at good prices and good returns. And there is some degree of uncertainty about whether those stars align.

On their side, they definitively had to move in the direction of building their customer front-end. And if you are a merchant and without that capability, you are eventually going to suffer from being an entity that sells through a computer screen and you are going to get lower margins.

So as a consequence, there was no doubt that the match between the two entities was extraordinary, and I can't think of a better match, honestly. The combination or the ability to reduce the inefficiencies on our side that come from being essentially philosophically short in having to reach a flat position by spending money on hedges. And that there is a certain inefficiency that goes away when we add a lot more generation matched against that.

And correspondingly, the other side has inefficiencies by fundamentally being long and protecting against unusual events by always having the kind of length where one doesn't ever get in jeopardy of losing money in an unusual event.

So the ability to reduce the inefficiencies on both sides while building a nationally-scaled platform is really pretty unusual. So I think that as we have looked at the landscape over the years, there really is no better match for us or for them than this combination.

Okay. So basically, the discussion was just between the two of you. There was no other discussions that took place?

No other parties; that is correct.

Thanks a lot.

Scott Senchak, Decade Capital.

Hi, thank you. Just a quick question, it looks like from the release there were two reasons that Texas was a little lower. One was the weather, the other was lower realized margins. Just wondering what was driving the lower realized margins in Texas?

Scott, it is Jack. It wasn't specific to Texas. As you recall, given the slope of the decline in commodity prices, margins were quite high across the board for our NewEnergy business in the first quarter of 2010.

We have seen those margins come in given the flatter price curve in Q1 2011, to the tune of about $1 or $1.20 per megawatt hour.

Okay, great. And then also kind of new retail business that you are signing up, I know there's a couple of other companies that are getting pretty aggressive. I was wondering if you are seeing increased competition in any decline in margins for kind of new business out there.

Hi, this is Kathi Hyle. So we are -- it is a competitive environment, no doubt about it. I will say that -- a couple things. One, we are in a very low price environment with low volatility and the urgency or the call to action from a customer standpoint is not particularly high right now.

Having said that, so volumes that are actually available to transact are low. Having said that, we have great success in the renewal rates of our customers so we are tracking as we expected with our existing customers in renewing and the rates that we are seeing are as we expected. The new business win rate on retail has been a little bit lower and I think that speaks to the competition that you are seeing in the marketplace.

However, the new business win rate, as Jack had mentioned, when our wholesale business has been higher. So net, the benefit of our platform, we are very -- the national platform and kind of being in the business in total of wholesale and retail has resulted in that we are tracking where we expect to be.

Okay, thanks. And just one more question. I think you guys are building some wind and solar this year. I was wondering if you were electing convertible ITCs and if that is impacting your earnings at all and kind of how much that would help you guys this year?

We are actually just building solar and I believe we are taking the grants, right?

Yes.

And how much is that going to help this year?

It doesn't. It spreads the contribution over the life of the asset.

Okay, thanks.

Ashar Khan, Visium.

My questions have been answered. Thank you.

Neel Mitra, Teilinger.

Good morning. I just had a question on the PJM capacity payments that you are forecasting in 2014. It looks like I backed into a number from about $170 a megawatt day on your Q4 call and it is supposed to come down to about $150 a megawatt day. First, are those numbers directionally correct and second, what is driving the decrease from the last call in your expectations?

So Neel, directionally, you are absolutely right. We do see that magnitude roughly of a decline. While we received the parameters around the auction from PJM, given the demand, given the expectation for a demand response to be bid in, given certain elements to the positive or negative, the increasing tone we don't see offsetting the reductions in demand. So as we fine-tuned our numbers, we took them down.

I will note that our expectation was last year that it would clear much lower than it actually did, so we tend to be conservative here. Obviously, we would rather be positively surprised than negatively, but because of our conservatism, I think it is our hope that we will see the auction clear higher. Certainly, we expect in RTO that the auction will clear year-over-year higher.

And Jack, you said the main driver is demand response from Q4 at this point?

No, it is overall. It is the level of demand across PJM, as well as some on the supply side, the ability to bid in certain demand response assets.

And then your comment on RTO, why are you guys more positive on RTO now?

Expectations that you will see more meaningful coal retirements given the EPA's guidance.

Great. Thank you very much.

All right, well, thank you all for joining us this morning and we look forward to next quarter and further updates on the merger as well. Thank you.

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