First Trust New Opportunities MLP & Energy Fund
Q2 2006 Earnings Call Transcript

Published: 28 Jul 2006

[Operator:]

Good day, everyone, and welcome to the FPL Group’s second quarter earnings conference call. (Operator Instructions) At this time, for opening remarks, I’d like to turn the conference over to Mr. Jim Von Riesemann, Director of Investor Relations. Please go ahead, sir.

[Jim Von Riesemann:]

Thank you. Good morning, and welcome to our 2006 second quarter earnings conference call. Moray Dewhurst, FPL Group’s Chief Financial Officer, will provide an overview of our performance for the second quarter. Lou Hay, FPL Group’s Chairman, President and Chief Executive Officer, Armando Olivera, President of Florida Power & Light Company, and Jim Robo, President of FPL Energy, are also with us this morning. Following Moray’s remarks, our senior management team will be available to take your questions. Before I turn it over to Moray, let me remind you that this communication is not a solicitation of a proxy from any security holder of Constellation Energy or FPL Group. Constellation Energy has filed with the SEC a registration statement on Form S 4 that includes a preliminary joint proxy statement and prospectus of Constellation Energy and FPL Group. Once finalized, a definitive joint proxy statement and prospectus will be sent to security holders of Constellation Energy and FPL Group seeking approval of the proposed transaction. Let me remind you that our comments today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements made herein about future operating results or other future events are forward-looking statements under the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from such forward-looking statements. A discussion of factors that could cause actual results or events to vary is contained in the appendix herein and our SEC filings. These risks, as well as risks associated with the proposed merger between FPL Group and Constellation Energy are fully discussed in the preliminary joint proxy statement prospectus included in the registration statement on Form S 4 that Constellation filed on June 23, 2006 with the SEC in connection with the proposed merger. And now I would like to turn the call over to Moray Dewhurst. Moray?

[Moray Dewhurst:]

Thank you, Jim. Good morning, everyone. FPL Group’s second quarter earning results were mixed. On the positive side. FPL Energy had another outstanding quarter, delivering adjusted earnings per share growth of 47% and continuing both the strong earnings and excellent operating performance trends experienced in recent quarters. New win projects, the January addition of the 70% interest in the Duane Arnold Nuclear facility and strong performance from our merchant portfolio, including the absence of the Seabrook refuelling outage, helped contribute to the outstanding comparisons to last year’s results. Florida Power & Light’s results, on the other hand, were hampered by the write-off of certain disallowed storm costs from prior years’ storm seasons. Absent this disappointing and unanticipated factor, results were much in line with the expectations we shared with you last fall. Weather-related sales comparisons, customer growth and underlying usage were all favorable, and higher O&M expenses were largely in line with our expectations. Despite the weak results from Florida Power & Light, FPL Energy’s performance has been so strong that we are well-positioned to deliver good overall results for the year. At this point, we expect full-year adjusted EPS to come in at the high end of our original 280 to 290 range, even including the negative impact of $0.07 from the storm cost issue. In addition, although we did not expect to provide a specific numerical update to our 2007 adjusted earnings per share expectations of $3.15 to $3.35 until the budgeting process is more advanced along the end of the third quarter, the underlying drivers at present support the upper half of this range. As always, our adjusted earnings expectations assume normal weather for the balance of the year and exclude the effect of adopting new accounting standards, merger-related costs and the marked-to-market effect of non-qualifying hedges, none of which can be determined at this time. Finally, at the end of our prepared remarks I will make a few comments on the status of our proposed merger with Constellation Energy Group and developments in Maryland. Now let’s look at the financial results for the second quarter. In the second quarter of 2006, FPL Group’s GAAP results were $238 million, or $0.60 per share, compared to $203 million, or $0.52 per share during the 2005 second quarter. FPL Group’s adjusted 2006 second quarter net income and earnings per share were $262 million and $0.66 cents respectively compared with $255 million or $0.66 per share in 2005. Our adjusted results exclude the marked to market effect of non qualifying hedges and merger-related costs. Please refer to the appendix of the presentation for a complete reconciliation of GAAP results to adjusted earnings. FPL Group’s management uses adjusted earnings internally for financial planning, for analysis of performance, for reporting of results to the Board of Directors and to the company’s employee incentive compensation plan. FPL Group also uses earnings expressed in this fashion when communicating its earnings outlook to analysts and investors. FPL Group management believes that adjusted earnings provides a more meaningful representation of FPL Group’s fundamental earnings power. At Florida Power & Light, the second quarter results were about where we had expected them to be, absent the challenge posed by the May, 2006 Florida PSC decision disallowing recovery of certain costs from prior years’ storm seasons. This alone accounted for a $0.07 decline in earnings per share versus last year’s comparable period and is included in our adjusted results. Absent this effect, the business would have shown slight growth in EPS. The quarter saw favorable weather and usage comparisons. Customer growth continued at a very good pace, albeit closer to our longer-term historical average than the extremely high levels of the last couple of years. Increases in O&M and interest expense plus reductions in AFUDC owing to the introduction to service of the Martin and Manatee expansions in June 2005 more than offset reductions in depreciation resulting from last year’s rate case and its settlement agreement. In the second quarter of 2006, Florida Power & Light’s GAAP and adjusted results were $182 million, or $0.46 per share compared to $201 million, or $0.52 per share during the 2005 second quarter. As I indicated earlier, customer growth continues at a healthy pace with the average number of FPL customer accounts having increased by 85,000, or 2% over last year’s comparable period. While this is slightly below the pace we have experienced during the last several years, the growth nevertheless remains close to historical averages of 2%, which is in line with our previously announced customer growth expectations. We will continue to monitor the underlying fundamentals of the Florida economy, including job creation, income growth, housing starts and will advise you should any change occur that would fundamentally alter our outlook. Retail kilowatt hour sales grew 6.8% during the quarter. Cooling degree days, the common metric used to determine weather impact on energy usage, were up more than 29% above last year’s second quarter and were about 10% above normal for the quarter. As a result, usage growth associated with weather increased 4.2% quarter over quarter. Underlying usage growth was 0.6% and customer growth accounted for 2%. Looking forward, we believe customer growth rates of around 2% should continue for some time, and we continue expect little or no growth in usage per customer for the full year 2006, owing primarily to price elasticity effects. Assuming no further major increases in fuel prices, however, and with continued steady economic growth, we expect usage growth to pick up again in 2007. For the second quarter FPL's 2006 O&M expense was $359 million compared to $316 million, driven largely by two major factors

[Operator:]

(Operator Instructions) We’ll hear first from Greg Gordon of Citigroup.

[Greg Gordon:]

Thank you. A couple questions. First, you’re reiterating your earnings guidance with a bias towards the high end of the range despite the fact that you’re charging off the costs of the storm damage that you weren’t allowed to recover.

[Moray Dewhurst:]

That’s correct.

[Greg Gordon:]

Can you sort of site the areas, either in FPL or FPL Energy that are sort of indirectly making up the difference?

[Moray Dewhurst:]

Greg, it’s pretty much entirely due to FPL Energy so absent the $0.07 hit from the PSC decision, we would expect FPL to come for the full year, you know, roughly in line with our original expectations. So the difference is all coming on the FPL Energy side and it’s a combination of things. Really, the existing portfolio has performed even better than we had anticipated and that’s really been true both from a commercial perspective and an operating perspective. We are doing extremely well on the new wind development and getting things into service. So it’s just pretty much the business is hitting on all cylinders.

[Greg Gordon:]

With regard to wind development, we’ve seen a lot of cost escalation for basic materials. When we look at the fact that it’s a good thing that you’ve got more opportunities to build wind turbines, how does that factor into our Capex budget? Should we expect the Capex budget to rise here just because of, not because of necessarily, only because of higher number of projects but is the – what are you looking at in terms of the cost per megawatt at this point?

[Moray Dewhurst:]

There’s no question that the cost of KW installed has gone up. You know, a few years ago we would be thinking about an average of $1,000 per KW and nowadays we’re probably thinking more of $1,300, $1,400, depending upon where it is. You know, obviously it’s cheaper if it’s a nice flat mesa that you’re building the thing than if it’s a crumpled ridge line. So, you know, that’s factored into the economics. So you’re right that the Capex gets driven both by the volume and the rate effect. Now offsetting that, of course, is the basic market environment for wind projects has also improved at the same time so, you know, the net is really, we think, very positive for the business, but certainly the cost of KW has gone up some.

[Greg Gordon:]

So when we think about the contract pricing that we put in our models, we should think about you guys targeting escalation and contract pricing so that the margin impact from higher capital costs is de minimus?

[Moray Dewhurst:]

Yeah. We have seen no decline in the, you know, the average profitability of the project. If anything, I would say that the profitability of the projects we’ve done in the last year has been a little better than, you know, what we had done before so yes, we have been able to, the contracted ones, to process the cost through.

[Greg Gordon:]

Okay. Last question. Back in the end of March when I held my conference down in your service territory before the conflagration in Maryland, the sense was that merger integration was going very, very well with Constellation. It might in fact have been ahead of schedule. What – how long would it take from start to finish to pick up where you left off and get to where you would be in a position to close and, you know, what milestone should we look for that would increase the probability that we’d get that announcement that you’ve restarted that process?

[Moray Dewhurst:]

Greg, that’s a tough question to answer directly as you’ve asked it. I guess I would respond by saying first of all, you shouldn’t attribute too much significance one way or another to a decision, or the absence of a decision, to “restart integration activities.” Certainly we made very good progress in the first quarter and we’re all very pleased with how much progress we were able to make and in a sense, there’s a range of possibilities, obviously, for where you need to be to close a deal but the practical reality is that we could get to a position to be able to close, I think, in a very short period of time. A matter of weeks. Now, that might not be as far along in detailed planning as we would like to be ideally, but we obviously have to balance that against the factors that we mentioned in the prepared remarks, which is the distraction to the folks who are delivering value right now and, you know, the remaining regulatory risk to the deal itself. So we feel very confident that on a relatively short notice, we can turn the thing back on and get done what we need to do to be in a good position to close and start delivering at least, you know, some synergies right away and as I said in the prepared remarks, we still feel great about the Year 3 run rate assuming acceptable regulatory outcome.

[Greg Gordon:]

Thank you.

[Operator:]

Our next question will come from Dan Eggers of Credit Suisse.

[Dan Eggers:]

Hi. Good morning.

[Moray Dewhurst:]

Good morning.

[Dan Eggers:]

I guess extending kind of on the wind conversation a little bit, there has been a lot of development beyond what you guys are doing. Can you give a little color on how easy it is to find new turbines or source, then, before the end of 2007 correction tax credit end?

[Moray Dewhurst:]

We are in excellent shape as far as turbine supply goes for the full commitment. The expectations that we talked about through the end of 2007 and actually we look pretty good in terms of supply availability beyond that so we, obviously we are the largest wind energy producer in the country, probably the world, so our supply situation is perhaps a little different than some others, so that’s really not been an issue for us.

[Dan Eggers:]

And I guess the wind resource issue as far as continuing to find good sites is, you know, as you get exponentially bigger, have you seen any degradation in the quality of wind resource that you’re building on?

[Moray Dewhurst:]

No, in terms of the fundamental wind resource we are still in the nation sort of scratching the surface. That just isn’t an issue. As always with wind projects, the challenge is to get the confluence of wind resource, transmission, land owners, local community acceptance, you know, all of these things together and obviously a customer, you know, a market for the energy, the green tax so it’s generally, the complication is getting all of those things to come together in one spot, not wind resource by itself.

[Dan Eggers:]

Okay and I just wondered on the service charge, you touched on it briefly but if you could give a little more color, consumption, the per capita consumption flattening out here a little bit. Concerns about the housing market slowing. Do you – what you guys are seeing trendwise and, you know, what we should be keeping an eye on, or what you guys are keeping an eye on?

[Moray Dewhurst:]

Sure. Let me sort of remind people of what we had set out as expectations for this year based on, you know, last fall view. We had expected that we would see some slowdown in customer growth because the last couple of years have really been well above, I mean, we’ve been sort of in a boom here so we just thought that that could not last forever and we are seeing some slowdown. But it’s kind of in line with where we were expecting, around the 2% level, and we expect that to continue for the next few years. On the usage side, we had expected this year, in aggregate, to show no usage growth, no growth in usage per customer, because obviously unfortunately in January we had to pass through a pretty healthy increase in the fuel bill and clearly there is some price elasticity in that so we had built that in. Once that sort of bubbles through, however, and passes through and you re-establish a new price level, unless there is another big increase in prices, which we certainly hope there won’t be, we would expect to see the underlying usage growth return. The underlying usage growth is driven by, you know, basically improving economic conditions and Florida’s economy continues to do extremely well and overall outpace the national economy. So we are seeing sort of, a little bit of a slowdown but kind of where we expected it to be. So nothing to cause us concern about at this stage but obviously that’s, you know, a crucial part of the cycle in all industries so it’s something that we keep our eyes on.

[Dan Eggers:]

Okay, thank you. I guess one last question. Have you – you’re not, obviously, required by law to get Florida approval for the merger, but can you just give some color on your conversations with the Florida Commission and how they’re responding given all the bluster in Maryland?

[Moray Dewhurst:]

Well, as you say, Florida doesn’t actually have to approve the merger per se, but obviously the Commission retains its overall responsibility and regulatory authority over our rates and conditions of service. So, as you can imagine, the Commission and the staff are intensely interested in the potential impact of the deal for FPL customers. The Commission intervened in the FERC proceeding and they’re taking an active role there. I would say at the moment they are kind of watching and waiting, but we would certainly expect that they and intervenors in Florida would be watching out carefully to make sure that this deal does have a positive impact for FPL customers, which we certainly think it will.

[Dan Eggers:]

Got it. Thank you.

[Operator:]

We’ll move next to Steve Fleishman of Merrill Lynch.

[Steve Fleishman:]

Hi, Moray.

[Moray Dewhurst:]

Good morning, Steve.

[Steve Fleishman:]

A couple questions. First, how much do you expect you’re going to spend on an annual basis on the Storm Secure program?

[Moray Dewhurst:]

That is a very good question and one which we, at present, do not have a clear answer to for the following reasons. There are a number of different elements to the Storm Secure program but the biggest one in terms of driving spending is the sort of hardening the infrastructure element. That is a very complicated question to get our arms around. This year we undertook a number of early projects, hardening infrastructure for some critical customers and some critical infrastructure in the state so we are beginning to get some practical experience as to what the appropriate upgrades are likely to be. But to be blunt, we have done these projects clearly not as efficiently as we would expect to do future projects. Like everything else, you learn as you go along. So we’re trying to figure out how much productivity enhancement we’re going to get as we scale up the program. So that’s one complicating driver. The second is, we are really still working through what’s the appropriate prioritization, you know, which feeders do we tackle first? The economies of doing some facilities as clusters, so different geographical areas, a whole bunch of things like that. So we are still working on translating the principals into a detailed plan, so I can’t give you a specific numerical answer. All I can say is it will be material to FPL Capex profile over the course of time. It will build.

[Steve Fleishman:]

Okay, and then kind of a different tact. On the – when you look out to the 06/07 guidance that you’ve talked about, how much, if at all, are you capturing any benefits of the recent forward capacity market ruling in New England and implementation of that? You know, the old LICAP? Is that, given when you hedge and such, are you not really capturing that yet or do you start capturing that in 07?

[Moray Dewhurst:]

Yeah. Not much impact in 06. We should start to see, you know, some benefit in 2007. Again, and that’s certainly one of the factors that we’re thinking about when - giving us more confidence in the upper end of the range for 2007 right now. But in all fairness to the guys at FPL Energy, we have not given them a chance to go through the kind of detailed financial process that we start to do in the third quarter, which is why we’re not putting specific numbers on it. So I guess the bottom line answer is, it’s one of the quality to drivers that we’re aware of that is behind our statement that we believe that right now the upper end of the range, the upper half of the range for 07 is realistic.

[Steve Fleishman:]

Okay. One last question and I know I asked this on the Constellation call, too, but what are your thoughts on their planned sale of these gas plants? Because, you know, while they’re not strategic for them, you know, gas plants have kind of been relatively strategic to you guys?

[Moray Dewhurst:]

Right. Well, I guess the sort of thing to say is that everything has its price. So we have always indicated that, you know, while we’re comfortable with the portfolio that we have, we’re always looking at, you know, other opportunities to improve by rationalizing that portfolio and Steve, as you know, for each of the last five years at least, we have every year sold at least one small project if not, you know, something bigger.

[Steve Fleishman:]

Right.

[Moray Dewhurst:]

So I think the whole principal of, you know, always examining the portfolio to see what makes sense, and in particular, if there are people out there who value it more than we do, you know, that’s something we go through constantly so we don’t have a problem with that. We think that makes a lot of sense. So we’ll have to see. I don’t know what the market looks like right now for those assets. We really haven’t tested the waters for those kinds of assets but clearly there have been some other transactions in the industry that would suggest that valuation multiples have improved on those assets.

[Steve Fleishman:]

I mean, if that’s successful, wouldn’t that then maybe send a signal of you reviewing your own gas plants, too, then?

[Moray Dewhurst:]

I wouldn’t read that into it. As I say, we’re always, in a sense we’re constantly reviewing the portfolio. At the moment we’re pretty comfortable in what we have.

[Steve Fleishman:]

Okay. Thank you.

[Operator:]

We’ll hear next from Vedula Murti with Tribeca Global Management.

[Vedula Murti:]

Good morning, Moray.

[Moray Dewhurst:]

Good morning, Vedula.

[Vedula Murti:]

I want to focus a little bit on the wind business and kind of more your, you know, we’re talking terms of a longer-term development of the business. One of the things, you know, I find, you know, as an investor that’s kind of lacking in the marketplace right now is a tier play wind company that’s, you know, predominantly in the United States. Obviously you guys are the largest player in the space by far. I’m wondering, could you give us your thoughts as to, you know, potential benefits and/or impediments to a potential IPO of the wind business and the - you know, from my view, an IPO of the wind business would provide a currency to help, you know, potential acquisitions of existing wind projects from smaller players to enhancing scale in the U.S. and providing another funding mechanism beyond obviously some of the Group project financings is done and that kind of thing, and also a vehicle, if you choose to expand ultimately internationally as well as a current CD to utilize. Can you discuss a little bit kind of how you’re viewing the business longer term and what the prospects or impediments may be to that type of an approach?

[Moray Dewhurst:]

Sure. I guess before I do, though, I want to just challenge one part of your question, which is I don’t think any structural changes that we might make would make it any easier for us to acquire smaller players, project interests. There are no constraints as far as I can see on us being able to do that. We’ve done that very successfully over the last few years.

[Vedula Murti:]

Well, I simply meant having a better – having a different kind of currency or something else to offer.

[Moray Dewhurst:]

Okay. That’s kind of what – quibble. Your basic question, I think is a very good one. It’s one we’ve wrestled with, actually, quite a lot over the last couple of years because we’re not convinced that we’re seeing full value for the business and the strategy reflected in the marketplace. The short answer is, we have not yet come up with a satisfactory structural alternative. We looked at a bunch of different things including things like tracking stocks but, better or worse, all I can say is we just haven’t seen one that really seems to work. Recall that one basic issue, constraint if you like, for the business is the way the business has been supported from a policy perspective in this country is two methods

[Vedula Murti:]

All right. Thank you very much.

[Operator:]

Our next question will come from Vic Khaitan of Deutsche Asset Management.

[Vic Khaitan:]

Yes, thank you, Moray. Just a question regarding, you mentioned about the, last statement about the merger update as to you will not do it at the expense of shareholder value and I see both in Maryland as well as in New Jersey there are a lot of concerns about merger and tougher conditions, so could you give us some idea about what conditions might make it difficult for you to complete this merger?

[Moray Dewhurst:]

Let me ask Lou to address this.

[Lewis Hay:]

Thanks a lot, Moray. Vic, I think it’s pretty darn hard for us to speculate on what the conditions are and I think our statements about not going ahead with the merger, you know, at the expense of shareholder value kind of speaks for itself. There’s been enough twists and turns in this situation so far that, you know, does cause one to, you know, at least pause and look at things. I will point out that so far there really has been no material change in value and, as with all deals, you have a series of puts and takes and we’re very, very comfortable with the current value proposition. But, you know, we still have not received some of the important regulatory approvals, primarily Maryland, and we’ll just have to, you know, just see where that shakes out. But we’re, you know, we’re hopeful. I think we’ve put forth some very, very strong testimony, you know, in the Maryland case and, like all utility mergers, we’re prepared to share a fair share of the synergies. But if we have to give up a disproportionate share, more than what we were expecting, that really has an impact on the value and that’s going to cause us to step back and take a fresh look at things.

[Moray Dewhurst:]

And Vic, just to add, we think that the $600 million that Constellation has put on the table and we stand behind in joint testimony is a very, very generous offer. It’s very good for the customers in Maryland.

[Vic Khaitan:]

Yeah. That’s an interesting situation, but the other party, too, had mentioned earlier that, standalone, you do have a pretty strong growth rate, don’t you?

[Moray Dewhurst:]

Sure.

[Vic Khaitan:]

Because you are talking about high single-digit or even low double-digit growth rate as a single, independent FPL. So that has not changed, regardless of the –

[Moray Dewhurst:]

No. As a standalone case, you know, we certainly feel at least as a good, probably somewhat better, our partner’s standalone case as we did, at the end of the last year. But we feel equally good about the long-term prospects for the combined entity. We’re still very positive about the incremental value that can be delivered through the deal. So really, nothing has changed here. We like the deal. We knew when we got into it that it had to be completed on acceptable regulatory terms. We’re still in that situation. As Lou said, nothing catastrophic has happened so far. Everything is going along, despite all the twists and turns. But we are certainly cautious and keeping an eye on things, and we’re not going to do something that’s stupid from a shareholder perspective.

[Vic Khaitan:]

Okay. Thank you.

[Operator:]

Moving next to Paul Patterson of Glenrock Associates.

[Paul Patterson:]

Good morning.

[Moray Dewhurst:]

Good morning.

[Paul Patterson:]

Just wanted to touch base with you again on the integration activity and where you guys might feel comfortable in reinitiating it? Is it – are you concerned about the actual makeup of the Maryland Public Service Commission and if we get a better idea of what that membership might be and it seems okay, would you feel comfortable then going back into integration activity? Or is it more that you actually want to see the conditions that the Maryland Public Service Commission has with respect to the merger? Or is, you know, just the other elements of SB 1, such as the power plant valuation and deregulation study kind of stuff, taxation kind of stuff that was also sort of part of this bill. Could you give us a sort of flavor as to what it is you’re looking from Maryland in this process that would make you guys feel more comfortable in getting that integration activity started again?

[Moray Dewhurst:]

Okay. Lew’s going to respond to this one.

[Lewis Hay:]

Paul, I think it’s a judgement call and there’s a lot of moving pieces, as you very well know and actually, just yesterday morning, Moray, Mayo and I were talking about the possibility of what we should do in terms of, you know, integration planning. Clearly with the Special Session of the General Assembly, one of the very, very big obstacles of the rate stabilization issue is now behind us, and we’re just being cautious. As Moray said earlier, we literally could close this deal and be ready for Day 1 by starting up integration just, you know, in a matter of weeks or maybe a month or so beforehand and we’re just trying to optimize the situation. So the only thing I can say is we’re in constant dialogue with Constellation on this issue and we’ll let you know when we’re ready to do it but, with all the variables, it really becomes, it’s just a judgement call and we’ll know it when we see it. And, you know, the senior folks at both companies continue to talk about things and I feel like we’re in a pretty good position for – we have a pretty comprehensive understanding of what we’re going to do and what needs to be done for Day 1 operations. So I feel good about where we are in that regard.

[Paul Patterson:]

Okay, so there’s not a key date or a key event that we should be, I mean it sounds like, I mean obviously, there are some key events, but there’s not one that we should be looking at in terms of seeing whether or not you guys start up the integration activity. Is that the right way to think?

[Lewis Hay:]

That’s absolutely the right way to think about it.

[Paul Patterson:]

Okay and then, just, I’m sorry if I missed it but I see that you guys had a $0.06 benefit in 2005 from weather, in the first quarter, excuse me, and a little bit of a hit but I was wondering, versus normal, and I’m sorry if I missed that. You might have mentioned it but I didn’t hear it. What is the impact of weather versus normal been so far this year?

[Moray Dewhurst:]

It’s on hold while we get the six-month impact. The first quarter was weak; weather impact was plus 10% on degree days this quarter so, just one second. Year-to-date it’s about flat.

[Paul Patterson:]

Okay, so it’s pretty much like normal?

[Moray Dewhurst:]

Yep.

[Paul Patterson:]

Excellent. Thanks a lot.

[Operator:]

Our next question will come from Keybanc’s Paul Ridzon.

[Paul Ridzon:]

Good morning. How are you?

[Moray Dewhurst:]

Good morning, Paul.

[Paul Ridzon:]

Just wondering if you were at the Palisades auction, what may have prevented you from being there, what may have ultimately turned you off and to what extent, maybe merger distraction played a role in that?

[Moray Dewhurst:]

Well, it’s our policy not to comment on specific transactions however I can tell you that there were people that said many times in the past which is that we are very interested in adding to the nuclear portfolio, and I think it is safe to assume that in general we will at least take a look at any nuclear plants that come up for sale. But beyond that, I guess the only other response that I want to make is that merger distraction is not a factor. As mentioned before, we’re trying to make sure that the folks who are running and operating the businesses can really focus their efforts on continuing to deliver value and I think they’ve been very successful in that.

[Paul Ridzon:]

Just wondering why you’re treating the storm cost recovery, or storm cost disallowance, as ongoing? It strikes me as pretty one-timeish.

[Moray Dewhurst:]

Well, we certainly hope it will be. It is what it is. It’s part of our GAAP results and we’ll leave it for investors to figure out how to treat it.

[Paul Ridzon:]

And just to reiterate, you were endorsing the upper end of your previous guidance, even with that headwind?

[Moray Dewhurst:]

That’s correct.

[Paul Ridzon:]

Just maybe, Lou, if we could get a – resonate maybe the tone you’re hearing from your shareholders with regards to how they’re viewing this merger?

[Lewis Hay:]

That’s a good question, Paul. Our sense is we continue to have fairly strong support from our shareholders but, you know, they keep urging us to make sure that we stay disciplined and focused on creating shareholder value which I would say I think we have a good track record of. I think the Constellation team does as well. I think we’re very much aligned in terms of our goal. As Moray said before, we are feeling better about our independent path than we were before and I think Constellation is saying essentially the same thing. We said when we announced the deal they’re both strong companies, they both have strong independent paths, but we believe that the combination is even all that much more powerful and we’ll have more opportunities going forward. So this is a deal built on the strength of two, I think, very good companies. So I think that’s the primary thing we’re hearing from investors.

[Paul Ridzon:]

Back to Paul Patterson’s question, you’re in a position to close this deal with a lot of unanswered questions revolving around stranded costs in Maryland, re regulation in Maryland. I mean, could you close that deal, given factors like that and uncertainties like that?

[Lewis Hay:]

I think it is a function of which uncertainties really are the uncertainties at that point. We feel very good about the legal position on the stranded costs. I will refer you back to comments that many on the team have made about that over the past summer, but we’re not particularly worried about that one so that’s the kind of issue you’re, you know, you’re thinking might be an open issue at the end of the day. Again, it’s all speculative but at this point in time that would not bother me based on what we know at this point. You know there’s always going to be, in our business, regulatory uncertainty. We’ve lived with that for, you know, our entire history as has Constellation. But, you know, the one you mentioned specifically, re regulation in Maryland, there are going to be some studies. We think the competitive in Maryland, you know, obviously it’s the source of power in Maryland and the PGM market, it’s the best developed market probably in the world. I think it’s working very well. We’re already seeing market entrants come in on the, you know, industrial and commercial of the business. So the competitive markets are working well there. There’s a number of early entrants, you know, the retail market is just starting up in Maryland but we are seeing entrants into that market; it’ll evolve, arguably a little slower but, like other markets, it should evolve. So we think that’s working very, very well. And, you know, we’ll point out that new legislation does raise the potential of BG&E building some plants of their own to bring about stability. I don’t know whether that will happen or not. But, that may be a source of new growth for BG&E so that could be something that could be good for the company and good for customers. We’ll just have to wait and see.

[Paul Ridzon:]

Just one last question. Moray, as you look at your budgeting process, do you think that the upper end of indicative 07 guidance could be conservative?

[Moray Dewhurst:]

I think I’ll just repeat what I said before. Right now we see the drivers supporting the upper half of the range. We will talk to you more in the third quarter call when we’ve been through the planning process.

[Paul Ridzon:]

Okay, thank you and congratulations on a pretty solid quarter.

[Moray Dewhurst:]

Thank you.

[Operator:]

Moving next to Ashar Kahn of SAC Capital.

[Ashar Kahn:]

Good morning.

[Moray Dewhurst:]

Morning, Ashar.

[Ashar Kahn:]

Moray, addressed to you or kind of Lou, I guess with any deal when you go to the Commission you put something on the table that you want as part of the synergy savings but could you just, trying to get a better sense, is the number like, you said $600 million. Is the number like $800 million not acceptable? You know, where is the bid/ask spread which makes you sure, because always the Commission is going to come in different with what you ask. So I’m just trying to understand, you know, there’s savings over here, what you’re saying, conservative, I’m just trying to understand where does the bid as become something which is not acceptable to you? Is it, you know, 50% higher? Is it 25% higher? I’m just trying to get a sense as to how you’re looking at it.

[Moray Dewhurst:]

Ashar, the way we’re looking at is that the $600 million that’s on the table from Constellation is extremely generous.

[Ashar Kahn:]

But is anything higher than that, that puts into question, I guess, the terms of the merger agreement or the merger itself? Is that correct?

[Moray Dewhurst:]

Anything higher than that would be even higher than extremely generous.

[Ashar Kahn:]

Okay. I appreciate it.

[Lewis Hay:]

Ashar, let me just add to that a second. You know, any number we would give you here, this is obviously a public forum, sounds to me like it’s just negotiating against ourselves. As Moray said, the whole package is very, very generous and, you know, it would just be irresponsible on our part, really, to answer your question at this point in time.

[Ashar Kahn:]

Okay. Thank you.

[Operator:]

We’ll move next to Danielle Seitz of Dahlman Rose.

[Danielle Seitz:]

Thank you. Most of my questions have been answered but I was wondering, could you sort of talk about the wind power conditions, as you said, were below normal and can you relate that to, for example, capacity factor relative to normal? Is that the – would that be a good measure?

[Moray Dewhurst:]

Danielle, if I understand your question, there’s two parts to it. First of all mechanically, certainly, the lower wind index translates to a lower capacity factor.

[Danielle Seitz:]

Right.

[Moray Dewhurst:]

For the assets. The more fundamental part of your question is kind of what’s going on in this particular quarter and the short answer to that is, as best we can tell, nothing other than just the usual variation. We do have one – some of the work that we’re doing at the moment is trying to relate fluctuations in the wind resource availability to other weather or climate phenomena over a longer period of time, and I would have to say that at the moment we just don’t know a great deal about that. We have a hypothesis about, you know, whether there’s a linkage between the weak wind resource and this extremely hot weather that we’ve seen in large parts of the country, but we don’t really at the moment, we can’t prove that one way or another.

[Danielle Seitz:]

And yourself, could take a short cut. Do you relate to a capacity factor on average for the whole system? Or you don’t? Is this normal? Is this normal?

[Moray Dewhurst:]

This is normal. Yeah, this is just part of the fluctuation. The wind resource does fluctuate quite considerably and it fluctuates, you know, more on a daily basis than on a monthly basis. More on a monthly basis than on a quarterly basis. So you can get, you know, some good quarters and some not-so-good quarters. This was a not so good quarter.

[Danielle Seitz:]

Yes, I just thought, just in terms of output, I was thinking that this could be something, an issue that was easy to measure. On another subject, could you comment on your thoughts on the market in Texas? I know the New England market was very profitable but I was wondering about Texas.

[Moray Dewhurst:]

The Texas market has been doing extremely well, really all through this year. One of the reasons FPL Energy is, you know, above our original expectations, the ERCOT portfolio has performed extremely well. So, you know, the market –

[Danielle Seitz:]

And your thoughts about the future?

[Moray Dewhurst:]

The market seems to be functioning pretty effectively. We’re still seeing demand grow so I guess, you know, don’t look for radical changes in the next couple of years and beyond that, I think, it’s a little speculative right now.

[Danielle Seitz:]

Right. I just was wondering if already there was a sense of, in terms of prices not so much in terms of demand, that prices were sort of flattening or something. You don’t see that?

[Moray Dewhurst:]

No. I mean, in the second quarter, we saw expansions in spark spreads, forward spreads in ERCOT and to go back to stuff that we’ve talked about in the past, you know, we had always indicated that we didn’t expect the market to come back into so called equilibrium until the latter part of the decade. I think we’re seeing some of that a little earlier than we expected. We mentioned that before and we speculated about whether that was, you know, going to be sustained or whether we might see a retreat from that but we haven’t seen a retreat from that so maybe it is coming a little earlier than we had thought.

[Danielle Seitz:]

Right, and it created a floor for prices then, because of the supply/demand. Great. Thank you. Appreciate it.

[Operator:]

And our last question will come from Michael Goldenberg with Luminous Management.

[Michael Goldenberg:]

Thank you. My questions have been asked and answered.

[Moray Dewhurst:]

Thank you, Michael.

[Operator:]

And Mr. Von Riesemann, we have no further questions at this time. I’ll turn the call back over to you for any closing or additional remarks.

[Jim Von Riesemann:]

Thanks, everyone, for joining us today and that concludes our conference call. You may disconnect.

[Operator:]

Once again, that does conclude today’s conference. We thank you all for your participation, and have a great day.