Good morning and welcome to the Constellation Energy's First Quarter 2008 Earnings 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 Vice President of Investor Relations and Financial Planning and Analysis for Constellation Energy, Mr. Kevin Hadlock. Sir, you may begin.

Thank you, good morning everyone. I am Kevin Hadlock, Vice President of Investor Relations and Financial Planning and Analysis. Welcome to our first quarter 2008 earnings calls and thanks for being with us today. Before we begin our presentation, let me remind you that our comments toady will include forward-looking statements which are subject to certain risk and uncertainties. For a complete discussion of these risks, we encourage you to read our documents on file with the SEC. Our presentation today is being webcast and the slides are available on our website, which you can access at constellation.com under Investor Relations. On slide three you'll notice we will use non-GAAP financial measures in this presentation to help you understand our operating performance. We've attached an appendix to the charts on our website, reconciling non-GAAP measures to GAAP measures. With that, I would like to turn the time over to Mayo Shattuck, Chairman, President and CEO of Constellation Energy.

Thank you, Kevin. Good morning everyone and thank you for joining us today. For the first quarter of 2008, we recorded adjusted earnings of $0.95 per share, $0.08 below the adjusted $1.03 per share earned during a strong first quarter of last year. These results were in line with our exceptions and reflect solid operating performance. We are also reaffirming earnings guidance for 2008 of $5.25 to $5.75 per share. Now let's turn to slide 5 to review operating highlights from the first quarter. We achieved several key operating successes in the first quarter. Strong results from our generation fleet continue to be driven by the roll off of below-market hedges. Our nuclear plants also delivered particularly strong operating performance as we successfully completed a planned outage at Calvert Cliffs Unit 1 in 19 days 15 hours, setting a new record for the shortest refueling outage for any plant of its type. In addition, forced outages in the nuclear fleet were limited to less than three days. We reached another milestone in our plans to develop and construct new nuclear plants by filing a complete Combined License application for Calvert Cliffs Unit 3. In addition, we continue to make progress working with the federal government to move the loan guarantee program forward. We also announced the acquisition of a partially complete Hillabee Energy Center in Alabama, which will complement our customer supply business in the Southeast. And finally, we were able to come to an agreement with Maryland legislative and regulatory leaders on a comprehensive settlement of prior legal, regulatory and legislative issues. Moving over to slide six, I'll walk you through the specifics of that settlement. Late last week, Governor O'Malley signed legislation passed by the General Assembly finalizing our settlement agreement with Maryland. Under this settlement, all PSE…

Thank you Mayo and good morning everyone. Let's begin on slide 11. As Mayo discussed earlier, we saw strong performance in the first quarter. Let me start by highlighting several of our key financial successes. During the first quarter, we continued to transact opportunistically. As Mayo mentioned, we purchased the Hillabee Energy Center for approximately $155 million, which will be completed at about 45% of new build cost. The project is expected to be operational in 2010. Consistent with our invest, develop, harvest strategy in upstream gas, we executed the sale of a non-operating interest in producing wells to Constellation Energy Partners, recognizing a gain of $14 million. At BGE, beginning in January 2008, we implemented electric revenue decoupling for residential and small commercial customers to eliminate the effect of abnormal weather and usage patterns on our electric distribution volumes. Going forward, these revenues will primarily be driven by customer growth and will not be affected by actual weather or usage conditions. While going without any notice, we retired $145 million of BGE's long-term debt, eliminating the lien on Constellation's generating assets previously owned by the utility. As Mayo highlighted, we achieved a settlement in Maryland of prior legal, regulatory and legislative issues. As part of this settlement, we will contribute approximately $187 million as a one-time credit to residential customers. BGE customers will also be relieved at the potential future liability for decommissioning Calvert Cliffs. We do not anticipate the assumption of this potential decommissioning liability from BGE's customers will result in material incremental costs to Constellation when it is time to decommission the plant. In addition, BGE agreed to delay the next electric distribution rate case such that new rates will be effective no earlier than October 2009 with a resulting increase in distribution rates capped at 5%.…

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Dan Eggers from Credit Suisse. Dan Eggers, Credit Suisse.

Good morning, just thinking a little bit about PM&T and kind of loss in the quarter, a better performance elsewhere, do we need to think about reshuffling expectations for the full year from those different businesses or is the expectation that you are going to make up, the loss plus the full year contribution expecting this year, arbitrating, where is that level of confidence come from?

I guess I would say of course we've reaffirmed for the year, and probably I wouldn't... in terms of... I don't know precisely what you mean by reshuffling expectations. But I think the short answer would be no. Obviously, we have stated our confidence on the year. In terms of the characterization of portfolio management trading in one category and structured products in another we have reported earnings in that format for several, -- in those separated distinction between portfolio management and trading and structured transactions for several years now, at a management level I think John highlighted in terms of the way we mange the over all portfolio, is a very similar activity, so in terms of the structured products gains, the principle driver was significant increase in the coal prices that created opportunities that we acted on quickly to capture gains, and I think the combination of, $47 million of traditionally characterize this portfolio management and trading losses combine with $239 million structured products gains, so it reflects the over all, pretty strong performance out of our portfolio management at management level.

Just looking, looking at the heat rate movements in PJM in the quarter kind of a disruption that had on results, if there is a not written kind of more normal expectation for heat rates is that cast any shadow over, full-year contribution or has an everything been marked down to reflect this world, what we see a you should pick some of that back up as the as year goes along?

I'm sorry. So Dan, the question was if it...

What happens if the doesn't recover, and what happens if it does? If it does, do you is it easier to get to your targets? And if it doesn't... have you already reflected all, of that non recovery in your numbers.

Yes.

Easy. Okay and I guess Mayo or John you guys talked earlier about being at the high end of the guidance range for this year, previously kind of being a little bit behind on some of the trading structure product side a bit it seems than a kind of a little bit of down visible earnings contribution in the second quarter, what is the level of confidence that you are going to be at the high end of the guidance this year.

Yeah, I mean and this is John Collins, in fact we know and as you know we are maintaining guidance in the range of $525 to $575 per share for the year. We would say based on where we are at to date in the current market conditions, we do not have the exact same level of confidence around hitting the mid to upper end of the guidance range. But we do still see opportunities to do that, so we haven't change our guidance at this point in time.

Okay. Thank you.

Our next question comes from the line of John Kiani of Deutsche Bank.

Good morning.

Good morning John.

I have a few questions. What were, outside of the transport that you mentioned John. What were the positions and the associated hedges that were disqualified, were there some accrual positions and some hedges that obviously as you mentioned disqualified and what were those exactly?

Yeah they are actually... it's... I don't know if you are confusing two concepts in the non qualifying hedges. The two components that are in there are gas transportation and gas storage and that the vast majority of that was gas transportation. So just as a way we have to manage those, we assume they are non-qualifying tank hedges. And the other piece I don't know if you are getting..

I am sorry I met the FAS 133 hedging effectiveness, I missed both.

That's was I was going to go.

Thank you.

I amsorry, I missed the FAS 133 hedging effectiveness, I missed both.

The FAS 133 hedging effectiveness is really a result of how we manage primarily generation length out the curve where you get into more illiquid markets where we primarily use gas the hedging forward generation length positions. And with breakdown in the heat rates that we saw in the first quarter is primarily the driver to that position. So the primarily driver and the two things that really happened in the other piece of it would have international freight business where we also saw some correlation breakdowns. But hedging effectiveness you're aware, is broken down into two pieces. There's the piece that's between 80% and 125% of the relationship and once you're below the 100% or above 100% you then within that range, you then have to do basically take that delta or dollar value offset to earnings. Once you go outside those ranges, 80% to 125% the whole hedge is disqualified and you basically than have to take the whole change in value to earnings. When we look at that $63 million in the first quarter $25 million was due to the correlations failures outside the, 81, 25 and roughly $38 million is related to the dollar value offset or the relationship between the 80 and 125.

Okay, John so that's -- I see that you that helpful. So is the right way to think about it that your long power -- in other words, sounds like you said there's generation length. So did you maybe by power from generators or you just long power from generators fairly for out on the curve and in order to hedge that long power position you bought gas as a hedge as a hedge against it?.

Effectively, of course, we're naturally long power in our portfolio, owing to the fact that we own power plants.

Right.

And to some extent out the curve in less liquid location, whereas not necessarily easy on a forward bases to sell power, we will to a certain degree sell gas instead of power and this tends to be a fairly stable relationships so historically as generally been a reasonably stable and effective hedging approach in the first quarter of course that historically stable relationship in forward relationship between gas prices and power prices broke down a bit. So fundamentally there is not a lot of news here other then the fact that since this forward correlation broke down to the requirement of FAS-133 caused us to take some unrealized losses to current earnings.

I see so, whatever long power position it was generating assets or whatever. You sold gas as a hedge against it and the heat rate moved downward and that was the exposure of both from an economic prospective and also from the hedge and effectiveness perspective.

Correct and because as John highlighted the correlation between gas and power of built outside of the range required in the fairly complicated accounting standard FAS-133 since that correlation break down occurred, this required us as John highlighted to take unrealized losses to current earnings.

Okay, that's helpful. And then another question I have is related to VAR, can you tell us what your average in max VAR were during the quarter?

Yes, we can...

Yes, hold on one second.

The average war at the 95%

The average VAR at the 95% confidence interval for the quarter for the total mark-to-market portfolio was $17.1 million and the high was $22.3 million.

Is that an overnight or 7 day or?

1 day, overnight, 95% compensated calculation.

Okay. Thank you and then I think you mentioned some gains or asset sales that were included in the merchant results. Can you talk about those a little bit more please?

Sure John, this is Tom again. Two basic categories and structured products and as over arching comment, of course this category of activity transacting to entering the structured transaction to capture gains as marketplaces move during the year. This has been a fundamental part of our operating approach for several years now. We have reported several such transactions directly over the years and certainly as part of our 2008 operating plan as we highlighted in January, this sorts of activities transacting to realize gains, it was part of our operating plan. The '08 operating plan contemplated of course a range of scenarios, but effectively embedded in that plan was gains of this type in the range of $100 to $200. So we have experienced gains of... $239 million as John indicated in the first quarter. So a bit above of our full year expectation and certainly faster than our full year expectation but fundamentally coal prices of course increased quite dramatically. We saw opportunities and we absolutely move quickly to transact to realize gains and rebalance the risk characteristics of our coal supply portfolio, so you fundamentally that was the principle driver. In addition, they were several transactions in our coal portfolio that are unable us to do that, our coal in London was very adept at acting quickly to capture the market opportunity, that was created in addition, we entered into a transaction of a type, we've entered into in prior years and reported on and prior years, which was we expectedly sold a unique contingent long power purchase position which had been purchased several years ago at much lower for billing market prices as market price increase on such unique contingent power positions. Our exposure to counter party performance risk increases, so on a repeated basis over the last several years, we transacted in effect selling these positions as a means of reducing our net exposure to counter party performance risk, so we did that as well this quarter again something that we've done several times in our report and several times in the past and again the type of transaction that absolutely contemplated in our 2008 operating plan.

Yes, if I can add just two things you know, to what Tom said, number one is that there is same market environment that allowed us to capture those coal price increases with the same environment and causes us to have the two producers default on their contracts, high prices, operational issues. And so what you basically were able to do is you don't take advantage of market opportunities to balance the portfolio properly, and secondly while we were able to, capture these upside in this pool transaction and at the same time were able to increase our backlog going forward. It's a very positive result on both parts of the equation there.

Okay, that's helpful. Thank you.

Our next question comes from Greg Gordon from Citigroup.

Good morning Greg.

Thanks good morning, so given that you started to answer my question, you gave a backlog number in the Analyst presentation in January. Backlog number for structured products of about a 150 million in '08, 160 million in '09 and 110 million in 2010 just eyeballing the bar charts. Did you monetize a big chunk of that future value to taking those gains in the first quarter or did you, in fact, build on the total backlog in the first quarter relative to what you disclosed in the analyst presentation?

We definitely built in net built on the backlog. So as John indicated we added in global commodities about $200 million to the backlog, net of the backlog reduction impact of the transactions through which we realized gains. So fundamentally and this has been a basic management metric we've followed for years, we obviously want to be adding to our total... creating total economic value in the quarter and we think in some of the change in the backlog we did that, we took... we saw market opportunities to realize some gains and market condition that made that attractive. We did so, we also added to the backlog to the degree that exceeded by $200 million, the amount of backlog reduction that resulted from the transactions through which we realized those gains.

Right so put in another way, you didn't rob Peter to pay Paul and make the earnings in the first quarter?

Yes.

Second question with regard to backlog and related to the coal business. Who were the counterparties that defaulted?

Well I think they are both public. So the first one was Black Diamond which was the largest majority of the loss and the other one was somewhat of almost a related party to Black Diamond because they did business with each other as a small company called Kyva so those were the two counter parties, these were coal suppliers where we had tonnage to be delivered through '08 basically through 2010 and however these contracts are derivatives and more mark-to-market and as a result we had to take these write offs.

But my arguments, are they domestic providers?

Yes, they are both domestic, they are both Central Appalachian coal providers. They... in some cases specific type of coal, and these were really isolated events because in this price market, eventually most coal suppliers are doing much better. However, in the case of Black Diamond, they had a plan to increase their production quite rapidly over the next 12 to 18 months. However, what... and so they had sold forward quite a bit of what they thought, they were going to produce and they ran into operational problems in trying to bring some new mine online and there lender CIT which is very public actually forced them into an involuntary bankruptcy, its been converted to a voluntary chapter 11 proceeding and we're on the unsecured creditors committee. So, however most of our when you take a look at coal suppliers most of them are performing much better in this market place, but it was the isolated operational event here I mean Kvya was buying from Black Diamond to met their needs.

I would just like to you sort of answered my next question, which was when you got into this coal business, there was a definitive increase in number of counter parties that you are transacting with that don't have credit ratings for which you had to apply your own credit metrics and you indicate in your K that a large majority of them were from your perspective, investment grade business. Should we begin to worry about your ability to effectively examine the credit of your counter parties as you expand these business?

No I don't think that you know... I don't think that's the case. I think we've very strong ability to examine the credit worthiness of our counter parties. I would correct one thing I think you said, Greg, though. There's very rarely you ever find a coal counter party that's investment grade and in fact if you look at the change in the credit quality of our portfolio over the last two years, it's going down to be less credit worthy primarily driven by international coal and freight and in domestic coal producers. So it is basically the best credit you find in the coal industry are generally in the mid to low BB range.

Okay, two more questions.

Greg let me to just add one thing in terms of the just the over the... your overarching question on the coal business... on our coal business as John indicated as you know we are supplier of coal, so we purchase coal from producers, we deliver coal to customers that are consumers of coal the majority of them electric utilities of course. As John indicated, most coal producers have sub investment great balance sheets and certainly as we assess those credits, we very much bear in mind the right way risk that applies that have to say our exposure to those coal producers increases if we've made long-term purchases as coal prices go up. These sub investment Greg coal producers financial strength also in general goes up as coal prices increase. So the phenomenon that causes our exposure to them in general also causes them to be more able to perform on all their obligation so we regard the portfolios containing a significant element of right way risk in this particular instance a single can single producer a small producer in the Appalachian region experience some specific performance or production problems which were whose financial impact was exacerbated by the quick one up in coal prices. So this producers had production prompts they cause in to be less able to produce coal then they though to be and in environment prices were much higher so in a very quickly they got a situation were they in the falls. Importantly across the whole portfolio back to your question we don't think there's a big system risk because these produces ability to perform in general goes up in correlation with our exposure to them we think this is very much in EDO syncretic situation as specific production problem and a specific small producers so we don't think it reflective of some broader problem across the whole portfolio its not to say that such a think could never happen again but nearly we don't think its reflective of bigger broader problem across the whole portfolio.

Great. Couple of more questions, one related to global commodities as we first question was ask just to stay that you gave us specific breakdown of $441 million of expect EBIT global commodities and then in your speak in the January you obviously already exceeded the structure product both of already exceeded what you have expect to earn from certain aspects of that should we assume that $391 million of portfolio management and trading all for 2008 and is now significantly lower and that in fact going to be offset by the fact that you were able to take these gains in the quarter and are you still targeting that $441 million?

Hey Greg, it's George Persky. Obviously we have a mix with in global commodities we have a mix of businesses and over the course of the year in aggregate, we still expect the combination of the three businesses to perform as expected, but obviously inside every year, there is variation in terms of what businesses are making the money and what businesses are not making the money. But in the case of portfolio management and trading prior to this quarter, we had 20 straight quarters of positive results. So its not I don't think it's too far of a stretch to think that PM&T will get back to profitability for the balance of the year. Question of could we make less in PM&T and more in structured products and was in our plant sure, does that reflect anything sort of material long-term in terms of the direction of the business now.

So that the overall target number is still achievable in your mind at this point of the year.

Yes.

Okay, one more question, the hedge EBITDA you gave an update on unhedged and hedge EBITDA for the generation business and while the unhedged EBITDA is up the hedge EBITDA is actually down modestly and then up using...dramatically 10, to 11 looks like the major reason for that is O&M you talk about what adjustments happened over the first quarter that effected the update of that, of those metrics.

The total unhedged EBITDA as, you have done the math, the total unhedged EBITDA over the 9 to 12 period is up about 900 million from what we told you in January hedged EBITDA is up I think about 200 million is significantly back and loaded or back and loaded over the 9 to 12 period in some to the specific question as to '09 I believe under most of that small negative was due the to the way we... we had a bit of a plan with respect to the way we plan for the cost of SO2 emissions, which was a negative, other than that, other than the arithmetic take is pretty transparent, how prices moved in order position for that we provided so, principally that slight downward was due to some plan issues,

Okay, so either more SO2 credits higher pricing for SO2 credit for some competition of the above?

Yes, I mean that we just we missed the modeling of SO2 credit appropriately in the plan that we gave you back in January, and so it's it is basically an impact within the $35 million to $40 million range.

And then when the scrubbers are up and running, that model error becomes not an issue any more?

Well it's not an issue [ph]. It was just specific to '09 and it exactly just was kind of like a bust. And so it was just specific to '09.

Okay, thank you gentlemen.

Our next question comes from Gregg Orrill from Lehman Brothers.

Thanks a lot. Two quick questions. The first one being on heat rates, and just really what's changed about your thesis on heat rates after seeing a downside year-to-date and what gets it back to where you think it should be? And then secondly, if you could address the second quarter generation EBITDA guidance being lower than Q2 '07.

I'll take the first one and John will take the second. Greg, this is Tom Brooks. On the first one what has changed... what has this done to change our thesis, nothing. As Mayo described, we look at this as situation where heat rates over the last several years have done pretty much which you... you would intuitively expect. In the '03, '04 time frame as significant new generation was being added as reserve margins increased, we saw a trend of declining heat rates since then with little new capacity being added and demand continuing to grow reserve margins have declined a bit and heat rates have increased and this has been a pattern with some ups and downs driven by various events particularly the hurricanes in the fall of '05 which influenced gas prices more than power. But it has been a fairly clear long-term trend. What we saw in the first quarter of this year was a significant departure from that trend. We can't explain it, we don't think its reflective of fundamentals, we think it could be, although this is purely speculative terms reflective of perhaps financial player who have shifted there risk preferences away from power and toward much more liquid commodities but that's only speculation on our part. We don't really no of course what influence this base it's hard for us to imagine a circumstances were in an environment of continued declining reserve margins, heat rates should significantly reduce over a short period of time. So we think it's likely to rebound. And, in fact in the first part of Q2 we've seen some rebound already.

On the second part of the question, you asked about the generation hedge EBITDA on the second quarter versus last year primarily it's just a couple of real driver there. In the second quarter of this year, we had a Ganay refueling outage and Ganay so you remember is our 18 month refueling outage so we did not have any refueling outage at all in 2007 and so that actually reduces our generation EBITDA by about $27 million in the second quarter year-over-year. The other big piece of it is primarily as part of our plan we're investing fairly heavily in the reliability improvements in our Baltimore-based combustion turbine fleet because of the requirements of our RPM, and the and the potential penalties that exist if your plants don't operate as expected. That actually year-over-year is about a $12 million increase and there is a lot of other factors that are going up and down there but those are the two biggest drivers of the year-over-year change in the generation EBITDA calculation.

Okay.

Operator, we've time for one more question.

Jonathan Arnold from Merrill Lynch.

Hey. Good morning.

Good morning.

I just wanted to revisit this heat rate question a little further. Sorry to do that, But to what extent do you think it's possible that the presence of the RPM capacity value had on the forward market is having an influence on heat rates as generators have that payment in that revenue stream going forward and I guess secondly... another possible thought is around gas is spiking your non-fuel components of the cost stack smaller portion of the overall cost. Might it be that with higher gas prices yield structurally you are going to see lower heat rates, can you comment on those thoughts?

On the first question I would say its certainly possible obviously the dynamics of forward markets are you know not only easy to disarm particularly in the short-term so its certainly possible that the existence of the RPM program, the likelihood of the RPM program will continue to cause generators to invest capital is influencing forward key rate that certainly could be I think we would doubt that such a view would cause anything close to the dramatic impact that we saw in the first quarter. So a possible hypothesis but I don't think it explains what happened in Q1 in terms of on a second question, I think probably, which to restate, I think was if gas prices increase from this level, could you simply... could you this actually influence heat rates themselves. And I suppose the answer to that too certainly is yes, but that would require in the long term a shift in the generation mix away from gas into other fuel types. Could that happen at high gas prices? Absolutely. I doubt that effect would be this dramatically... the potential for that effect would be anything close to this dramatically visible in the first quarter.

Thanks a lot.

Thank you all very much for attending this quarter and we will see you next quarter.