Constellation's earnings grow by 7.5% in quarter

Factors include weather, cost-cutting and gains from energy trading

August 01, 2002|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

Even as issues over credit worthiness and weakened investor confidence continue to dog the energy sector, Constellation Energy Group Inc. said yesterday that second-quarter earnings grew 7.5 percent with a helpful boost from warmer Maryland weather, cost reductions and gains in its energy- trading business.

Excluding special items, the owner of Baltimore Gas and Electric Co. reported earnings of $81.3 million, or 50 cents a share for the quarter that ended June 30. In the corresponding quarter a year ago, the company earned $75.6 million, or 45 cents a share. Analysts had expected earnings of 45 to 55 cents a share in the second quarter.

While a continuing drop in power prices forced the company to lower its earnings expectations for the year, Chief Executive Officer Mayo A. Shattuck III said he is optimistic that Constellation will be able to increase profits by 10 percent during the next several years.

But even as other energy companies have scaled back their trading activity recently, Shattuck said Constellation would stick to its plan to run an integrated company with a regulated delivery business and unregulated businesses, including generating plants and trading operations.

"Even taking a restrained stance on growth, we still believe 10 percent growth is possible," Shattuck said on a conference call with analysts. "The credit and liquidity issues have created a lot of anxiety for investors, a lot of companies have reduced trading activities or gotten out.

"We are not getting out of the deregulated power market and we are not getting out of trading. But we have modified."

To protect itself against many companies that have become loaded with debt and are encountering credit constraints, Constellation has lowered the size of its trading positions.

Shares of Constellation gained 72 cents yesterday to close at $27.87 on the New York Stock Exchange.

With power prices continuing to decline and a change in the way Constellation books its energy trades, earnings expectations for the year were lowered to $2.45 to $2.65 a share. The company had forecast earnings of $2.65 to $2.75.

"Constellation has performed fairly well given the tumultuous environment in the energy industry," said Jeffrey Gildersleeve, an Argus Research utilities analyst. "We really applaud their move to change accounting methodologies because it provides more visibility on their earnings and it will help investors feel more comfortable. I think it's a step in the right direction and we expect more companies to follow Constellation's more conservative patterns."

Shattuck reported that about a third of the company's second-quarter earnings came from its transmission and distribution business, while the rest came from its unregulated merchant business.

Revenue for the quarter increased 24 percent to $1 billion, from $826.1 million for the second quarter of 2001.

Strong results from Constellation Power Source, the impact of warm weather, the addition of a nuclear plant in New York and higher earnings from other nonregulated businesses boosted earnings by 40 percent over last year's second quarter. But those gains were offset by the prolonged outage at Calvert Cliffs Nuclear Power Plant, the impact of higher purchased fuel costs, lower California power prices and a decrease in contributions from its new Midwest peaking plants.

Without the special items, earnings for the second quarter were $91.3 million, or 56 cents a share.

The special items - which cut $10 million, or 6 cents a share, from earnings - included after-tax costs of a work force reduction initiative announced last year, the sale of a steam turbine-generator set, and a gain from the sale of securities and real estate.

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