CEG expects strong 2003

Company's optimism tied to earnings expectations, two power plant projects

April 23, 2003|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

In sharp contrast with many of its ailing peers in a volatile industry, Constellation Energy Group Inc. reaffirmed its strong earnings expectations for the year yesterday and said two key power plant projects in California and Southern Maryland have been completed earlier than expected to help boost profits.

High Desert Power Project, among the first new major plants to serve Southern California in more than a decade, began operations yesterday and will produce enough electricity to serve more than 500,000 households. Completing construction ahead of the initial summer deadline means the plant will be online for this season's peak energy demands, Constellation officials said.

In addition, intricate work to replace steam generators and refuel Unit 2 of Calvert Cliffs Nuclear Power Plant in Southern Maryland was completed 32 days ahead of schedule. At full operating capacity, the 1,685-megawatt nuclear plant produces enough power to serve more than a million homes.

High Desert and Calvert Cliffs will balance out lower earnings expectations from Constellation's energy trading operations because of a decline in the market and accounting changes. But Constellation said it still expects to meet its original 2003 earnings forecast of $2.65 to $2.85 per share.

In comparison, former high-flyers such as Dynegy Inc. in Houston and Allegheny Energy Inc. in Hagerstown narrowly avoided bankruptcy in recent months, and even Duke Energy Corp. has scaled back its trading operations.

"These two recent accomplishments show that we are top performers at constructing and operating our plants," said Michael J. Wallace, president of Constellation Generation, the company's power generating line of business. "That's important to us because it's our strategic objective to add to our fleet. While it is unclear what will happen in the industry, from an operational point of view, financial point of view and competitive point of view, we're a very strong performer in the industry.

"As the industry continues to go through transitions, we're positioned to engage in and prepare for acquisitions."

High Desert, built at the former George Air Force Base in Victorville, adds 830 megawatts to Constellation's merchant energy business, which owns an additional 11,500 megawatts nationwide. Electricity produced there will be delivered to the California Department of Water Resources under a contract that will pay Constellation $12.1 million a month through 2011.

High Desert is the last project on Constellation's construction program, but the company is looking to buy existing plants. Constellation has begun discussions with various parties, but Wallace said the company is using a "disciplined approach to acquire only when we find an appropriate price."

That cautious approach earned widespread applause from analysts and investors.

Shares of Constellation have been steadily rising over past few months and gained 33 cents yesterdayto close at $29.67.

"They're outperforming," said Jeffrey Gildersleeve, an energy analyst at Argus Research. "It has a lot to do with Constellation going through its hard knocks early on in this down cycle. Right now, Wall Street would rather see companies be on the conservative side. Having a good balance sheet, visible earnings that resemble cash flow and a management team that is being prudent with investors' capital are three things that are big themes that people seem to be buying in this sector.

"The company seems to be performing well, and the stock has followed."

Over the past year, Chief Executive Officer Mayo A. Shattuck III has helped turn around a troubled company that had canceled a yearlong plan to split into two businesses, saw its stock price plummet and racked up $5 billion in debt.

Shattuck and his executive team immediately trimmed the work force, killed major power plant projects not in construction, sold off nonenergy-related businesses and preserved cash and refinanced debt to improve its liquidity.

Those moves have helped Constellation move into a position of strength, enabling it to buy several energy businesses in the past several months.

"There was a lot of doubt that Constellation would make their earnings assumptions because so many other companies were going through difficulties," said Daniele M. Seitz, an energy analyst with Salomon Smith Barney. "They had a major nuclear plant going through several repairs. They had to contend with very volatile power prices as the company was going through the deregulation of their power system. But very early on, the company took on drastic cost reductions and took on a very realistic view of their earnings. They've had strong results since then.

"It's very, very important that they did not have the liquidity issues that most companies have been struggling with," Seitz said. "That was a really unique situation. That strong balance sheet is helping a lot."

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