Constellation Energy's profit slips as revenue soars 27% to $3.5 billion

Earnings at BGE are flat

energy giant buys stakes in two natural gas fields

July 30, 2005|By Paul Adams | Paul Adams,SUN STAFF

Constellation Energy Group Inc., parent of the Baltimore Gas and Electric Co., reported yesterday that sales climbed 27 percent in the second quarter and that the company made its first foray into gas production as part of its strategy to be a diversified energy powerhouse.

Despite the sales increase, Constellation's net income dropped 5.1 percent, a decline it attributed mostly to the absence of gains the company recorded from a synthetic fuel plant in 2004.

Net income for the quarter that ended June 30 was $121.7 million, or 68 cents per share, compared with $128.2 million, or 76 cents per share, for the second quarter a year ago.

The quarter provided further evidence that Constellation's strategy of buying up power plants, signing new wholesale power buyers and pushing into competitive markets is paying off with increased sales. The company continued to add big power customers, helping to push sales from its nonregulated business to $2.93 billion, up from $2.2 billion in the quarter a year ago.

Constellation's merchant-energy business accounted for three-fourths of the company's $3.54 billion in sales, up from $2.8 billion a year earlier. It was the 13th consecutive quarterly increase in revenue.

Excluding special items, which included a 21-cent gain from synthetic fuel tax credits in the second quarter last year, Constellation said it earned 66 cents per share, up 22 percent from 54 cents per share. That beat analyst estimates of 62 cents per share.

Earnings for BGE, the company's regulated utility serving the Baltimore area, were flat at 13 cents for the quarter.

Shares lose 37 cents

The company's shares fell 37 cents to $60.21 in trading yesterday. The shares have gained 37.8 percent for the year.

"The business is clicking on all cylinders," said Mayo A. Shattuck III, Constellation's chairman, president and chief executive.

Constellation expanded its natural gas business with the purchase of interests in two producing fields in Alabama and Texas for a combined $233 million.

The move marks the next step in the company's efforts to manage its energy risk and be a full-service buyer, seller, distributor and producer of multiple forms of energy. The two fields contain an estimated 216 billion cubic feet equivalent of gas and are expected to produce 10.5 billion cubic feet in 2006.

Shattuck said the company would pursue similar acquisitions as it seeks to apply to its natural gas business the same growth strategy it has employed in the electricity market. The company also bought a small Houston natural gas trading business in the quarter.

Also during the quarter, the company completed the sale of its Oleander power plant in Florida, a move aimed at disposing of assets in states that don't allow electricity competition.

Shattuck said Constellation increased its share of the competitive power market to 24.5 percent, making it by far the largest provider of power in markets that allow electricity providers to compete for customers. The company continues to expand its share and is shopping for more power-producing assets to acquire.

"We're clearly the national market leader," he said.

Energy bill to help

The latest quarterly results came on the same day Congress passed a sweeping energy bill containing provisions that will boost Constellation's ambition to build a new nuclear reactor and buy up competitors. President Bush is expected to sign the bill.

The $14.5 billion spending bill includes loan guarantees and other subsidies to promote the construction of new nuclear facilities.

Constellation is part of a consortium that is seeking to build a new plant. The company's Calvert Cliffs nuclear plant is on a short list of potential sites for a new reactor. President Bush visited the plant June 22 to tout provisions in the energy bill aimed at boosting new nuclear energy development.

"We do believe [the bill] will encourage more investment in nuclear energy in the near future," said Paul Allen, Constellation's senior vice president of corporate affairs.

The bill also repeals a New Deal-era act that limits inter-regional mergers in the power industry and puts a lid on investment in utilities by non-energy companies.

With the Public Utilities Holding Act gone, industry analysts say they expect to see a new round of consolidation within the industry. That could work to Constellation's favor, given its strong stock performance and ready pool of cash.

"We're acquisition-minded," Allen said. "And we intend to be one of the survivors in all of this."

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