CEG earnings fell in quarter

Net down 5.6% for BGE parent, target of protest over rate rise


Constellation Energy Group reported a 5.6 percent drop in first-quarter profit yesterday, during a time when critics say the company is making windfall profits that could be diverted to lower rates for residential customers in Central Maryland.

Though down slightly from a year ago, the Baltimore-based company's quarterly profit of $113.9 million, or 63 cents per share before adjustments, exceeded analysts' expectations. The first-quarter profit compared with net income of $120.7 million, or 68 cents per share, in the year-ago quarter.

The decline in profit was due in part to costs of $9.7 million for economic hedging activity that did not qualify for hedging accounting, and $1.5 million in merger-related expenses.

Excluding those costs, the company earned 70 cents per share, compared with 71 cents in the year-ago quarter. On that basis, the average estimate of analysts surveyed by Thomson Financial was 66 cents. The company's shares gained 50 cents, or nearly 1 percent, to close at $54.92 on the New York Stock Exchange.

The earnings results came a day after protesters picketed outside the headquarters of the state Public Service Commission to condemn the company's pending increase in electric rates for residential customers of its Baltimore Gas and Electric Co. subsidiary.

The PSC late Thursday night may have approved the rate plan, a source said, although the commission formally said no decision was made. The proposed rate plan will spread the 72 percent rate increase over 18 months for BGE customers who "opt in" for it.

Constellation head Mayo A. Shattuck III took questions from analysts and investors yesterday morning about the impact of the rate plan, as well as the overall political atmosphere in Maryland, which could impact Constellation's planned merger with FPL Group Inc. of Juno Beach, Fla.

Shattuck said during the conference call that he remains optimistic that Maryland lawmakers would not call a special session to revisit legislation aimed at providing more extensive rate relief to customers and intervening in the merger.

"I think the good news is that Constellation shareholders will fare well" whether the merger goes through or not, Shattuck said.

The political uncertainty clouded a quarter that otherwise saw sales climb 37 percent to $4.9 billion from $3.57 billion a year earlier. The company's wholesale electricity supply and trading arm continues to be an engine for growth that is the primary impetus for the proposed merger with FPL.

"The success of the company in the last four years has really had much to do with the success of operations outside of [Maryland]," Shattuck said.

Power plants

Shattuck used the earnings release to counter claims that the company is making windfall profits off the Maryland and Mid-Atlantic power plants that the company took over from BGE as part of the move to deregulation in 1999. Those plants have been contracted to provide power at capped rates to BGE customers. But the rising cost of coal and natural gas has driven up costs at plants that burn those fuels, resulting in reduced profits for the company.

The same combination of rate caps and soaring fuel costs that are blamed for the utility's rate rise trimmed gross margin from the company's Mid-Atlantic power plants by $76 million, excluding special items.

"So the profitability of that fleet has suffered incrementally for the last six years to the point where they don't make any money," Shattuck said.

Even after the rate caps expire in June, Shattuck said, those plants will still only make a profit similar to what they earned under traditional regulation.

"The Mid-Atlantic plants appear to be underperforming due to the inability to pass through higher costs because of the rate caps," said Paul Patterson, a utilities analyst with Glenrock Associates in New York.

The company received $528 million in so-called stranded costs over six years to help defray an expected decline in value for the plants. Instead, the plants have increased in value along with the price of electricity, prompting calls by politicians for the company to return the money to ratepayers.

BGE results

Net income at BGE fell to $68.6 million, or 38 cents a share, from $71.1 million, or 41 cents a share, in the year-ago quarter. Milder winter weather was partly responsible as consumers used less gas for heat.

Though much of the political attention is on BGE, Constellation's unregulated business of trading power and supplying electricity to large customers outside of Maryland continued to drive sales. One-time costs also lowered profit from that business to $43.6 million, or 24 cents per share, compared with $48.9 million, or 28 cents per share, in the year-ago quarter. "The wholesale operations, particularly the portfolio management and trading, appear to be a strong driver this quarter," said Patterson, the Glenrock analyst.


Sun reporter Andrew A. Green contributed to this article.

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