Constellation's net falls 24%

Higher fuel prices sock utility

BGE's earnings are off 11%


Constellation Energy Group, which is fighting to preserve its proposed merger with FPL Group Inc. of Florida, said second-quarter profit fell 24 percent as the cost of fuel used to generate electricity from its Mid-Atlantic power plants soared along with global energy prices.

Net income was $93.1 million, or 52 cents per share, compared with $121.7 million, or 68 cents per share for the second quarter last year. The earnings were better than the company and analysts had originally forecast, sending Constellation shares up 65 cents to $57.45 in trading yesterday.

Both the merger and profitability of the company's Maryland power plants have become entwined in the recent political debate over rising electric rates for residential customers of Constellation's Baltimore Gas and Electric subsidiary.

The Baltimore energy company said yesterday that BGE's earnings fell 15 percent last quarter, primarily for the same reason electric rates are rising - increased fuel costs coupled with state-mandated rate caps.

The company's profits will factor into regulatory hearings to decide whether to approve the proposed $11 billion merger with FPL, which some lawmakers threatened to kill this year unless the company provided rate relief for BGE customers.

Executives for Constellation and FPL said yesterday that there is a limit to how much merger savings they are willing to give back to Maryland ratepayers as part of the deal. Constellation has said in filings with the state Public Service Commission that it is willing to provide up to $600 million over 10 years if the deal is approved.

"BGE is less than 20 percent of our earnings this quarter, and it's just important to put that in perspective of how big a company BGE is, and as a consequence, that number in the scheme of any utility merger I can think of is a very generous offer," said Mayo A. Shattuck III, Constellation's chief executive.

FPL Chief Executive Officer Lewis Hay III said the two companies will "not sacrifice excessive value" to Maryland to consummate the transaction. FPL reported yesterday a 17 percent increase in second-quarter profit to $238 million, or 60 cents per share.

Constellation said sales climbed 27 percent in the second quarter to $4.42 billion from $3.48 billion. Increased expenses and acquisition-related costs offset the revenue gains, as fuel costs and purchased energy expenses rose 31 percent to $3.4 billion.

The company's Mid-Atlantic power plants have suffered under six years of rate caps imposed by Maryland lawmakers as part of the transition to a deregulated power market. Those caps expired July 1, setting up a 72 percent rate increase for BGE customers. Lawmakers temporarily capped that increase at 15 percent, after which rates will rise to market levels over two years.

The legislation also sought to replace the state's five utility commissioners with a new panel that will be charged with overseeing the merger hearings. The state Court of Appeals granted a temporary restraining order blocking the replacement of the commissioners and is poised to make a final ruling in coming weeks. The legal back and forth could delay merger hearings, which the company hoped to complete before year's end.

The commission threw out the company's original merger application July 10, saying the legislation changed the standards for approval of utility mergers.

Constellation and FPL refiled their application July 21, and a hearing to determine a schedule for merger deliberations is scheduled for Aug. 9.

Shattuck said the cost to power the Mid-Atlantic plants increased along with the cost of coal and other fuels burned to make electricity, as well as increased emissions costs. The result was an 18-cent decline in earnings per share from the plants in the second quarter.

In the first six months of this year, the plants earned about $100 million less than in the previous year, Shattuck said. Those plants' profitability should improve with the expiration of rate caps in Maryland.

BGE contributed 11 cents per share to earnings in the quarter, a decline of 2 cents from the comparable quarter last year. The company's merchant and wholesale energy business comprised the lion's share of earnings, 43 cents per share.

Much of the increased wholesale revenue was driven by Constellation's energy trading and portfolio management arm, which contributed $148 million compared with $34 million in the quarter last year. The trading business is considered more volatile than other parts of the company, prompting concern among some analysts.

"It's volatile and unpredictable and I guess the question is, is it sustainable?" said Paul Fremont, an analyst with Jefferies & Co. in New York.

Constellation affirmed its earnings guidance for the rest of the year, saying it expects to earn between $3.35 and $3.65 per share for all of 2006.

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