CEG tops forecasts as profit rises 75%

Most of 3Q's $324.4 million was in energy marketing

October 28, 2006|By Paul Adams | Paul Adams,SUN REPORTER

Constellation Energy Group reported yesterday a 75 percent increase in third-quarter net income, helping to blunt any investor concerns about the Baltimore-based energy company's decision this week to walk away from a $12.4 billion merger with FPL Group Inc. of Florida.

The results were driven largely by the wholesale energy marketing and trading businesses that helped make Constellation an attractive acquisition target for FPL.

Analysts said the higher-than-expected results may have provided the right backdrop for Constellation executives to terminate the merger. The deal collapsed in the face of regulatory delays and political uncertainty in Maryland, where customers of Constellation's Baltimore Gas and Electric Co. utility, which accounts for less than a fifth of its earnings, faced a 72 percent rate increase.

The company's Mid-Atlantic fleet of power plants - which includes those that supply some of BGE's power - also benefited from the expiration of rate caps in Maryland, which had forced the company to supply power to the utility for below-market rates.

Net income climbed to $324.4 million, or $1.79 per share, compared with $185.5 million, or $1.03 per share, in the year-earlier third quarter. Sales rose 10 percent to $5.43 billion.

Analysts on a conference call with executives yesterday spent little time focusing on the merger's demise, signaling Wall Street's acceptance of Constellation's earlier moves to prepare itself for life as a stand-alone company.

The company recently announced it was selling six gas-fired power plants for $1.64 billion to raise cash and pay down debt.

Analysts said the company also is being more selective in who it does business with in its wholesale operations, giving lenders and credit-rating agencies more confidence in the company's financials.

"Despite the potential for distraction associated with our recently terminated merger with FPL Group, our employees continue to execute and, as a result, we are on track to outperform our business plan for the year," said Mayo A. Shattuck III, Constellation's chief executive officer.

Excluding one-time gains and costs associated with the merger, earnings were $1.56 per share. The results handily beat analysts' expectations of $1.28 per share, according to polling by Thomson Financial.

Wall Street reacted mildly to the results, sending shares down 81 cents to $61.74 per share in trading yesterday.

The muted response was partly because a sizable chunk of the gain in net income came from Constellation's energy trading and portfolio management operations, which can produce unpredictable results from quarter to quarter. That makes it harder for investors to predict whether future quarters will prove as profitable.

Investors also may have been focusing on news that the company was leaving future earnings guidance unchanged, despite the higher-than-expected third-quarter results, analysts said.

"Basically, it's good news so far as it looks like they're doing better in that business than maybe people had anticipated," said Paul Patterson, an energy analyst with Glenrock Associates in New York.

Constellation reported that profit from its Mid-Atlantic power generation plants had increased 23 percent year-over-year.

The increase came in part because contracts requiring it to supply power to the utility for below-market prices had expired along with rate caps imposed as part of the move toward deregulation.

In an interview earlier this year, Shattuck said the plants were losing money as a result of the caps and would return to a "more normal" rate of return once the contracts expired.

Fiery debate over BGE's rate increase and the structure of Maryland's electric market were ultimately responsible for the merger's collapse. But yesterday's earnings results further demonstrate how Constellation's future - and most of its profits - lies with its customers outside Maryland.

Excluding one-time items, profit from energy sales to large industrial users, municipalities and other utilities scattered nationwide climbed 60 percent to $1.34 per share in the third quarter.

Meanwhile, profit at BGE fell to 20 cents per share from 24 cents in the year-earlier quarter.

Reflecting on BGE's results and the difficult political atmosphere in Maryland, Citigroup analyst Greg Gordon asked Shattuck yesterday whether he would consider splitting the utility off from Constellation's faster-growing unregulated businesses. Such a move would allow the company to merge with a competitor without state regulatory approval.

Shattuck indicated that no such plans are being contemplated.

paul.adams@baltsun.com

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