CEG profit rises in 4Q

Excluding plant sales, 24% net gain helps offset less BGE revenue

February 01, 2007|By Paul Adams | Paul Adams,Sun reporter

Recognizing that its proposed merger with a Florida energy company was hopelessly mired in a dispute over utility rates, Constellation Energy Group moved last summer to sell six of its gas-fired power plants to reduce debt and position itself for life as a stand-alone entity.

That move and continued growth of its wholesale energy business more than doubled the Baltimore-based energy company's fourth-quarter profit and helped offset a slide in revenue at its Baltimore Gas and Electric Co. subsidiary, which saw earnings fall with milder weather and rising costs.

The company warned yesterday that in coming years it may need to seek more frequent increases in the utility's delivery charge to consumers as it copes with increased costs to maintain the power grid.

Including proceeds from the plant sales, Constellation's net income rose to $405 million, or $2.22 per share, compared with $195.2 million, or $1.09 per share, in the year-earlier quarter. Revenue fell 10 percent to $4.59 million.

Adjusting for the one-time gains, earnings for the quarter were $1.08 per share, up 24 percent from 87 cents in the year-earlier quarter. The average forecast of eight analysts polled by Thomson Financial was for earnings of 89 cents.

Constellation's earnings report came days after FPL Group Inc. of Juno Beach, Fla., said its fourth-quarter profit rose 28 percent. The two reports are a sign, analysts said, that both companies have emerged strong now that the uncertainty of the merger is no longer a distraction. Constellation's shares rose 21 cents yesterday to $72.55, up 43 percent over a low of $50.55 per share reached during the height of last year's legislative uproar.

"It was not a merger that either company needed to be successful," said Barry Abramson, an analyst with Gamco Investors in Rye, N.Y. "I think they would have done a little better together than how they're going to do separately, but they both look very strong right now as separate companies."

For the year, Constellation reported net income of $936.4 million, or $5.16 per share, compared with $623.1 million, or $3.47 per share, in 2005.

Excluding one-time gains, earnings per share for the year were $3.61 per share, up 25 percent from $2.89 per share earned in 2005.

Political fallout from a 72 percent rate increase at BGE scuttled the FPL merger. But yesterday's results demonstrate that the utility's impact on Constellation's profits continues to shrink even as it remains under scrutiny by lawmakers and regulators.

The utility's 2006 earnings were down 14 percent and are expected to fall another 20 percent this year. Constellation officials told analysts yesterday that by 2008 they will ask Maryland regulators for an increase in the fee BGE charges to deliver electricity to its 1.1 million customers.

The delivery fee is separate from the electricity commodity charge, which was behind last year's rate increase. Any approved increase would likely be small compared with the rate rise linked to rising electricity costs, from which BGE does not profit and passes through to consumers.

BGE hasn't gone before the Public Service Commission for a rate case since 1993. But such long gaps will likely come to an end as the company grapples with rising costs to maintain power lines, upgrade its systems and pay for things like employee health care, said Mayo A. Shattuck III, Constellation's chairman and chief executive.

"In most jurisdictions, rate cases are in and out of the [Public Service Commission] on a regular basis," he said in an interview. " ... So I think it's just a fact that we're going to begin to look like most other states when we start into a schedule of rate review."

BGE's adjusted fourth-quarter earnings were 18 cents per share, down 28 percent from adjusted earnings of 25 cents in the year-earlier quarter.

BGE's lower results were offset by continued growth in Constellation's sales of wholesale natural gas and power to large Fortune 100 companies, municipalities and utilities nationwide. Income from those operations soared to $1.25 per share, compared with 72 cents a year earlier.

Income from the company's Mid-Atlantic group of power plants contributed to earnings as power supply contracts locked in at below-market rates continue to expire. Those contracts are gradually being repriced at higher rates, a trend that will continue in years ahead as demand for power in the Maryland market outstrips supply.

The state's power deficit combined with a shortage of power lines to bring cheaper electricity in from other states will likely drive prices higher in coming years, adding to profitability.

"Clearly, the generation assets are beginning to see more value due to the higher prices," said Paul Patterson, an analyst with Glenrock Associates in New York.

The potential for rising prices in the wholesale power market may spell more difficulty for utility customers. But Constellation officials note that Maryland's new, stricter environmental regulations and other factors will require it to spend an estimated $565 million on its power plants this year and another $686 million in 2008. In total, the environmental rules will result in $1.1 billion in capital spending, the company projected.


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