CEG profit rises 70%

Power demand, lifting of rate caps help 1st-quarter earnings gain

April 26, 2007|By Paul Adams | Paul Adams,Sun reporter

The 1999 deal to move Maryland to a deregulated power market handed Constellation Energy Group title to a fleet of valuable power plants formerly owned by its utility subsidiary. But it also locked the company into multiyear agreements to sell the electricity they produced at bargain prices.

With those obligations recently ended, the company is seeing its profits soar and its shares reach new highs as the market forces unleashed through deregulation begin to take shape.

Constellation said yesterday that first-quarter profit climbed more than 70 percent, with much of the growth driven by its nationwide wholesale power supply business and the strength of the plants it assumed from Baltimore Gas and Electric Co. about seven years ago.

Net income for the quarter that ended March 31 was $195.7 million, or $1.07 per share, compared with $113.9 million, or 63 cents per share, in the year-earlier quarter.

Earnings were $1.03 per share excluding one-time charges. Sales climbed to $5.1 billion from $4.9 billion in the year-earlier period.

The average estimate of analysts polled by Thomson Financial was for earnings of 95 cents per share.

The company's shares touched an all-time high of $95.48 before settling back to close up 60 cents at $93.25 per share yesterday.

The earnings come as state regulators are considering a plan to make BGE customers pay full-market rates after having six years of electricity rates capped at pre-1993 levels.

The average customer is due for a roughly 50 percent rate increase this summer, which comes on top of a 15 percent rise from last year.

For Constellation, the expiration of rate caps means not having to sell power for below-market prices at a time when fuel costs are rising. Mayo A. Shattuck III, Constellation's chief executive, said the former BGE plants were losing money a year ago.

"We have demonstrated that the rate caps of the last six years drove the Baltimore fleet to a level where it was losing money, and all that is happening now is it's restoring a fair return on capital invested," he said.

The company's merchant energy business, which includes the power plants, saw its earnings contribution climb to 67 cents per share for the quarter, up from 17 cents in the year-earlier period. The increase more than offset a decline in BGE's year-over-year results, which fell 2 cents to 36 cents for the quarter.

The utility's earnings have been flat or lower in recent years as Constellation has built the unregulated side of its business into a wholesale energy empire that ranks 119th on the Fortune 500 list of the nation's largest companies.

The expiration of BGE rate caps tells only part of the story behind recent investor interest in the company. Constellation's shares have been on an upswing since new energy market rules went into effect this year making it more profitable to own power plants in areas where electricity and power lines are in short supply.

The rules are aimed at spurring companies to build power plants in areas where they are needed most. The Baltimore-Washington corridor is among the areas in greatest need within the 13-state power pool to which Maryland belongs.

Constellation is among the primary beneficiaries of the new market rules, known as the "reliability pricing model." With prices on the rise, company officials disclosed this week that they are contemplating expansions at two power plant sites in Maryland, which could help lower future electricity prices by increasing supply.

The potential projects are in addition to a proposed expansion of Constellation's Calvert Cliffs nuclear station in Lusby. That would depend on how federal officials implement provisions in the 2005 energy bill aimed at spurring new nuclear development.

Company officials told analysts in a conference call yesterday that the plant expansions are in the early stages and could be years off.

But Shattuck said renewed interest in building power plants shows that the new market rules - which will add to power costs in the near term - are working as intended. He called it evidence that deregulation is working, despite calls for a return to the days when utilities owned power plants with regulated profits.

"Of course, new capacity ends up bringing prices down, and it's contingent upon believing in free markets and price signals," he said.

The state Public Service Commission concluded hearings this week that mark the beginning of a sweeping look at whether aspects of deregulation should be rolled back, and whether utilities should be allowed to own power plants again.

Constellation has projected earnings growth several years out, leading several analysts to increase their price targets for the company's shares and earnings yesterday.

Credit Suisse analyst Dan Eggers set a price target of $97 and raised his earnings estimates to $4.50 for 2007 and climbing to $6.32 by 2009.


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