Constellation thrives

Gamble on rising commodity prices pays off

August 01, 2008|By Lorraine Mirabella | Lorraine Mirabella,Sun reporter

A bet on sharply rising commodity prices paid off in the second quarter for Baltimore-based Constellation Energy Group, which said yesterday that profit jumped 47 percent thanks to a strong performance in its trading business, which buys and sells energy in competitive markets.

Constellation, parent of Baltimore Gas and Electric Co., said it earned $171.5 million, or 95 cents per common share, in the quarter that ended June 30, compared with income of $116.3 million, or 64 cents per common share, in the second quarter of last year. Total second-quarter revenue for the utility and merchant energy businesses rose to $5.08 billion, from $4.88 billion.

Earlier this year, "we were very bullish about where commodity prices would go, power, gas and coal," and bet "those prices would increase during the second quarter, and as a result, we owned those commodities in the markets," said John R. Collins, Constellation's chief financial officer.

The results came on the same day that Exxon Mobil Corp. reported the biggest profit ever by a U.S. corporation, highlighting how companies in the energy business are enjoying strong results despite a slowing economy and fears of a recession. With consumers paying much more for gasoline and electricity compared with a year ago, given the worldwide demand, many companies that buy and sell those materials are finding their fortunes rising.

Constellation's portfolio management and trading unit, which trades energy commodities as part of its global commodities group, accounted for most of the group's $386 million worth of new business generated during the second quarter, the company said.

"There was a huge amount of trading benefit," said Paul Patterson, an analyst with Glenrock Associates in New York. "Clearly, in the merchant sector, this was the big earner, the big swing factor this quarter."

But he said that likely had to do with a complicated set of factors and could have been a result of more than rising commodity prices.

"This is a company that's involved in very dynamic and complex energy markets, and therefore one should expect the potential for more volatility in their results."

The company kept its earnings forecast for the year at the previous estimate of $5.25 to $5.75 per share. Shares of Constellation rose $1.59, or almost 2 percent, to close at $83.16 yesterday.

Constellation officials yesterday pointed out that the profit came from the company's competitive side, which besides the commodities group includes power generation and wholesale supply to large customers.

Mayo A. Shattuck III, Constellation's CEO, told analysts the company has started to assess capital requirements of the global commodities business and it was exploring strategic alternatives that could involve a partnership agreement.

Constellation's utility, BGE, reported a loss of 60 cents per share, which included the 70-cents-per share earnings impact of the company's settlement with the state. That settlement will give its 1.1 million Maryland utility customers a credit of $170 per residential electric customer in September. Excluding the impact of the settlement, BGE earned 9 cents per share, up 1 cent per share over second-quarter 2007 adjusted earnings.

Excluding the $188 million earmarked for the credits, Constellation said it earned $1.82 per share.

Higher electricity prices have greeted consumers for the past several years: Maryland customers are paying about 85 percent more for electricity after power markets were deregulated in 1999.

In light of those costs, Constellation officials yesterday said they are continuing pilot programs to help utility customers conserve energy and keep costs down.

Higher costs for oil also have helped turn in strong performance for oil companies, as prices have almost doubled in the second quarter from a year earlier.

Exxon Mobil, the world's largest publicly traded oil company, reported yesterday that second-quarter earnings rose 14 percent, to $11.68 billion, the highest-ever by an American company. Exxon broke its own record.

The net income of $2.22 a share compared with $10.26 billion, or $1.83 a share, in the quarter a year ago, and revenue increased 40 percent, to $138.1 billion, from $98.4 billion in the quarter a year ago.

Despite those figures, analysts had expected Exxon to earn more. Its shares fell $3.95 or 4.7 percent to $80.43 yesterday.

Wire services contributed to this article.

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