Shares of BGE parent fall 16%

Constellation Energy reports mistake in estimating collateral

August 13, 2008|By Tricia Bishop | Tricia Bishop,Sun reporter

Shares of Constellation Energy Group fell 16 percent yesterday - the largest one-day drop in seven years - after one analyst questioned the company's accounting and another raised concerns about the effects of a potential credit downgrade.

The stock closed down $11.79 to $61.25 on the New York Stock Exchange.

It was the biggest percentage decrease for the Baltimore company since July 20, 2001, when shares fell 21 percent after Constellation lowered its earnings forecast for that year.

Yesterday's decline was the third-biggest drop on the New York Stock Exchange.

"The drop of the stock is breathtaking," said Paul Patterson, an analyst with Glenrock Associates in New York. "It's hard to pinpoint exactly what has gotten everybody so concerned."

Energy companies are typically volatile investments, analysts said, but Constellation, which owns Baltimore Gas & Electric, has been doing well amid rising prices. Last month, the company reported a 47 percent increase in its second-quarter profit, buoyed by its gas and electricity trading business.

But a few lines in the quarterly report it filed Monday with the U.S. Securities and Exchange Commission drew analysts' attention: Constellation said it made a mistake in a filing earlier this year.

The company said it significantly underestimated the amount of collateral it would have to put up if its credit rating were lowered below investment grade, a development that analysts said was unlikely.

The company, which is considering building a nearly $10 billion nuclear reactor at Calvert Cliffs in Lusby, relies heavily on its borrowing power.

Constellation did not respond to requests for comment yesterday.

The company's SEC filing said a three-level credit downgrade would trigger collateral obligations of $3.4 billion, more than double the $1.6 billion figure the company provided in May.

Constellation attributed the $1.8 billion difference to price increases and the failure to take into account certain contracts with credit downgrade provisions.

That explanation made Deutsche Bank "somewhat concerned," analyst John Kiani said in a research note Monday.

Constellation has been under a "negative" credit watch from rating agency Standard & Poor's since February.

But Kiani said a credit downgrade to junk status is unlikely, given the company's efforts to strengthen its balance sheet and recent profitability forecasts.

A higher collateral obligation makes the stock riskier to own, Barry Abramson, an analyst with Gamco Investors Inc. in New York, told Bloomberg News.

"No one is alleging that the company did anything deliberate," he said, "but it hurts confidence to see an error that is of this magnitude."

In a separate report issued yesterday, Jefferies & Co. analyst Paul Fremont upgraded Constellation's stock to "hold" from "underperform" and gave it a target price of $71.

But Fremont also said his firm was puzzled by some of Constellation Energy's accounting, including "unexplained adjustments to depreciation," certain cash flow characterizations and unclear market-to-market adjustments.

"We look forward to the company providing answers to accounting questions at its August 28, 2008 analyst meeting in Baltimore," Fremont wrote.

Constellation's stock is down 43 percent this year from a high of $107.13 on Jan. 9.

"I'm scratching my head a little bit at the magnitude," Patterson said.

"It's almost as if, overnight, people have come to the realization that this company is involved in dynamic, volatile financial and energy markets, and they're shocked by the fact. ...

"It's not exactly a news flash."

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