Constellation Profit Falls 84%

Costs From Nuclear Deal, Shedding Businesses

August 01, 2009|By Hanah Cho | Hanah Cho,

Constellation Energy Group reported Friday an 84 percent drop in second-quarter profit as the Baltimore company suffered losses from shedding some of its businesses and costs related to its deal with a French utility.

But the owner of Baltimore Gas & Electric Co. raised earnings projections for the year to reflect a more positive outlook even as executives responded to Wall Street analysts' concerns about completing its $4.5 billion transaction to sell half of its nuclear power business to Electricite de France.

"Looking forward, I'm very encouraged by the prospects for Constellation," chief executive Mayo A. Shattuck III said in a conference call for analysts and investors.

Also on Friday, Fitch Ratings dropped Constellation's credit rating a notch - a mixed message that reflects the risk that the EDF deal could fail but also Fitch's opinion that such a scenario would not prove disastrous for Constellation. The company's "survival no longer hinges on completing the EDF transaction," Fitch said.

Facing a near-bankruptcy last fall amid the global financial meltdown, Constellation agreed to sell itself to Warren Buffett's MidAmerican Energy Holdings Co. before scrapping that agreement in favor of a rescue by EDF.

On a conference call with Constellation officials, analysts asked about the timing of the EDF deal and talks between Constellation and Maryland officials, who have been discussing a settlement that might involve ratepayer relief and tighter regulation. Regulators said Thursday that they need more time to review the transaction, which would force the companies to miss their Sept. 17 deadline to close the deal.

Constellation also is seeking legal relief, appealing a court decision denying its right to challenge the Public Service Commission's authority to review the deal until the regulatory proceedings are completed. Constellation contends that the PSC has no say in the matter.

One analyst sarcastically compared Maryland with a socialist nation, referring to it as the "People's Republic of Maryland." Another wondered whether Constellation should let the EDF deal expire because the state was asking for too much in concessions.

In response, Shattuck said the transaction is important to the company's long-term nuclear business as well as to the state and ratepayers. Constellation and EDF are committed to closing the deal, he said, although he acknowledged that it cannot be completed "at all costs."

The company's proposal that includes a delay in asking for a rate increase for electricity and gas delivery is a fair deal, Shattuck added, despite Gov. Martin O'Malley saying it's not enough.

"We have to hold our ground," Shattuck said. "We fully expect the PSC to hold its ground on the issues because it's their responsibility."

Constellation's net income was $28.3 million, or 4 cents per share, compared with a profit of $175 million, or 95 cents per share, in the corresponding period last year.

Revenue fell to $3.8 billion in the second quarter, down from $4.7 billion during the previous year.

Excluding one-time costs, Constellation said earnings would have been $1.08 per share, beating Wall Street expectations of 76 cents, according to five analysts surveyed by Bloomberg.

Constellation's charges resulted primarily from a $123.8 million loss from the sale of its international commodities, Houston-based gas trading and other power-trading operations as part of a restructuring plan to cast off some of its riskiest businesses.

The company lost another $70.5 million in write-downs and $9.2 million in costs associated with the EDF transaction.

BGE, Constellation's regulated utility business, reported adjusted earnings of 6 cents per share, down from 9 cents per share in the second quarter of 2008. The profit decline was mostly caused by BGE increasing its reserve for uncollectable accounts.

Despite the lower demand for power, Constellation said BGE's business was insulated because of regulatory "decoupling," in which its compensation is based on assets rather than revenue.

Constellation's guidance for the year is $3.10 to $3.30 per share, compared with a previous outlook of $2.90 to $3.20 per share. The company's shares fell 33 cents on Friday to close at $28.70. Fitch downgraded Constellation's debt from BBB+ to BBB, which is considered at the lower end of the "investment grade" category.

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