While the generation asset sale arena may not have exactly been a buyer’s market to date, a string of recent generator bankruptcies may finally start to push prices down to the point over the next couple of quarters where companies such as Constellation Energy Group take a closer look at bidding on power plants, Mayo Shattuck, Constellation’s CEO, said last Thursday.

Shattuck said that it has been “very disappointing” that the market for generation assets hasn’t reached “its appropriate equilibrium to date.”

However, with the recent bankruptcy filings of PG&E National Energy Group, NRG Energy and Mirant Corp., “we are getting closer to market-clearing prices getting to the point where companies like ourselves will buy at values that reach our own hurdle rates, but it’s been a long time coming.”

The Constellation CEO said that “there are a lot of natural forces that are working against that, particularly the banks’ interests, but the activity level remains high there. I suspect that we’ll begin to see some of these assets clearing the market over the course of the next couple of quarters.”

An analyst asked Shattuck to detail what types of assets the company is interested in acquiring. “Obviously, we’re interested in assets that match our load-serving requirements so that they might be strategically located,” the Constellation CEO responded.

Secondarily, Shattuck said that based on what those load requirements might be, “we’re interested in assets that fit the profile and the stack that have a physical balance to our overall portfolio.” From Constellation’s standpoint, the company is “able to narrow the available field, both regionally and their position with[in] the stack, as to how interested we are in them.”

There has been speculation that Baltimore, MD-based Constellation might be interested in some of Mirant’s assets, which are located in its neighborhood. Mirant previously acquired the generation assets of Potomac Electric Power Co. (PEPCO), which is based in Washington DC.

On the call, Constellation CFO Follin Smith noted that the company on Wednesday filed an amended 10-Q quarterly report at the Securities and Exchange Commission, revising Constellation’s first quarter 10-Q. “The revised filing did not change gross margin, net income or cash flow, but it did reduce our first quarter revenues and operating expenses by $283 million,” she said.

“Quite simply, we had an error which went undetected until after the Q was filed,” Smith said. The Constellation executive said that in the course of implementing New England’s standard market design (SMD) in the first quarter, “we booked transactions with the ISO as independent transactions.”

Under New England’s SMD, “we now buy power from a third party generator, sell to the ISO in one zone, and then buy from the ISO and sell to our customer in another zone. We booked that as two buys and two sells, rather than one buy and one sell,” Smith noted. “The ISO transactions should have been netted out.”

The CFO told analysts that this was an “inadvertent error” that did not affect any of the metrics “by which you judged our first quarter performance. We caught it quickly and are comfortable our controls are good.”

Constellation reported earnings of $0.58 per share for the second quarter of 2003, which exceeded the company’s earnings guidance provided on April 30 of $0.33 to $0.43 per share. That guidance excluded special items. In the 2002 second quarter, Constellation earned $0.50 per share.

For the 2003 second quarter, Constellation’s merchant energy business earned $0.45 per share. These results exceeded the high end of April 2003 earnings guidance by $0.15, which was calculated excluding special items, and represent an increase of 15.4% compared to earnings excluding special items of $0.39 per share in the second quarter of 2002.

Factors contributing to the year-over-year increase in the second quarter 2003 results include:

Factors which partially mitigate the quarter-over-quarter improvement include: (i) the one-time impact of a favorable settlement with the California Department of Water Resources in the second quarter of 2002; (ii) higher interest expense, reflecting a reduction in capitalized interest expense related to completion of several large power plant construction projects, which were underway during last year’s second quarter; and (iii) inflationary and other cost increases.

“Competitive supply activities exceeded our expectations,” said Shattuck in a prepared statement. “Constellation Power Source generated highly profitable new transactions and added value to our portfolio of existing transactions through smart risk management. Additionally, our recent acquisition, NewEnergy, is hitting stride adding to the earnings potential of our competitive supply platform.”

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