Liquidity-challenged energy merchants looking for ways to pay down debt may hear a knock at the door from Baltimore-based Constellation Energy Group in the very near future — if it hasn’t happened already. Many of the best opportunities, especially the power plants, have fallen below book value in just a few weeks, and they offer an especially attractive buy, CEO Mayo Shattuck III told analysts during a conference call Wednesday.

As Constellation slowly accumulates more assets to complement its existing infrastructure, and still keeps its debt at manageable levels, Shattuck said, “Patience is a real virtue here. There will be opportunities.”

“Strong” new origination results from its energy trading arm, Constellation Power Source, as well as warmer weather within the service territory of its major utility, Baltimore Gas & Electric Co. (BGE), helped second-quarter income to jump compared with a year ago. Constellation also gained in accretion from the addition of Nine Mile Point, along with its planned cost-cutting initiatives to boost its earnings for the quarter. Those gains helped to offset losses that came from an extended outage at its Calvert Cliffs Nuclear Power Plant, higher purchased fuel costs, lower California power prices, and the impact of its new-build assets.

Second-quarter income totaled $81.3 million, or 50 cents a share, compared with $75.6 million, or 46 cents, during the same period last year. Excluding special items, the company earned 56 cents per share for the quarter. Wall Street had pegged earnings between 45 cents and 55 cents a share, with an average of 51 cents, according to Thomson First Call analysts. Revenue stood at $1.02 billion from $826.1 million a year earlier. Excluding special items, earnings totaled $91.3 million, or 56 cents a share, an increase of 16 cents over the second quarter of 2001.

Special items totaled $10 million, or 6 cents, consistent with its April guidance. The special items included after-tax costs of 5 cents a share following a workforce reduction initiative announced late last year; the loss of 2 cents a share on the sale of a steam turbine-generator set from a discontinued development project; and a gain of 1 cent a share from the sale of securities and real estate.

Excluding special costs, wholesale earnings were up 39 cents a share for the second quarter, compared with 32 cents for the second quarter of 2001. For the first six months, the merchant unit earned 57 cents a share, down from the first six months of 2001 when it earned 60 cents a share. However, Constellation’s exposure to credit risk in the power market is limited, according to John Collins, the company’s chief risk officer. About 95% of the trading counterparties have investment-grade credit, he said, and Constellation’s exposure to non-investment grade partners is less than $16 million. Its largest exposure to one counterparty is $8 million, Collins said.

To adjust for reduced liquidity overall in the wholesale sector, Constellation lowered the size of its trading positions and said that its “value-at-risk,” which measures potential trading liabilities, dropped about 65% since the end of the second quarter. Its value-at-risk at July 26 was $9 million at two standard deviations, compared with $18 million in the second quarter. Shattuck said the company held onto some of its trading positions in the Northeast longer than it wanted to because it could not find a credit-worthy counterparty.

“Our focus in the second quarter continued to be on strengthening our balance sheet, reinforcing a superior level of liquidity, and improving the quality of our earnings, while expanding our customer relations along the value chain of energy products and services,” said Shattuck. “I am pleased to say we made progress in each of these areas. Our net debt to total capital ratio now stands at 52%, and our liquidity profile is among the best in our sector.”

Shattuck cited an agreement in the quarter to purchase AES NewEnergy for $240 million, which he said would extend the company’s load-serving capabilities to commercial and industrial customers. It is complementing Constellation’s existing energy-delivery operations, said Shattuck, and is already a “profitable…hedgeable business.”

Integration of Nine Mile Point is also on track, he said, and “BGE’s process improvement program continued to meet expectations for productivity and operational performance.” Also, “the build-out of our senior management team brought us additional top-flight talent to help seize the opportunities ahead. All in all it was a good quarter that was achieved in the context of trying times for the industry.”

In the second quarter, BGE’s regulated businesses had earnings of 15 cents a share, up from 13 cents a year earlier. Other non-regulated businesses earned 2 cents a share, excluding gains on sales of securities and real estate. Compared to the second quarter of 2001, the other non-regulated businesses benefited from new business at Constellation Energy Source, the absence of 2001 losses in the international portfolio, and lower interest expense.

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