Weak Numbers From Constellation Energy

Before the bell today, Constellation Energy Group Inc. (CEG) reported its fourth quarter and fiscal 2011 results. Adjusted earnings per share came in at 5 cents, way below the Zacks Consensus Estimate of 63 cents. Quarterly earnings were also lower than the year-ago earnings of 42 cents per share. On a reported basis, including one-time items, loss per share came in at $2.91 versus earnings of 79 cents per share in the year-ago quarter.

Fiscal 2011 adjusted earnings came in at $2.12 per share, falling short of the Zacks Consensus Estimate of $2.94. The reported figure was below the fiscal 2010 earnings of $3.06 per share. On a reported basis, however, the company digested a loss of $1.70 per share for fiscal 2011 versus a wider loss of $4.90 per share in fiscal 2010.

Operational Results

Constellation Energy's quarterly revenues of $2,952.8 million fell way behind the Zacks Consensus Estimate of $5,915.0 million. Revenues were also lower when compared with $3,474.6 million in the year-ago quarter.

Non-regulated revenues rose from $391.2 million to $2,299.5 million; regulated electric revenues decreased $88.3 million to $485.1 million; while regulated gas revenues shrunk $42.3 million to $168.2 million.

Fiscal 2011 revenue was $13,758.2 million versus the Zacks Consensus Estimate of $16,480 million. Full year revenue also came below $14,340 million generated a year ago.

Fiscal 2011 Segmental Results

Baltimore Gas and Electric Company (BGE), overseeing the company’s regulated business, reported adjusted earnings of 69 cents per share in 2011, flat year over year. However, fiscal 2011 earnings include Hurricane Irene restoration costs of 12 cents per share.

The Generation segment reported 2011 adjusted earnings of $1.43 per share, down 38 cents from 2010 adjusted results of $1.81 per share. The decrease is primarily the result of lower power prices, increased outage days at CENG and last winter's extreme weather in Texas. These negative variances were partially offset by earnings contribution from new generation assets.

The NewEnergy segment reported adjusted earnings of 85 cents per share in 2011, an increase of 8 cents per share compared with 77 cents in 2010. The increase is primarily the result of higher contribution from structured products and the sale of certain upstream assets.

Financial Condition

Constellation Energy reported $964.5 million of cash and cash equivalents at the end of fiscal 2011, compared with $2,028.5 million at fiscal-end 2010. Long-term debt (net of current portion) increased to $4,456.4 million, compared with $4,054.2 million at fiscal-end 2010.

Outlook

Baltimore-based Constellation Energy is a supplier of power, natural gas and energy products and services for homes and businesses across continental United States.

Earlier, on April 28, 2011, Exelon Corporation (EXC - Analyst Report) entered into a definite agreement to acquire Constellation Energy, for about $7.9 billion. The exchange ratio agreed upon represents an 18.1% premium to the 30-day average closing stock prices of Exelon and Constellation as of April 27, 2011. Following the completion of the merger, Exelon shareholders will have 78% ownership of the combined company, while the rest will belong to Constellation shareholders. The companies expect to close the merger by early 2012.

This merger will create the nation’s premier competitive energy products and services supplier in terms of load and customers as well as the biggest competitive power generator with the largest nuclear fleet in the U.S. The consolidated entity will also produce power at much lower costs. The merger will also enable them to jointly work on fuel innovation, increase efficiency and provide better options and rates to customers.

The Exelon-Constellation merger has received approval from the Department of Justice, the New York Public Service Commission, the Public Utility Commission of Texas and the shareholders of Exelon and Constellation.

Despite obvious positives to be reaped from such a consolidation, the deal came after both the companies showed a dubious track record of failing to acquire or be acquired by other companies. On a few occasions, Exelon has made unsuccessful attempts to clinch acquisitions. The target companies, for instance, were NRG Energy Inc. (NRG - Analyst Report) in 2008, Public Service Enterprise Group Inc. (PEG - Analyst Report) in 2004 and Illinois Power Company in 2003.

Constellation Energy came close to be acquired twice before both the deals fell through. NextEra Energy Inc.'s (NEE - Analyst Report) attempt to buy Constellation was thwarted in 2005 by the interference of state officials. Another deal to be acquired by Berkshire Hathaway failed in 2008.

In the near term, with the merger pending approval in Maryland, we are maintaining our Zacks #4 Rank (short-term Sell rating) on the Constellation Energy stock. This implies that the stock is expected to perform lower versus the broader U.S. equity market over the next 1–3 months. We are, however, Neutral on Constellation Energy in the long term.