(CEG) Constellation Energy Analyst Reiterates at Neutral

Constellation Energy’s (CEG) merchant energy business provides a relatively stable and growing earnings stream through wholesale energy-related products and services. The company has a diversified fleet of power generating units, strong balance sheet compared to its peers and the synergies from the Exelon Corporation (EXC) merger, which are among the other positives.

However, adverse decisions in pending regulatory cases, lowered electricity demand and erratic weather conditions somewhat weigh on the positives. We thus retain our Neutral recommendation on the company.

Constellation Energy’s merger with Exelon Corporation is expected to be a strategic fit and earnings accretive to the combined entity in the second year itself. The merger deal would provide a huge boost in terms of lowering collateral costs for its competitive businesses. The company will also acquire StarTex Power, a Houston retail electric provider, thereby increasing its foothold in the Texas mass market.

Geographic disparity in the target market has helped the company to shape a portfolio that is well-positioned for capitalizing on regional differences in power prices and weather-driven demand thus aiding the merchant energy business to deliver steady earnings.

Constellation Energy remains diversified between owned generation, contractual generation, regulated distribution and competitive supply. Diversified generation assets help the company to minimize the impact of volatile commodity prices on its costs.

On the flip side, rate relief at regular intervals in the company’s service areas might weigh on the results of the company. The performance of Constellation Energy’s regulated utility, BGE, depends upon rate relief at regular intervals in the company’s service areas. Any adverse decisions in pending regulatory cases from the Maryland Public Service Commission can materially impact the company’s earnings.

Being a merchant power generator, Constellation Energy is susceptible to lower electricity demand. According to the Energy Information Administration (EIA), total electricity consumption is estimated to fall slightly during 2011. Residential electricity sales are expected to shrink by 2.1% during 2011. This will affect the performance of the company in the near term.

Constellation Energy reported adjusted earnings of 63 cent per share in the first quarter, lower than the Zacks Consensus Estimate of 96 cents and year-ago earnings of $1.43.

In its earnings conference call, the company has retained its fiscal 2011 earnings guidance in the range of $3.10-$3.40 and its 2012 guidance range of $2.40-$2.70.

The Zacks Consensus Estimate for second-quarter 2011 is 81 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $3.22 and $2.45 per share.

The quantitative Zacks #3 Rank (short-term Neutral rating) for the company indicates no clear directional pressure on the stock over the near term.

Baltimore-based Constellation Energy Group Inc. is a diversified holding company for a group of energy businesses focused on wholesale power marketing and merchant generation. It competes with American Electric Power Co. Inc. (AEP) and Duke Energy Corporation (DUK).

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