Constellation Energy Spurs Capacity – Analyst Blog

Constellation Energy (CEG) announced that it has completed the purchase of two natural gas combined-cycle generation facilities in Texas from Houston-based Navasota Holdings. Constellation paid $365 million to purchase Quail Run Energy Center, a 550-megawatt facility near Odessa, Texas and Colorado Bend Energy Center, a 550-megawatt facility near Wharton, Texas.

With this purchase, the generation capacity of Constellation Energy increased to 8,218 megawatts in the United States and Canada from the existing capacity of 7,118 megawatts. Constellation Energy will have 100% ownership of the plants and will initially function under an operations and maintenance agreement with North American Energy Services Company (NAES). Constellation maintains an option to build an additional 275 megawatts of capacity in each site.

This purchase not only increases the total portfolio of Constellation but also ensures its enhanced physical presence in ERCOT (Electric Reliability Council of Texas). The company sells a significant amount of power in ERCOT through its wholesale and retail supply businesses. There is a steady increase in demand for power in ERCOT and these purchases will definitely enable the company to meet its load-serving commitments.

Constellation Energy’s acquisition of these Texan power plants is a part of the company’s strategic goal to acquire assets in key markets, particularly where the demand for power supersedes its generation capacity.

In view of the competitive landscape, Constellation Energy’s production portfolio was greater than its peers Companhia Paranaense de Energia (ELP) and CPFL Energia S.A. (CPL) and these purchases will further increase the gap in production.

During the first-quarter 2010 earnings call, Constellation Energy reaffirmed its 2010 earnings guidance range of $3.05 to $3.45 per share but lowered the previous guidance range for 2011 by 20 cents to $3.25 to $3.65 per share. The revised guidance for 2011 reflects the impact of lower forward commodity prices on its generation fleet, which is expected to be offset, in part, by improved earnings from its New Energy segment.

Baltimore, Maryland based Constellation Energy, through its subsidiaries, supplies energy products and services in North America. The company operates in three segments: Merchant Energy, Regulated Electric, and Regulated Gas.

We like Constellation Energy’s decision to purchase the additional two plants as it will enable the company to meet the increased demand for power in the markets it caters to. Despite this positive move, we still maintain a neutral outlook on Constellation as the company is yet to realize the synergies of the purchase.