Constellation Energy Group Inc. (CEG) signed an agreement with Houston-based Navasota Holdings to purchase two natural gas combined-cycle generation facilities in Texas for $365 million. The transaction includes the Colorado Bend Energy Center, a 550-megawatt facility near Wharton, Texas, and Quail Run Energy Center, a 550-megawatt facility near Odessa, Texas.
Constellation Energy estimates the cost of acquisition per kilowatt of capacity at $332. Constellation Energy expects to close the transaction in the second quarter of 2010.
The proposed purchase would add 1,100 megawatts of capacity to Constellation Energy’s generation portfolio in ERCOT (Electric Reliability Council of Texas), where the company’s large wholesale and retail supply businesses sell a significant amount of power.
The acquisition is in line with the company’s previously announced strategy of deploying up to $1 billion over the next 12-24 months to acquire assets in regions where the company’s load obligations exceed its generation capacity. Colorado Bend and Quail Run each have 275-megawatt expansion projects in advanced development, creating the long-term potential to further balance Constellation Energy’s generation capacity and customer supply obligations in ERCOT.
Constellation Energy is a leading supplier of energy products and services to wholesale and retail electric and natural gas customers. It owns a diverse fleet of units in the United States and Canada, totaling approximately 7,100 megawatts of generating capacity, and is among the leaders in pursuing the development of new nuclear plants in the United States. The company delivers electricity and natural gas through the Baltimore Gas and Electric Company, its regulated utility in Central Maryland.
Constellation Energy remains diversified among owned generation, contractual generation, regulated distribution and competitive supply. Its diverse fleet of power generating units located across four U.S. states and Canada is a mix of coal, oil, natural gas and renewable sources (including geothermal, solar, hydro-electric and biomass).
Diversified generation assets help the company to minimize the impact of volatile commodity prices on its costs.
However, we believe that the above positives are already reflected in the current valuation leaving little room for above-market gain.
Also in the near-term, the fortunes of the company appear a little bleak due to the tepid economy, lower demand for electricity, over-exposure in the merchant power space and low-dividend yield compared to its peers. Thus we maintain our near-term Neutral recommendation on the Zacks #3 Rank stock.
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