Constellation to Acquire Assets – Analyst Blog

Energy utility Constellation Energy Group Inc. (CEG) announced that it signed an asset purchase agreement with Boston Generating to acquire its 2,950 megawatt fleet for $1.1 billion or $372 per kilowatt.

 

The decision to acquire the power plants in New England Power Pool (NEPOOL) region gels well with Constellation’s goal to acquire assets in regions where it has significant load obligations. Constellation Energy currently serves approximately 13.3 trillion watt hours of customer load in the NEPOOL.

 

The proposed transaction is expected to be completed through a court-approved bankruptcy proceeding to be initiated by Boston Generating. If successful, the company would acquire five power plants located in the Boston area: four natural gas fired plants including Mystic 8 and 9, Fore River, Mystic 7; and a fuel oil plant, Mystic Jet.

 

Constellation plans to finance the transaction through cash in hand and partly through issue of new debts. The company has a strong cash balance, with cash and cash equivalents amounting to $1.6 billion as of June 30, 2010, which is more than sufficient to finance the deal.

 

The adjusted earnings of Constellation at the end of the quarter were 71 cents a share compared with $1.08 per share at the end of second-quarter 2009. The Zacks Consensus Estimates for third-quarter 2010, fiscal year 2010 and fiscal year 2011 are 79 cents, $3.25 and $3.42, respectively.

 

We consider the acquisition of assets in the NEPOOL area as positive, securing Constellation’s physical presence in the region. The transaction is expected to be accretive to the bottom line beginning 2011.

 

We retain a short-term Zacks #3 Rank on the stock, which translates into a Hold rating. Lower demand in electricity, risk in the merchant power space and a low-dividend yield continue to limit valuation of the company. Hence, we maintain a long-term Neutral rating on the stock.

 

Based in Baltimore, Maryland, Constellation Energy supplies energy products and services in North America through its subsidiaries.