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WIKI ANALYSIS
Constellation Energy Group (NYSE: CEG) sells electricity to electric utilities, cities and companies. CEG also has an electric and natural gas utility subsidiary which serves 1.7 million customers in central Maryland through Baltimore Gas and Electric Company (BGE). CEG has a maximum capacity of 8,800 megawatts(MW) of electricity, enough to power around 6.8 million homes[1].
Electric utility companies are under increasing pressure, in the form of government legislation, to adopt cleaner electricity generation methods while maintaining competitive prices. CEG, however, is in an advantageous position versus many of its peers due to its substantial nuclear generation portfolio. In 2007, over 60% of the electricity generated by the company came from nuclear reactors and only 35% from coal.[2]
Business Financials
Business Segments
Constellation Energy Group has three primary business segments: Merchant Energy Business, Regulated Electric Business and Regulated Gas Business.
- Merchant Energy Business - This business operates electric power plants (nuclear, coal, oil, gas, renewable) throughout the United States and sells it to large customers and businesses such as electric utilities, cities and companies.
- Regulated Electric & Gas Business - CEG's regulated electric and gas business operates within central Maryland and operates under the name, Baltimore Gas and Electric Company (BGE). It delivers electricity to more than 1.1 million customers and natural gas to 600,000 customers.
When it comes to evaluating utility companies, it is important to look at net income rather than revenues since operating and debt expenses play a critical role determining the success low-margin utility businesses. Although CEG has demonstrated steady revenue growth over the past three years, net income has not kept pace. It fell by $114.9 million in 2007 compared to the previous year.[3] CEG had two gains of sales of generating facilities artificially lifting profit in 2006. To gain a clearer idea of how CEG's core business performance excluding one time gains, income from continuing operations has grown 23.8% each year from 2005 to 2007.
Key Trends/Forces
Ahead of the Curve: CEG's "Green" Profile
Growing political awareness of the risks of global warming is resulting in increasing governmental pressure for utility companies to reduce emissions. In 2008, three major investment banks predicted that the U.S. government would cap CO2 emissions in the next three years. Caps would effectively penalize big CO2 producers such as electric utility companies that own coal-fired power plants to encourage the use of cleaner electricity generating technologies. However, unlike peer Allegheny Energy (AYE), more than half of CEG's comes from nuclear and renewable energy better positioning the company to withstand the possible upcoming legislation aimed at reducing CO2 emissions.
CEG is Nuclear Powering It Up
The key difference between nuclear and fossil plants is the cost structure. Nuclear plants require very large capital investments (to construct the plant) but little expenditure for fuel because it takes relatively little uranium to power a plant. On the other hand, fossil fuel plants require relatively little capital investment but have high fuel costs because they require large amounts of coal, oil or gas. In the past, low fossil fuel prices gave given fossil fuel plants a cost advantage over nuclear plants. The cost advantage, compounded by the stigmas of nuclear energy (the not in my backyard phenomenon) has prevented new nuclear construction for almost 30 years.[6] Rising fossil fuel prices along with growing awareness of the carbon dioxide emissions are making nuclear energy a more viable choice. Already, nuclear utilities such as Exelon, Entergy and Duke Energy Corporation (DUK) have begun filing for permits for construction of new nuclear plants. CEG is ahead of the pack. The company owns owned three nuclear power plants at the end of 2007 and has increased its nuclear generation capacity by 32% over the past 5 years[7] The company has also submitted an application to the U.S. Nuclear Regulatory Commission to build a new 1,600MW reactor in their existing Maryland nuclear power plant [8] and another application to the U.S. Nuclear Regulatory Commission to seek approval for a new 1,600MW nuclear generator in its existing New York plant to address the New York's growing energy needs.[9]
Increasing demand for wholesale electricity
A growing shortage of available electrical power plants has stemmed from strict environmental regulations and a "not in my back yard" mentality which has limited regional utilities from building new power plants to sustain and meet their customer's growing energy needs. To remedy the supply shortfall, utilities must purchase additional electricity on the open market from companies such as CEG. In recent times, CEG has benefited greatly from their low-cost nuclear generation fleet as utilities around the country try to find cheaper supply alternatives to their costly coal, oil and natural gas electricity facilities.
A high commodity price environment coupled with power plant shortages due to legislation bode well for CEG's future. In addition, competing on the open markets allows them to sell electricity to the highest bidder, setting them apart from electric utilities, as their rates are regulated and capped by the government.
CEG's Advantage: Protection from rising coal prices
In 2007, coal prices rose steeply. Although CEG's power generation portfolio draws upon numerous energy sources including coal, oil, gas, it generates a majority of its energy from renewablesand nuclear power, insulating it from rising coal prices.
Competition
| CEG | D | AYE | EIX | AEP | DUK | Entergy | Exelon | PEG | |
|---|---|---|---|---|---|---|---|---|---|
| Revenue (FY 2007, USD Billions) | 21.2[10] | 15.7[11] | 3.3[12] | 13.1[13] | 13.4[14] | 12.7[15] | 11.5[16] | 18.9[17] | 12.8[18] |
| Generation Capacity (Megawatts) | 8,700[19] | 26,555[20] | 9,670[21] | 14,500[22] | 38,000[23] | 40,000 (include int'l)[24] | 30,000[25] | 33,000[26] | 16,000[27] |
| Customers (Millions) | 1.7[28] | 2.4[29] | 1.5[30] | 4.8 (SCE)[31] | 5[32] | 3.9[33] | 2.7[34] | 5.68[35] | 3.8[36] |
| After Tax Profit Margins (%) | 3.9[37] | 16.1[38] | 12.5[39] | 8.4[40] | 8.1[41] | 11.8[42] | 9.9[43] | 14.5[44] | 10.4[45] |
| CEG [46] | D[47] | AYE [48] | EIX [49] | AEP[50] | DUK[51] | Entergy [52] | Exelon[53] | PEG [54] | |
|---|---|---|---|---|---|---|---|---|---|
| % Coal Power | 31 | 25.5 | 80 | 7.4 | 73 | 43 | 10.1 | 5.7 | 28 |
| % Natural Gas & Oil | 19 | 32.8 | 9 | 10.5 | 16 | 27 | 66 | 21.7 | 49 |
| % Nuclear Power | 45 | 21.5 | 0 | 24.8 | 8 | 13 | 23 | 66 | 23 |
| % Renewable Power | 5 | 8.0 | 11 | 57.3 | 3 | 17 | .3 | 6.3 | N/A |
Electrical Generation Fleet Mix
The above table encapsulates the utilities' current electrical generation fleet broken down by power source (e.g. coal, natural gas, oil etc.). It is worth noting that these percentages do not necessarily reflect the actual source percentages for electricity generated as power-plants are used at various capacities depending on the market demand and price of electricity.
To further clarify, if each one of CEG's power plants were operating at 100% capacity, nuclear would power 45% of the generated electricity. However, since nuclear plants were cheaper to operate than their fossil fuel power plants during 2007, CEG tended to utilize its nuclear power-plants to a greater degree. This explains why 61% of electricity generated from CEG in 2007 was from nuclear.
References
- ↑ Power of Electricity
- ↑ CEG's 2007 10-k (Pg.6)
- ↑ CEG's 2007 10-k (Pg.71)
- ↑ CEG's 2007 10-k (Pg. 71)
- ↑ CEG's 2007 10-k (Pg. 2)
- ↑ Scientific American (9/26/07) - Nuclear Power Reborn
- ↑ Constellation Energy Elevates Michael J. Wallace to Vice Chairman to Expand New Nuclear Strategy
- ↑ Firm Applies To Expand Nuclear Plant In Maryland
- ↑ Firm Notifies USNRC
- ↑ CEG's 2007 10-k (Pg 29)
- ↑ D's 2007 10-k (Pg 53)
- ↑ AYE's 2007 10-k (Pg 58)
- ↑ EIX's 2007 Annual Report (Pg 102)
- ↑ AEP's 2007 10-k (Part 1)
- ↑ DUK's 2007 10-k (Pg 38)
- ↑ ETR's 2007 10-k (Pg 1)
- ↑ EXC's 2007 10-k (Pg 67)
- ↑ PEG's 2007 10-k (Pg 40)
- ↑ CEG Generation
- ↑ D's 2007 10-k (Pg 18)
- ↑ AYE - About Us
- ↑ EIX's 2006 Annual Report (Pg 18 & 29)
- ↑ AEP's Investor Page)
- ↑ DUK's Energy Business Segments
- ↑ Entergy - About Us
- ↑ Exelon - Power Generation
- ↑ PEG's 2006 10-k (Pg 40)
- ↑ Baltimore Gas & Electric
- ↑ D's 2007 10-k (Pg 1)
- ↑ AYE's About Us
- ↑ EIX's 2006 Annual Report (Pg 17)
- ↑ AEP's Investor Page)
- ↑ DUK's Energy Business Segments
- ↑ Entergy - About Us
- ↑ Exelon - About Us
- ↑ PEG's 2006 10-k (Pg 10)
- ↑ CEG's 2007 10-k (Pg 29)
- ↑ D's 2007 10-k (Pg 53)
- ↑ AYE's 2007 10-k (Pg 58)
- ↑ EIX's 2007 Annual Report (Pg 102)
- ↑ AEP's 2007 10-k (Part 1)
- ↑ DUK's 2007 10-k (Pg 38)
- ↑ ETR's 2007 10-k (Pg 1)
- ↑ EXC's 2006 10-k (Pg 67)
- ↑ PEG's 2007 10-k (Pg 47)
- ↑ CEG's 2007 10-k (Pg 24)
- ↑ D's 2007 10-k (Pg 18)
- ↑ AYE's Generation Facilities
- ↑ EIX's 2006 Annual Report (Pg 19)
- ↑ AEP's Power Plants and other assets
- ↑ DUK's 2006 10-k (Pg 34)
- ↑ Entergy's 2006 10-k (Pg 173)
- ↑ Exelon's 2006 10-k - Properties
- ↑ PSEG's 2006 10-k (Pg 41)
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