Constellation Energy In Green Mode - Analyst Blog

Constellation Energy Group Inc. (CEG) has signed a 20-year Energy Savings Agreement (ESA) with the U.S. Department of State that will help the department meet the energy reduction goals set for the federal government by President Barack Obama.

Under the agreement, Constellation will supply the State Department and other federal facilities with an estimated 120,000 megawatts of clean energy annually from two new renewable energy facilities proposed to be developed. The company for this purpose will build a solar project on a 40-acre site in New Jersey, and a wind facility in Pennsylvania.

The State Department and other federal government facilities covered by the contract, including part of the White House campus, expect to reduce greenhouse gas emissions associated with internal electricity consumption by approximately 30%–35% by December 2012.

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

Constellation Energy remains diversified among owned generation, contractual generation, regulated distribution and competitive supply of energy. Its diverse fleet of power generating units located across the U.S. and Canada is a mix of coal, oil, natural gas and renewable sources (including geothermal, solar, hydro-electric and biomass). Diversified generation assets help Constellation Energy minimize the impact of volatile commodity prices on its input costs.

However, we believe that the above positives have already been reflected in the current valuation of Constellation Energy, leaving little room for above-market gains. Also, in the near term, the fortunes of the company appear a little bleak due to a tepid Maryland economy, risks in the merchant power space, pending regulatory cases and a low-dividend yield, which continue to restrain valuation in the near term.

We have a Zacks #3 Rank (short-term Hold recommendation) on Constellation Energy shares. This implies that the stock is expected to perform in line with the broader U.S. equity market over the next 1–3 months. Our long-term ‘Neutral' rating on Constellation Energy also supports this view, suggesting investors against taking any position on the stock for the time being.

A window of opportunity however is offered by its Zacks #2 Rank (short-term Buy recommendation) peers like Central Vermont Public Service Corporation (CV) and El Paso Electric Company (EE).