Constellation Enjoying Higher Margins from Wholesale Business as Retail Space Becomes Crowded

Constellation's NewEnergy segment reported adjusted earnings of $46 million for the third quarter, reversing a year-ago loss of $14 million, on strong results from wholesale load serving contracts, and the absence of year-ago charges.

GAAP NewEnergy earnings were $43 million, versus a loss of $15 million a year ago.

Lifting NewEnergy earnings was a $72 million improvement in contribution from wholesale load serving and structured products. Another $40 million year-over-year benefit resulted from the absence of year-ago losses resulting from contract novations in Constellation's legacy UK coal and freight business.

As reported Friday, the negative impact from ERCOT weather and pricing in August resulted in a $32 million decline in earnings. In addition to the Texas impact, the retail business also posted a $10 million decline versus the year-ago, on a variety of issues including lower margins. This $10 million decline at the retail segment excludes a $0.07 per share negative impact versus the year-ago largely reflecting dilution from the MXenergy and StarTex acquisitions, as well as integration costs.

Constellation reported that its retail unit has seen margin degradation as market participants have moved away from the wholesale load serving business and focused on retail. This behavior accounted for some of the higher margins recorded by Constellation in its wholesale business for the quarter, as the space was less competitive.

Executives said that Constellation continues to do a "robust' retail business with "attractive" renewal rates. However, the win rate, relative to expectations, is, "a little bit less than [] expected," reflecting increased competition in the retail market. Constellation attributed the increased retail competition to generators now viewing retail contracts as a more desirable, less risky hedge for their generation.

While Constellation did not see a meaningful retail margin or risk premium impact from February's ice storms in ERCOT, executives do expect to see retail margin uplift in ERCOT from the summer's event as risk is priced back into the system.

As only reported by Matters Friday (10/28), Constellation is considering building new peaking generation at existing sites in ERCOT. Executives also said that Exelon's high-heat rate load following generation assets will bring "particular value" in managing peaking loads in ERCOT.

Constellation reported that NewEnegy has 2,700 accounts using its VirtuWatt 3.0 online energy management application.