Unfortunately, that’s not the case. And that means Constellation will have to clear a number of hurdles if it’s going to fulfill its long-term promise.
Last year, the company bet big on higher energy prices and paid the price dearly when the economy collapsed.

Constellation’s very high level of debt, with large bond maturities in 2009 and 2012 at that time meant they were flirting with financial disaster.  That forced the company into a deal with Électricité de France SA (EDF), in which the European energy giant agreed to inject $4.5 billion into Constellation in exchange for almost 50% ownership of its nuclear plants.

That includes a brand new plant, Calvert Cliffs 3, that’s still subject to pending regulatory approval. Maryland Gov. Martin O’Malley has convinced the Public Service Commission (PSC) to hold open, public hearings to determine if this new deal is in the public’s best interest.

One of the main points of contention is the two energy companies’ demand to access the cash at distributing subsidiary Baltimore Gas & Electric Co. (BGE).

“We know that BGE is a cash cow for Constellation Energy,” said Gov. O’Malley. “We know that BGE pays more than half of all dividends paid into Constellation Energy and has a huge impact on Constellation’s bottom line.  We also know that Constellation Energy has had a tumultuous history over these last few years.”

The Maryland governor also noted that Constellation last year lost 80% of its stock value and was just hours away from bankruptcy before EDF stepped in.

Potential construction costs associated with the new nuclear plant are another large uncertainty. Nuclear plants have the tendency to run over budget, and that means the utilities then come back to regulators asking for rate increases in order to fund the cost overruns.

On the other hand, EDF Vice President John Morris recently testified to the PSC that “a decision denying EDF’s application or imposing conditions on the approval of the application that cause it to fail, would bring an end to the development” of the project.

And the company’s Chairman and Chief Executive Officer, Pierre Gadonneix, told French lawmakers that EDF expects to get all the necessary approvals for this transaction by the end of the year.

The approval would generate strong economic gains for the state of Maryland, where EDF’s U.S. headquarters are based.

Électricité de France, a firm owned 84% by the French government has its own challenges.  Having bought British Energy Group PLC and embarked in other growth-oriented investments, it too got caught with too much debt. Like Constellation, EDF is in debt-reduction mode.  The company is rumored to be pondering the sale of another 20% stake in British Energy, a swap of electricity assets with German utility E.On AG and the possible float of another 14% of its own stock.

We must also factor in the possibility that destructive protectionism will affect the deal.  The Obama administration recently levied special import duties on Chinese tires.  When governments are forced to confront the tough realities of high unemployment, the likelihood that they resort to protectionism to boost local employment is high.  And this always conspires against efficiency and global growth.

Fortunately, there is no evidence of any such pressure playing a role yet.

In addition to the many uncertainties about the EDF deal and the Calvert Cliffs plant, we have to deal with regulatory uncertainties that are plaguing the industry.  Evolving environmental regulations will require large increases in capital investments.  These eventually are passed on to consumers, reducing demand.  In the months and years ahead, we might see so-called “cap-and-trade” legislation, smart grid systems and renewable portfolio standards that will complicate things even more in unpredictable ways.

The cap-and-trade legislation, should it pass, could benefit Constellation greatly.  If the United States made a stronger commitment to reducing carbon emissions, nuclear would have to be a big part of the equation. And Constellation already is well positioned to take advantage of this.  But while such regulation would be good for the company in the long run, right now it is just another uncertainty.

We also need to remember that a new nuclear power plant in the United States hasn’t been built in 20 years, so a new labor force and supply chain is needed.  And despite the fact that with the support of EDF, Constellation is the largest nuclear operator in the world, these challenges cannot be achieved overnight.

We are not going to go into the Constellation results in detail.  Demand was down in the United States in general, the summer was mild, and industrial demand – which is down between 3% and 7% in different regions – is not coming back yet.

Constellation has indeed taken steps to reduce its trading and other risks and divested several non-profitable operations.  The vast majority of Constellation’s June 30 earnings were due to special items that boosted GAAP (Generally Accepted Accounting Principles) earnings.  The special one-time items from divested earnings accounted for about 60% of the strong upside adjustment. But they are not likely to recur, and in this complex business, some other one-time items have the unfortunate trait of appearing out of nowhere – just when it is least convenient to shareholders.

I love Constellation’s strong operating performance, its strong position in nuclear energy, and its focus on growing alternative energy.  These strengths are likely to play out well over the long term, and could even lead this company to superior profits down the line.  But there are too many uncertainties weighing on an already damaged balance sheet, which makes the risk for this company too large to bear in the short term.

If Constellation is hit by any one of these risks, another big hit to the stock could lead to another equity infusion.  And the traditional argument for buying utility stocks as an income investment does not work well either, given its low dividend yield and the company’s need to conserve cash.

So, with so much left to chance, I would not buy Constellation at this time. But there is enough long-term potential, that if I already owned Constellation stock, I would hold it for a while to see if those uncertainties are resolved. But be aware that holding the stock is an overly speculative position that needs to be monitored constantly for the developments that we outlined above.

Shares of Constellation Energy closed Friday down 1.45%, or 47 cents, at $31.84. The stock earlier this month hit a 52-week high of $33.37 after falling to a 52-week low of $15 in March.

Recommendation: Hold Constellation Energy Group Inc. (NYSE: CEG) (**).

Source: Constellation Energy Group Inc. Has Long-Term Potential, But Short-Term Problems

There’s no doubt America has an energy problem… or maybe you could call it a fossil fuel problem. All the fuels we’ve relied on since time immemorial are skyrocketing in price. (Dinosaur bones just don’t take the old gas tank as far as they used to — as we personally discovered yesterday filling up at $4 a gallon here in NV.)

The least harmful and most clean-burning fossil fuel, natural gas, is shooting up in price, too. The North American continent (both the U.S. and Canada) has been “running to stand still” for a long time now in terms of natural gas production. The rate at which new wells are coming on line is barely keeping pace with the depletion of old wells. And nor does it help that nuclear plants are looking a lot more expensive than first realized, or that natural gas and water are required in huge quantities to unlock the black treasure of Canada’s oil sands.

As a result of these and other factors, the time has finally come for the liquid natural gas (LNG) market. The world desperately needs to be able to ferry natgas from one continent to another — like crude oil — and LNG technology is the way to do it. BreakAway Investor editor Andrew Mickey is right on top of this trend. Take a look.

Selling Out to the Highest Bidder (for Natural Gas)

by Andrew Mickey, Editor, BreakAway Investor

“We are not in the charity business. Whoever will give me the best price, I will follow him.”

- Abdullah bin Hamad al-Attiyah, Oil Minister of Qatar

Qatar is already taking advantage of this situation. And they’re making no qualms about their motivation: make as much money as possible.

But Qatar is just one small player in the next monster trend in the energy business. The situation is getting bad, real bad. The profit opportunity, however, is just as big as the situation is bad.

Already Exxon Mobil, Merrill Lynch, BHP Billiton, and dozens of others are getting in on the action. Now, as we put all the pieces of this complicated puzzle together, you can take your piece of the action, too.

Decades in the Making

For decades we’ve heard it’s coming — a completely new source of energy. But I’m not talking about some economically questionable alternative energy source or something with numbers that only “work” with lavish government subsidies. I’m talking about liquefied natural gas, or LNG.

The LNG market has been on the verge of a major breakout, seemingly for years. But the numbers just never made sense. It has taken years of infrastructure buildup to lay the foundation for the industry. And with oil companies required to shell out at least $5 billion just to build an LNG plant, they just weren’t going to take too big of a gamble.

That, however, is all rapidly changing.

Exxon Mobil, Merrill Lynch and China National Oil Company have combined to commit $30 billion to investing in new LNG facilities over the next five years. BHP has committed $25 billion for new LNG facilities in Australia. Worldwide, LNG investments are expected to eclipse $100 billion over the next decade. Warren Buffett, Shell, BP and Gazprom are all betting big on LNG.

Together, they’re all helping to nurse the LNG industry from infancy to maturity in short order. And with all these companies placing huge bets, you can bet they’re laying the foundation for a major win.

But the LNG market is still in its relative infancy. As a result, most investors just don’t understand all the details… yet. But that’s exactly what is creating an opportunity in the next big trend in energy.

We’ve got to understand three aspects of the booming LNG industry in order to profit from this situation. First, we’ve got to look at the basic nuts and bolts of the industry (how natural gas is turned into LNG and so forth). Second, we’ve got to realize natural gas will finally become a truly global commodity and the highest bidder will get the gas. Third, we’ve got to find the bottleneck — and who has is developing the solution. And that’s where we’ll put our money.

Natural Gas Goes Global

The United States has been getting natural gas on the cheap for decades. Most natural gas consumers (primarily power companies and utilities) have been paying very low prices for natural gas compared to the rest of the world. Despite the recent doubling in natural gas prices, U.S. utilities can still buy it for around $11 per million BTU (MMbtu).

The rest of the world is paying much higher prices. Spain pays $13 per MMBTU, Korea and India pay $14 per MMBTU, and Japan pays the highest price of about $15 per MMBTU.

The cause of the wide price range is pretty simple. Natural gas is produced and consumed locally. For instance, natural gas in the U.S. is produced from a well and transported via pipeline to the end-user.

Although there are some fairly long offshore pipelines, building a pipeline across the Pacific or Atlantic Oceans is technically and economically unfeasible. As a result, Asian, European, African, Australian and North American natural gas prices can vary widely. There was no way to trade natural gas on a global level.

The growth of the LNG industry is already starting to change all that. Japan recently paid $19 per MMBTU of LNG and China and Europe are also paying top dollar for LNG. But they’re happy to do it. The price may seem high now, but the long-term LNG contracts these countries have signed will save them a lot more money as natural gas prices continue to rise over the long term.

There is no transparent market for LNG. The LNG market is made up of privately negotiated contracts between suppliers and consumers. That lack of transparency is helping to keep this boom quiet for the time being.

The highest natural arch in the world is 25 miles southwest of Kashi, Xinjiang, China. It’s made of sandstone and nearly 1,200 feet tall. Eric Shipton (1907-1977), the famed British mountain climber, “discovered” the arch in 1947.

Of course, he really didn’t “discover” it in the usual sense. Local Chinese had known about the arch for hundreds of years. It just escaped Western notice until Shipton’s arrival. Shipton had a long resume of climbing mountains all over the world, from Mount Kenya to India’s Kamet. In his book Mountains of Tartary, though, he got the location of the arch mixed up. So when a team from the Guinness Book of World Records set out years later to verify the existence of the arch, they couldn’t find it. So the arch was “lost” again.

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Millionaire Secrets Revealed

The secret millionaire’s market has been around for quite sometime, and I’d be surprised if you’d ever heard of it before now.

These elite traders are ramping up their activity, even as the country plummets into a recession. That’s because this market if perfect for the economic climate we’re in right now.

Want in? Well now’s your chance to pick up your guest pass into this elite market…

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It wasn’t until 2000 that a National Geographic team found it again. As National Geographic Adventure reports: “It beggars belief that a significant wonder of the world could remain missing in an age of satellite imagery, but there it is.” So we discovered the arch, lost it and discovered it again. Of course, it hadn’t moved all the while.

And that gets us to element 42. It’s called molybdenum, or “moly” for short (pronounced “molly”). It’s a metal that, like other natural resources, has been around a long time. People thought it was some sort of lead compound. It was, however, officially “discovered” by German-Swedish chemist Carl Wilhelm Scheele in 1778. Even then, it took a while before we figured out what to do with it. So essentially, moly was lost yet again.

Fast-forward a bit into the modern, smoke-belching world of steel and oil. Steel producers and energy companies know all about Scheele’s discovery. Steel producers use it to strengthen steel. But only recently, due to a number of factors, has the market rediscovered this metal — in a big way. In fact, some are now heralding moly as the “energy metal.”

The moly market has long been one marked by sleepy indifference. The price of moly wandered under $5 per pound for most of the ‘90s and in the first couple of years of this century. But this once-drowsy backwater has suddenly become a frenzy of deal-making and price spikes. At work are the usual suspects, supply and demand.

Moly has many uses. For the most part, it’s used to reinforce steel of all kinds. It has a growing use in oil and gas pipelines. It takes about 1.6 million pounds of moly for every 1,000 kilometers of pipeline. Just for a frame of reference, there is something like 80,000 kilometers of pipeline in the planning stages globally. That’s a lot of moly.

Moly’s big push toward new highs will come from booming energy markets. All of the trends in the energy world play well in moly’s favor. Deeper drilling and longer pipelines to find and access more remote oil and gas will consume a lot of moly. Then there is ocean exploration. Just think of all those deep-water platforms sitting out there in the rolling, watery plains of the Gulf of Mexico and the North Sea. They need moly, too. The increasing reliance on heavy oils and tar sands, which are corrosive fuels, is good for moly — which has anti-corrosive properties.

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Another Black Monday

Back in 1987, the market fell, and fell hard. The same elements that were in play then are in play now and we could see history repeat itself.

That means as much as 3,000 points could be simply erased from the market in one single day. That could lead to quite a market collapse.

And the worst part is, that’s not all that’s coming. Click here to see what other shocks you can soon expect…

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Oil refiners use moly as a catalyst to reduce the sulfur content in crude oil. Government mandates require lower sulfur content in gasoline and diesel fuels — which bodes well for moly demand. About 95 percent of all oil refineries use moly in this way.

Nuclear plants also use moly for pipes. In fact, mandates now require moly on all pipe refits to existing plants. The majority of existing plants are about 22-44 years old, so refits will be big. Plus, there are hundreds more on the drawing board worldwide. A nuclear plant requires about 400,000-500,000 pounds of moly. So I certainly don’t see demand weakening there.

Plus, there are many more uses of moly. It’s used in cars to build lighter, stronger and more fuel-efficient vehicles. In a way, moly is a “green metal” — if such a thing is possible — because of its role in reducing “greenhouse gases.” It has other unique properties valuable in making pigments, corrosion inhibitors and lubricants.

The neat thing about this is that substitution is difficult. So even though the price of moly is up a lot, it has not affected demand much. That’s also due to the fact that most applications require a relatively small percentage of moly relative to overall cost. So its cost to, say, a refinery, is a lot more than it was, but is still small compared with overall costs.

And there are few substitutes for moly. I expect the moly market to remain tight at least through 2009.

Regards,
Chris Mayer

–Hold everything. How about a reality check?

–”Brazil’s plan to become one of the world’s biggest oil exporters hinges on exploiting crude 6 miles below the ocean surface in deposits so hot they can melt the metal used to carry uranium to nuclear plants,” reports Joe Carroll in Bloomberg this morning. It gets better (or worse, depending on your perspective).

–”Tapping what may be the biggest oil finds in the Western Hemisphere in three decades will require equipment that can withstand 18,000 pounds per square inch of pressure, enough to crush a pickup truck, pipes that can carry oil at temperatures above 500 degrees Fahrenheit (260 Celsius) and drill bits that can penetrate layers of salt more than one mile thick.”

–The oil industry is becoming metals-intensive. And not just any metals. Our friends at Diggers and Drillers call them ’super metals,’ which sounds about right. It takes a special kind of metal to withstand the heat and temperatures you find in off-shore, deep-sea oil operations. That’s probably the better investment angle than, say, buying Petrobras (NYSE:PBR).

–Think about this for a second. To produce oil from Carioca, Brazil will have to drill to a depth of 10,000 metres (32,000 feet). That is twice as far down as the world’s deepest current production hole. It’s also deeper in the ocean than Mt. Everest is high in the sky. It may as well be Mars or Venus or the moon for as otherworldly as the conditions are.

–The oil industry sure has come a long way from when Colonel Edwin Drake drilled his first well in Titusville, Pennsylvania in 1859. Drillers are going to places they’ve never gone before, and it’s not cheap. For example, Exxon had to develop special pipes for its Sakhalin II project in Siberia because steel pipes were shattering at the temperatures engineers encountered. Bloomberg reports that Chevron destroyed more than a dozen drill bits costing US$50,000 each in a $4.7 billion oil project in Tahiti.

–Where do you even buy $50,000 drill bits?

–Incidentally, did you know that Howard Hughes made his money in drill bits? We didn’t know it either until we researched the subject this morning. Cemented carbide cutting tools, or tools made of tungsten and diamond, are in great demand these days. But in the oil business, it was Howard Robard Hughes Sr. who introduced rotating steel cones to the wildcatters in East Texas in the first two decades of the twentieth century.

–Hughes held the patent on the first rotating tricone bit for 17 years, between 1934 and 1951. This was the peak of exploring and drilling in the Continental U.S. It made Hughes and his more famous and eccentric son Howard very rich. You can afford to be weird when you reach a certain level of wealth. It doesn’t make it right, though. If you want to see a picture of the Hughes drill bit, check this out.

–Resources Minister Martin Ferguson told the ABC that contrary to reports in The Australian last week, the Federal Government has not told Chinese companies to “back off” in their pursuit of their Australian quarry.

–Right. You don’t imagine the Federal Government could come right out and tell China to get lost. It doesn’t want that to happen. But in an interesting coincidence, Stephen Wyatt reports in yesterday’s Financial Review that the, “Chinese may relent in iron-ore negotiations.” This refers to the reluctance of Chinese steel producers to pay a ‘freight premium’ for Australian iron ore (over and above what China pays for Brazilian ore).

–We called the Foreign Investment Review Board (FIRB) ourselves yesterday to see if they publish any information on foreign companies seeking to acquire $100 million or more of an Australian publicly listed company.

–”No we do not,” we were told.

–Fair enough. Here’s what we know. In early April the FIRB shot down a bid by the Shougang Group (China’s sixth largest steel maker) for Mount Gibson Iron Ore (ASX:MGX). We know that Shenzhen Zhongjin Lingnan Nonfemet Co Ltd has a joint bid with and Indonesian firm Herald Resources Ltd (ASX:HER). We also know that China’s state-owned MCC Mining has bid A$400 million one Cape Lambert Iron Ore’s Ltd (ASX:CFE) iron ore projects.

–There are other deals in the works. China Shenhua Group, China Coal Energy, and Yanzhou Coal Mining Co Ltd (listed in Hong Kong and China’s third biggest coal producer by market cap) are all interested in Australian coal. And Chinese iron ore trader Haoning Group would like to buy a stake in iron ore producer Brockman Resources Ltd (ASX:BRM).

–That’s what we know. What we don’t know is what Australia and China are saying to each other behind closed doors. And we don’t know what other Aussie companies might be on Chinese watch lists.

–If the FIRB isn’t going to tell us, there are other ways of prospecting around. Gabriel has been working on some technical and fundamental stock screens that produce at least ten new trading ideas each day (five momentum up, five momentum down).

–We’re experimenting with the variables, but this morning we asked him if a stock with symbol UMC had shown up on any of his screens. “Yes, yesterday it did. On the momentum up screen.”

–The stock came up on our computer screen last night when we were reading up on news from the bauxite market. UMC is the United Minerals Corporation (ASX:UMC). Please read this next note. We are not tipping it and have done no diligence on the stock at all.

–We do note, however, that the company is chasing both iron ore and bauxite in the Pilbara. That got our attention. We aren’t tipping it, but we wanted to know more.