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Constellation to Sell Upstream Gas Assets

Baltimore-based Constellation Energy Group will sell its upstream gas assets in an effort to improve liquidity, CEO Mayo Shattuck III said Thursday. The assets, including Constellation Energy Partners LLC (CEP), have a book basis of $850 million and could sell for as much as $1 billion, Shattuck said.

"This has really always been in our plan to harvest this portfolio. Even a portion of the 2008 operating plan had the divestiture of a couple of these assets, so we actually have the process well under way. We're just adding to this process the rest of the upstream gas portfolio," he said.

Constellation Energy formed CEP in 2006 and is the majority owner (see NGI, Aug. 14, 2006). Constellation Energy will continue to support CEP through its operating service agreement, Shattuck said. "Over time we will strategically resolve that situation. Right now the real leverage is associated with selling the upstream gas assets," he said.

"We intend to work closely with our board of managers and the management team at Constellation Energy to evaluate the potential impact that their current and future decisions may have on our company," said CEP CEO Stephen R. Brunner. "As we move forward through the process we will focus on developing a plan that is in the interests of our company and unitholders. We do not expect any immediate impact on our business operations..."

At the end of July Constellation Energy posted earnings of $171.5 million (95 cents/share) for 2Q2008, compared to $116.3 million (64 cents) in 2Q2007, and reaffirmed guidance for 2008 at $5.25-5.75/share. But the revelation that Constellation Energy could be forced to post $3.37 billion in collateral if its credit rating were to deteriorate led to a nearly 20% drop in the utility's share price earlier this month. According to Shattuck, the utility has made "significant progress" in bolstering its liquidity since the discovery of an error in calculating the collateral required under the credit rating downgrade scenario, including securing a firm underwritten commitment for an additional $2 billion credit facility that extends through the end of 2009.

"With just over a month left in the quarter, we stay on track to achieve that guidance range," he said.

Most of CEP's initial gas holdings were in Alabama's Black Warrior Basin. Last year CEP expanded its coalbed methane holdings in the Cherokee Basin of Oklahoma with the acquisition of Newfield Exploration Oil & Gas Properties, a subsidiary of Houston-based Newfield Exploration Co., for $128 million (see NGI, Aug. 6, 2007) and closed the $240 million acquisition of AMVEST Osage Inc., a subsidiary of privately held AMVEST Corp., in late July (see NGI, July 16, 2007). In April 2007 CEP completed another Cherokee Basin deal, acquiring coalbed methane properties and more than 500 miles of pipeline gathering systems from EnergyQuest Resources LP for $115 million (see NGI, March 12).

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