Baltimore-based Constellation Energy has agreed to sell 3,145 MW of gas-fired generation assets to Tenaska Power Fund LP for $1.635 billion in cash, subject to closing adjustments. The transaction is expected to yield net proceeds of approximately $1.5 billion, and Constellation anticipates a one-time, pre-tax gain of approximately $245 million.

Constellation said in June it would consider selling the assets. “Physical assets have been and will continue to be at the core of our overall business strategy,” said Constellation CEO Mayo A. Shattuck at the time. “However, in the current market environment our gas-fired assets offer fewer synergies to our competitive supply portfolios than our baseload coal and nuclear assets.”

The transaction is expected to close before the end of 2006 or in early 2007 and is subject to regulatory approvals and other standard closing conditions. The transaction would be neutral to 2007 earnings and accretive in 2008 if proceeds are applied to the repurchase of debt and equity in proportions consistent with the company’s current balance sheet. However, consistent with the company’s prior practice, proceeds will be applied to debt reduction until target leverage ratios have been achieved. The balance of proceeds will be used to invest in the business or repurchase equity.

Constellation Energy expects that it will be at its target leverage ratios upon completion of the divestiture. After the sale is complete, future free cash flow would then be fully available for reinvestment in the business or for the repurchase of shares. In total, it expects that the sale of plants will be modestly dilutive in 2007, 2008 and 2009 and accretive thereafter.

Assets to be sold are:

“This acquisition maintains our investment philosophy of focusing on quality facilities that are well-positioned to serve key markets,” said Paul Smith, senior managing director of Tenaska Capital. “The plants are clean, efficient and strategically located. The portfolio complements our existing assets and enhances our market position.”

In accordance with the terms of the merger agreement between FPL Group and Constellation Energy (see NGI, Dec. 26, 2005), FPL Group has granted approval for Constellation Energy to proceed with the sale of the plants. Credit Suisse and Deutsche Bank advised Constellation Energy on the sale.

Earlier this month FPL Group announced it is suing the state of Maryland and its public service commission to hasten consideration of its pending merger with Constellation (see NGI, Oct. 9). A series of legal disputes over legislation passed by Maryland lawmakers this summer preceded the Oct. 4 filing by FPL.

In July the Federal Energy Regulatory Commission extended the period in which it will consider the merger proposal until Feb. 2, 2007. “The Commission finds, based on good cause, that further consideration is required to determine whether the proposed transaction meets the standards of Section 203(a)(4) of the FPA,” FERC said in its order.

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